Autodesk, Inc. - Annual Report: 2020 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
FORM 10-K
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 31, 2020
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
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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) | ||
Registrant’s telephone number, including area code: (415) 507-5000
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.01 Par Value | ADSK | The Nasdaq Global Select Market | ||
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”). Yes ☐ No ☒
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 31, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, there were approximately 219.8 million shares of the registrant’s common stock outstanding that were held by non-affiliates, and the aggregate market value of such shares held by non-affiliates of the registrant (based on the closing sale price of such shares on the Nasdaq Global Select Market on July 31, 2019) was approximately $34.3 billion. Shares of the registrant’s common stock held by each executive officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 13, 2020, the registrant had outstanding 219,521,425 shares of common stock.
2020 Form 10-K 1
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for registrant’s Annual Meeting of Stockholders (the “Proxy Statement”), are incorporated by reference in Part III of this Form 10-K to the extent stated herein. The Proxy Statement will be filed within 120 days of the registrant’s fiscal year ended January 31, 2020.
2020 Form 10-K 2
AUTODESK, INC. FORM 10-K
TABLE OF CONTENTS
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FORWARD-LOOKING INFORMATION
The discussion in this Annual Report on Form 10-K 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, future financial results ( by product type and geography) and subscriptions, the effectiveness of our efforts to successfully manage transitions to new markets, expectations for and our ability to increase annualized recurring revenue, cash flow, our subscription base, and other financial and operational metrics, the potential impact of the recent Coronavirus disease (COVID-19) on our business and results of operations, the impact of past and planned acquisitions and investment activities, expected market trends, including the growth of cloud and mobile computing, the effect of unemployment, the availability of credit, the effects of global economic conditions, the effects of revenue recognition, the effects of newly recently issued accounting standards, expected trends in certain financial metrics, including expenses, expectations regarding our cash needs, the effects of fluctuations in exchange rates and our hedging activities on our financial results, our ability to successfully expand adoption of our products, our ability to gain market acceptance of new businesses and sales initiatives, and the impact of economic volatility and geopolitical activities in certain countries, particularly emerging economy countries, the timing and amount of purchases under our stock buy-back plan, and the effects of potential non-cash charges on our financial results and the resulting effect on our financial results. In addition, forward-looking statements also consist of statements involving expectations regarding product capability and acceptance, 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 Annual Report on Form 10-K 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 a number of factors, including those set forth below in 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.
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PART I
ITEM 1. | BUSINESS |
Note: A glossary of terms used in this Form 10-K appears at the end of this Item 1.
GENERAL
We are a global leader in 3D design, engineering and entertainment software and services, offering customers productive business solutions through powerful technology products and services. We serve customers in architecture, engineering and construction; product design and manufacturing; and digital media and entertainment industries. Our customers design, fabricate, manufacture and build anything by visualizing, simulating and analyzing real-world performance early in the design process. These capabilities allow our customers to foster innovation, optimize their designs, streamline their manufacturing and construction processes, save time and money, improve quality, deliver more sustainable outcomes, communicate plans, and collaborate with others. Our professional software products are sold globally, both directly to customers and through a network of resellers and distributors.
Corporate Information
Our internet address is www.autodesk.com. The information posted on our website is not incorporated into this Annual Report on Form 10-K. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on the Investor Relations portion of our website at www.autodesk.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
PRODUCTS
Our architecture, engineering and construction products improve the way building, infrastructure, and industrial projects are designed, built, and operated. Our product development and manufacturing software provides manufacturers in automotive, transportation, industrial machinery, consumer products and building product industries with comprehensive digital design, engineering, manufacturing and production solutions. These technologies bring together data from all phases of the product development and production life cycle, creating a digital pipeline that supports greater productivity, accuracy through process automation, and insights that enable more sustainable outcomes. Our digital media and entertainment products provide tools for digital sculpting, modeling, animation, effects, rendering, and compositing for design visualization, visual effects and games production. Our portfolio of products and services enables our customers to foster innovation, optimize and improve their designs, save time and money, improve quality, communicate plans, and collaborate with others. A summary of our revenue by geographic area and product family is found in Note 2, “Revenue Recognition,” in the Notes to Consolidated Financial Statements.
Autodesk’s product offerings, sold through a subscription, include:
Architecture, Engineering and Construction ("AEC")
• | AutoCAD Civil 3D |
AutoCAD Civil 3D solution provides a surveying, design, analysis, and documentation solution for civil engineering, including land development, transportation, and environmental projects. Using a model-centric approach that automatically updates documentation as design changes are made, AutoCAD Civil 3D enables civil engineers, designers, drafters, and surveyors to significantly boost productivity and deliver higher-quality designs and construction documentation faster. With AutoCAD Civil 3D, the entire project team works from the same consistent, up-to-date model so they stay coordinated throughout all project phases.
• | BIM 360 |
BIM 360 construction management cloud-based software enables almost anytime, anywhere access to project data throughout the building construction lifecycle. BIM 360 empowers those in the field to better anticipate and act, and those in the back office to optimize and manage all aspects of construction performance.
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• | Industry Collections |
The AEC Collection, including AutoCAD, AutoCAD Civil3D, and Revit, aims to help our customers design, engineer, and construct higher quality, more predictable building and civil infrastructure projects, commonly used by AEC industry experts.
• | PlanGrid |
PlanGrid cloud-based field collaboration software provides general contractors, subcontractors, owners and architects access to construction information in real-time. With PlanGrid technology, any construction team member can manage and update blueprints, specs, photos, requests for information (RFIs), field reports, punchlists and other critical jobsite data. The data collected within PlanGrid software acts as a digital trail during the building process, allowing for easy turnover to the owner for operations and maintenance after construction is complete. PlanGrid mobile-first technology is accessible on modern desktop, laptop or mobile devices, including native iOS, Android and Windows.
• | Revit |
Revit software is built for Building Information Modeling ("BIM") to help professionals design, build, and maintain higher-quality, more energy-efficient buildings. Using the information-rich models created with Revit, architects, engineers, and construction firms can collaborate to make better-informed decisions earlier in the design process to deliver projects with greater efficiency. Revit includes features for architectural, mechanical, electrical and plumbing design as well as structural engineering and construction, providing a comprehensive solution for the entire building project team.
AutoCAD and AutoCAD LT
• | AutoCAD |
AutoCAD software is a customizable and extensible CAD application for professional design, drafting, detailing, and visualization. AutoCAD software provides digital tools that can be used independently and in conjunction with other specific applications in fields ranging from construction and civil engineering to manufacturing and plant design.
• | AutoCAD LT |
AutoCAD LT software is purpose built for professional drafting and detailing. AutoCAD LT includes document sharing capability without the need for software customization or certain advanced functionality found in AutoCAD. Users can share all design data with team members who use AutoCAD or other Autodesk products built on AutoCAD.
Manufacturing ("MFG")
• | CAM Solutions |
Our computer-aided manufacturing ("CAM") software offers industry-leading solutions for Computer Numeric Control ("CNC") machining, inspection, and modeling for manufacturing. A comprehensive line-up of expert products, including PowerMill, FeatureCAM, PowerInspect, PowerShare, and others, help our customers manufacture complex, innovative products and components with maximum quality, control, and production efficiency.
• | Fusion 360 |
Fusion 360 is the first 3D CAD, CAM, and Computer-aided Engineering ("CAE") tool of its kind. It connects the entire product development process on a single cloud-based platform.
• | Industry Collections |
The Product Design & Manufacturing Collection offers connected, professional-grade tools that help our customers make great products today and compete in the changing manufacturing landscape of the future. The collection offers access to a wide range of our products, including AutoCAD, Fusion 360, Vault, and Inventor.
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• | Inventor |
Inventor enables manufacturers to go beyond 3D design to digital prototyping by giving engineers a comprehensive and flexible set of tools for 3D mechanical design, simulation, analysis, tooling, visualization, and documentation. Engineers can integrate AutoCAD drawings and model-based design data into a single digital model, creating a virtual representation of a final product that enables them to validate the form, fit, and function of the product before it is ever built.
• | Vault |
Vault data management software makes it easier to manage data in one central location, accelerate design processes, and streamline internal/external collaboration. Vault integrates with more than 30 Autodesk design applications, provides powerful revisioning and access control capabilities, and enables customers to share product data securely to improve engineering cycle time and reduce manufacturing errors.
Media and Entertainment ("M&E")
• | Industry Collections |
The M&E Collection provides end-to-end creative tools for entertainment creation. This collection enables animators, modelers and visual effect artists to access the tools they need, including Maya and 3ds Max, to create compelling effects, 3D characters and digital worlds.
• | Maya |
Maya software provides 3D modeling, animation, effects, rendering and compositing solutions that enable film and video artists, game developers, and design visualization professionals to digitally create engaging, lifelike images, realistic animations and simulations, extraordinary visual effects, and full length animated feature films.
• | Shotgun |
Shotgun is cloud-based software for review and production tracking in the M&E industry. Creative companies use the Shotgun platform to provide essential business tools for managers and visual collaboration tools for artists and supervisors, who often work globally with distributed teams.
• | 3ds Max |
3ds Max software provides 3D modeling, animation, and rendering solutions that enable game developers, design visualization professionals and visual effects artists to digitally create realistic images, animations, and complex scenes and to digitally communicate abstract or complex mechanical, architectural, engineering, and construction concepts.
PRODUCT DEVELOPMENT AND INTRODUCTION
The technology industry is characterized by rapid technological change in computer hardware, operating systems, and software. In addition, our customers’ requirements and preferences rapidly evolve, as do their expectations of the performance of our software and services. To keep pace with these changes, we maintain a vigorous program of new product development to address demands in the marketplace for our products, such as enabling more flexibility and sustainable outcomes.
The software industry has undergone a transition from developing and selling perpetual licenses and on-premises products to subscriptions and cloud-enabled technologies. To address this shift, Autodesk made a strategic decision to shift its business model from selling perpetual licenses to selling subscriptions. Subscription plan offerings are designed to give our customers increased flexibility with how they use our products and service offerings and to attract a broader range of customers such as project-based users and small businesses. Subscriptions represent a combined hybrid offering of desktop software and cloud functionality which provides a device-independent, collaborative design workflow for designers and their stakeholders. We discontinued the sale of new commercial licenses of most individual software products in 2016. Additionally, in June 2017, we commenced a program to incentivize maintenance plan customers to move to subscription plan offerings, maintenance-to-subscription ("M2S"), while at the same time increasing maintenance plan pricing over time for customers that remain on maintenance plans. Since launching the program, a substantial majority of maintenance plan customers have converted to subscription plan offerings. We will be retiring maintenance offerings as of August 7, 2021. Customers will have a one-year period starting August 7, 2020 to convert a maintenance seat to subscription plan offerings. Additionally, in order to offer better
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service to our customers, we are transitioning our existing customers from serial numbers to named users. We migrated our single user subscriptions in fiscal 2020 and are planning to transition multi-user subscriptions to named users in fiscal 2021.
We dedicate considerable technical and financial resources to research and development to further enhance our existing products and to create new solutions and technologies to expand our market opportunity and deliver additional automation and insights to our customers. For example, in fiscal 2020, we continued and expanded our investments in construction. We continued to make investments in the traditional data creation tools to support the design and pre-construction phases, while expanding our investment in the areas of site execution with process and project management Construction Cloud tools. Recognizing the value of data continuity across the construction lifecycle of design, building and operations, we made investments in the pre-construction and site execution phases of the project through our cloud-based tools. To connect the phases of construction upstream with design, we invested in and announced our Construction Cloud project delivery platform that allows individuals, teams and projects to be connected across all phases in a common data platform and increase efficiencies. We anticipate ongoing investments in construction that support pre-construction, site execution as well as the handover phase of the project and will continue to invest in connecting workflows and data across the ecosystem of the project.
Our software is primarily developed internally; however, we also use independent firms and contractors to perform some of our product development activities. Additionally, we acquire products or technology developed by others by purchasing or licensing products and technology from third parties. We continually review these investments to ensure that we are generating sufficient revenue or gaining a competitive advantage to justify their costs.
The majority of our research and product development is performed in the United States, China, Singapore, Canada, and the United Kingdom. However, we employ experienced software developers in many of our other locations. Translation and localization of our products are performed in several local markets, principally Singapore and Ireland. We generally localize and translate our products into German, French, Italian, Spanish, Russian, Japanese, Korean, and simplified and traditional Chinese.
We plan to continue managing significant product development operations internationally over the next several years. We believe that our ability to conduct research and development at various locations throughout the world allows us to optimize product development, lower costs, and integrate local market knowledge into our development activities. We continually assess the significant costs and challenges, including intellectual property protection, against the benefits of our international development activities.
For further discussion regarding risks from our product development and introduction efforts, see Item 1A, “Risk Factors.”
MARKETING AND SALES
We sell our products and services globally, primarily through indirect channels consisting of distributors and resellers. To a lesser extent we also transact directly with our enterprise and named account customers and with customers through our online Autodesk branded store. Our indirect channel model includes both a two-tiered distribution structure, where distributors sell to resellers, and a one-tiered structure, where Autodesk sells directly to resellers. We have a network of approximately 1,500 resellers and distributors worldwide. For fiscal 2020, approximately 70% of our revenue was derived from indirect channel sales through distributors and resellers.
We anticipate that our channel mix will continue to change, particularly as we scale our online Autodesk branded store business and our largest accounts shift towards direct-only business models. Importantly, we expect that the majority of our revenue will continue to be derived from indirect channel sales in the near future. We employ a variety of incentive programs and promotions to align our reseller channel with our business strategies. Our ability to effectively distribute our products depends in part upon the financial and business condition of our distributor and reseller networks. The loss of, or a significant reduction in, business with any one of our major distributors or large resellers could harm our business; see Item 1A, “Risk Factors,” for further discussion.
Sales through our largest distributor, Tech Data Corporation and its global affiliates (collectively, "Tech Data"), accounted for 35%, 35%, and 31% of our net revenue for fiscal years ended January 31, 2020, 2019, and 2018, respectively. Ingram Micro Inc. ("Ingram Micro"), our second largest distributor, accounted for 10%, 11%, and 8% of Autodesk's total net revenue for fiscal years ended January 31, 2020, 2019, and 2018, respectively. We believe our business is not substantially dependent on either Tech Data or Ingram Micro. Should any of the agreements between us and Tech Data or Ingram Micro be terminated for any reason, we believe the resellers and end users who currently purchase our products through Tech Data or Ingram Micro would
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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. No other distributor, reseller, or direct customer accounted for 10% or more of our revenue.
Our customer-related operations are divided into three geographic regions: the Americas; Europe, Middle East and Africa (“EMEA”); and Asia Pacific (“APAC”). Each geographic region is supported by global marketing and sales organizations. These organizations develop and manage overall marketing and sales programs and work closely with a network of domestic and international sales offices. We believe that international sales will continue to comprise the majority of our total net revenue. Adverse economic conditions and currency exchange rates in the countries that contribute a significant portion of our net revenue, including emerging economies, may have an adverse effect on our business in those countries and our overall financial performance. Our international operations and sales subject us to a variety of risks; see Item 1A, “Risk Factors,” for further discussion.
We also work directly with reseller and distributor sales organizations, computer manufacturers, other software developers, and peripherals manufacturers in cooperative advertising, promotions, and trade-show presentations. We employ mass-marketing techniques such as webcasts, seminars, telemarketing, direct mailings, sponsorships, advertising in business and trade journals, and social media. We have a worldwide user group organization and we have created online user communities dedicated to the exchange of information related to the use of our products and services.
We generate revenue primarily through various offerings that provide recurring revenue. Under our subscription plan, customers can use our software anytime, anywhere, and get access to the latest updates to previous versions through term-based product subscriptions, cloud service offerings, and enterprise business agreements. With the discontinuation of the sale of perpetual licenses, we have transitioned away from selling a mix of perpetual licenses and maintenance plans in favor of a consolidated subscription model. However, our customers who have previously purchased a perpetual use license for the most recent version of the underlying product are able to renew a previously purchased maintenance plan, until maintenance offerings are retired as of August 7, 2021, that provides them with unspecified upgrades when and if available, and receive online support during the term of their maintenance contract.
CUSTOMER AND RESELLER SUPPORT
We provide technical support and training to customers through a multi-tiered support model, augmented by direct programs designed to address certain specific customer needs. Most of our customers receive support and training from the resellers and distributors from which they purchased subscriptions or licenses for our products or services, with Autodesk in turn providing second tier support to the resellers and distributors. Other customers are supported directly via self-service using the Autodesk Knowledge Network which guides customers to answers in our online support assets, support forums, webinars or to support representatives using different modalities such as social media, phone, email and webchat. We also support our resellers and distributors through technical product training, sales training classes, webinars and other knowledge sharing programs.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE PROGRAMS
Education
Autodesk is committed to helping fuel a lifelong passion for design and making among students of all ages, both within and outside the classroom. We offer free educational licenses of Autodesk's professional software to students, educators, and accredited educational institutions worldwide. We inspire and support beginners with Tinkercad, a simple online 3D design and 3D printing tool. Through Autodesk Design Academy, we provide secondary and postsecondary schools hundreds of standards-aligned class projects to support design-based disciplines in Science, Technology, Engineering, Digital Arts, and Math (STEAM) using Autodesk's professional-grade design, engineering and entertainment software. Autodesk Design Academy curricula is also syndicated on iTunes U and Udemy, where millions of students go to learn online. Classes and projects are available on our Instructables website for anyone looking to expand their "making" skills. Our intention is to make Autodesk software ubiquitous and the design and making software of choice for those poised to become the next generation of professional users.
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Sustainability Programs
To help our customers imagine, design, and make a better world, our sustainability initiatives focus our efforts on the areas where we can have the greatest positive impact: enabling sustainable practices through our products, delivering free sustainable-design learning and training resources, providing software grants to qualifying nonprofits and entrepreneurs, and leading by example with our sustainable business practices. Through our products and services, we are supporting our customers to better understand and improve the environmental performance of everything they make.
Climate Change
In addressing the global challenges posed by climate change, we make it possible for our customers to innovate and respond to associated changes in regulation, building code, physical climate parameters and other climate-related developments. This effort can directly and indirectly create more demand for existing and new Autodesk products and services in the short and long-term. Furthermore, our leadership is committed to taking climate action and that commitment goes hand-in-hand with our values and reputation in the marketplace.
Climate Change Management Actions
To drive continued progress and meet growing demand, we continue to expand the solutions, education, and support we offer, helping customers secure a competitive advantage for a low-carbon future by designing high-performance buildings, resilient cities and infrastructure, and more efficient transportation and products. To continue to grow this market, we provide software and support to early stage entrepreneurs and start-up companies who are designing clean technologies. We plan to expand these offerings in the future based upon demand and opportunity in response to challenges posed by climate change.
Internally, we are investing in best practices to mitigate our greenhouse gas emissions and climate change risk through investments in renewable energy, energy efficiency, disaster management and recovery strategies, and materials innovation. We are on track to meet our science-based greenhouse gas reduction target of 43% absolute emissions by fiscal 2020 and have announced a new commitment to being net-zero emissions by the end of fiscal 2021. Our results will be published in our fiscal 2020 sustainability report.
Climate Change Governance
With oversight from our CEO, the Sustainability & Foundation Team has direct responsibility for setting and implementing our corporate sustainability strategy, including our climate change strategy.
Emissions Performance & Other Key Performance Indicators
By end of fiscal 2019, Autodesk had reduced its net greenhouse gas emissions for its operational boundary by 41% from our fiscal year 2009 baseline to 178,000 metric tons of carbon dioxide equivalent. This reduction was accomplished through increased investment in renewable energy and energy efficiency in our global real estate portfolio and investments with our customers to create carbon avoidance projects that generate verified emission reduction credits. More information about our sustainability commitment can be found in our annual sustainability reports, which we have published on our website since 2008. Our fiscal 2020 sustainability report will be published in the second quarter of fiscal 2021.
Philanthropy
The Autodesk Foundation (the "Foundation"), a privately funded 501(c)(3) charity organization established and solely funded by us, leads our philanthropic efforts. The purpose of the Foundation is twofold: to support employees to create a better world at work, at home, and in the community by matching employees' volunteer time and/or donations to nonprofit organizations; and to support organizations and individuals using design to drive positive social and environmental impact. In the latter case, we use grant funding, software donations, and training to accomplish this goal, selecting the most impactful and innovative organizations around the world, thus, leading to a better future for our planet. On our behalf, the Foundation also administers a discounted software donation program to nonprofit organizations, social and environmental entrepreneurs, and others who are developing design solutions that will shape a more sustainable future.
DEVELOPER PROGRAMS
Our business and our customers benefit from our relationships with an extensive developer network. These developers create and sell their own interoperable products that further enhance the range of integrated solutions available to our
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customers. One of our key strategies is to maintain an open-architecture design of our software products to facilitate third-party development of complementary products and industry-specific software solutions. This approach enables customers and third-parties to customize solutions for a wide variety of highly specific uses. We offer several programs that provide strategic investment funding, technological platforms, user communities, technical support, forums, and events to developers who develop add-on applications for our products. For example, we have created our web services platform, Autodesk Forge. The Forge Platform includes web services that enable software developers to rapidly develop the next generation of applications, and experiences that will power the future of making things. Forge facilitates the development of a single connected ecosystem for integrating Autodesk applications with other enterprise, web and mobile solutions.
COMPETITION
The markets for our products are highly competitive, are subject to rapid change, and can have complex interdependencies between many of the larger businesses. We strive to increase our competitive separation by investing in research and development, allowing us to bring new products to market and create exciting new versions of existing products that offer compelling efficiencies for our customers. We also compete through investments in marketing and sales to more effectively reach new customers and better serve existing customers.
Our competitors include large, global, publicly traded companies; small, geographically focused firms; startup firms; and solutions produced in-house by their users. Our primary global competitors include Adobe Systems Incorporated, AVEVA Group plc, Bentley Systems, Inc., Dassault Systèmes S.A. and its subsidiary Dassault Systèmes SolidWorks Corp., Intergraph Corporation, a wholly owned subsidiary of Hexagon AB, MSC Software Corporation, Nemetschek AG, Oracle Corporation, Procore Technologies, Inc., PTC Inc., 3D Systems Corporation, Siemens PLM, and Trimble Navigation Limited, among others.
The software industry has limited barriers to entry, and the availability of computing power with continually expanding performance at progressively lower prices contributes to the ease of market entry. The industry continues to undergo a platform shift from the personal computer to cloud and mobile computing. This shift further lowers barriers to entry and poses a disruptive challenge to established software companies. The design software market is characterized by vigorous competition in each of the vertical markets in which we compete, both from existing competitors and by entry of new competitors with innovative technologies. Competition is increasingly enhanced by consolidation of companies with complementary products and technologies and the possibility that competitors in one vertical segment may enter other vertical segments that we serve. In addition, some of our competitors in certain markets have greater financial, technical, sales and marketing, and other resources than we do. Because of these and other factors, competitive conditions in these industries are likely to continue to intensify in the future. Increased competition could result in price reductions, reduced net revenue and profit margins, and loss of market share, any of which could harm our business. See Item 1A, “Risk Factors,” for further discussion of risks regarding competition.
We believe that our future results depend largely upon our ability to better serve customers by offering new products, including cloud and mobile computing products, whether by internal development or acquisition, and to continue to provide existing product offerings that compete favorably with respect to ease of use, reliability, performance, range of useful features, continuing product enhancements, reputation, price, and training.
INTELLECTUAL PROPERTY AND LICENSES
We maintain an active program to legally protect our investment in technology through intellectual property rights. We protect our intellectual property through a combination of patent, copyright, trademark and trade secret protections, confidentiality procedures, and contractual provisions. The nature and extent of legal protection associated with each such intellectual property right depends on, among other things, the type of intellectual property right and the given jurisdiction in which such right arises. We believe that our intellectual property rights are valuable and important to our business.
Nonetheless, our intellectual property rights may not be successfully asserted in the future or may be invalidated, circumvented or challenged. In addition, the laws and enforcement of the laws of various foreign countries where our products are distributed do not protect our intellectual property rights to the same extent as U.S. laws. Enforcement of intellectual property rights against alleged infringers can sometimes lead to costly litigation and counterclaims. Our inability to protect our proprietary information could harm our business.
From time to time, we receive claims alleging infringement of a third party’s intellectual property rights, including patents. Disputes involving our intellectual property rights or those of another party have in the past and may in the future lead to, among other things, costly litigation or product shipment delays, which could harm our business.
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We retain ownership of software we develop. Our combined hybrid offerings include both desktop software and cloud functionality. Desktop software is licensed to users pursuant to ‘click through’ or signed license agreements containing restrictions on duplication, disclosure, and transfer. Cloud software and associated services are provided to users pursuant to on-line or signed terms of service agreements containing restrictions on access and use.
We believe that because of the limitations of laws protecting our intellectual property and the rapid, ongoing technological changes in both the computer hardware and software industries, we must rely principally upon software engineering and marketing skills to continually maintain and enhance our competitive market position.
While we have recovered some revenue resulting from the unauthorized use of our software solutions, we are unable to measure the full extent to which unauthorized use of our software products exists. We believe, however, that unauthorized use of our software is and can be expected to be a persistent problem that negatively impacts our revenue and financial results. We believe that our transition from perpetual use software licenses to a subscription-based business model combined with the change from desktop to cloud-based computing will shift the incentives and means by which software is used without authorization.
In addition, through various licensing arrangements, we receive certain rights to intellectual property of others. We expect to maintain current licensing arrangements and to secure licensing arrangements in the future, as needed and to the extent available on reasonable terms and conditions, to support continued development and sales of our products and services. Some of these licensing arrangements require or may require royalty payments and other licensing fees. The amount of these payments and fees may depend on various factors, including but not limited to: the structure of royalty payments, offsetting considerations, if any, and the degree of use of the licensed technology.
See Item 1A, “Risk Factors,” for further discussion of risks related to protecting our intellectual property.
PRODUCTION AND SUPPLIERS
The production of our software products and services involves duplication or hosting of software media. The way that we deliver software has evolved during our business model transition. For certain cloud-based products, we use a combination of co-located hosting facilities and increasingly Amazon Web Services and to a lesser degree other infrastructure-as-a-service providers. We offer customers an electronic software download option for both initial product fulfillment and subsequent product updates. Customers who choose electronic fulfillment receive the latest version of the software from our vendor’s secure servers. Customers may also obtain our software through media such as DVDs and USB flash drives available from multiple sources. The purchase of media and the transfer of the software programs onto media for distribution to customers are performed by us and by licensed subcontractors. Packaging materials are produced to our specifications by outside sources. Production is performed in leased facilities operated by independent third-party contractors. To date, we have not experienced any material difficulties or delays in the production of our software and documentation.
EMPLOYEES
As of January 31, 2020, we employed approximately 10,100 people. None of our employees in the United States are represented by a labor union. In certain foreign countries, our employees are represented by work councils. We have never experienced any work stoppages and believe our employee relations are good. Reliance upon employees in other countries entails various risks and changes in these foreign countries, such as government instability or regulation unfavorable to foreign-owned businesses, which could negatively impact our business in the future.
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ACQUISITIONS
Over the past three years, we acquired new technology or supplemented our existing technology by purchasing businesses or technology related assets focused in specific markets or industries. For the fiscal years ended January 31, 2019 and 2018, we acquired companies accounted for as business combinations. There were no business combinations or technology acquisitions in fiscal year 2020. The following were significant acquisitions for fiscal years 2019 and 2018:
Date of closing | Company | Details | ||
January 2019 | BuildingConnected, Inc. ("BuildingConnected") | The acquisition of BuildingConnected enabled Autodesk to add bid-management capabilities to its construction portfolio. | ||
December 2018 | PlanGrid, Inc. ("PlanGrid") | The acquisition of PlanGrid enabled Autodesk to offer a more comprehensive, cloud-based construction platform. | ||
July 2018 | Assemble Systems, Inc. ("Assemble Systems") | The acquisition of Assemble Systems enabled Autodesk's customers to influence, query and connect BIM data to key workflows across bid management, estimating, scheduling, site management and finance. | ||
GLOSSARY OF TERMS
Annualized Recurring Revenue (ARR)—Represents the annualized value of total monthly recurring revenue for the preceding three months. "Maintenance plan ARR” captures ARR relating to traditional maintenance attached to perpetual licenses. "Subscription plan ARR" captures ARR relating to subscription offerings. Refer to the definition of recurring revenue below for more details on what is included within ARR. Recurring revenue acquired with the acquisition of a business is captured when total subscriptions are captured in our systems and may cause variability in the comparison of this calculation.
ARR is currently one of our key performance metrics to assess the health and trajectory of our business. ARR should be viewed independently of revenue and deferred revenue as ARR is a performance metric and is not intended to be combined with any of these items.
Billings—Total revenue plus net change in deferred revenue from the beginning to the end of the period.
Cloud Service Offerings—Represents individual term-based offerings deployed through web browser technologies or in a hybrid software and cloud configuration. Cloud service offerings that are bundled with other product offerings are not captured as a separate cloud service offering.
Constant Currency (CC) Growth Rates—We attempt to represent the changes in the underlying business operations by eliminating fluctuations caused by changes in foreign currency exchange rates as well as eliminating hedge gains or losses recorded within the current and comparative periods. We calculate constant currency growth rates by (i) applying the applicable prior period exchange rates to current period results and (ii) excluding any gains or losses from foreign currency hedge contracts that are reported in the current and comparative periods.
Core Business—Represents the combination of maintenance, product subscription, and EBA.
Enterprise Business Agreements (EBAs)—Represents programs providing enterprise customers with token-based access or a fixed maximum number of seats to a broad pool of Autodesk products over a defined contract term.
Free Cash Flow—Cash flow from operating activities minus capital expenditures.
Industry Collections—Autodesk Industry Collections are a combination of products and services that target a specific user objective and support a set of workflows for that objective. Our Industry Collections consist of: Autodesk Architecture, Engineering and Construction Collection, Autodesk Product Design & Manufacturing Collection, and Autodesk Media and Entertainment Collection. We introduced Industry Collections effective August 1, 2016 to replace our suites.
Maintenance Plan—Our maintenance plans provide our customers with a cost effective and predictable budgetary option to obtain the productivity benefits of our new releases and enhancements when and if released during the term of their contracts. Under our maintenance plans, customers are eligible to receive unspecified upgrades when and if available, and technical support. We recognize maintenance revenue over the term of the agreements, generally one year.
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Net Revenue Retention Rate (NR3): Measures the year-over-year change in ARR for the population of customers that existed one year ago (“base customers”). Net revenue retention rate is calculated by dividing the current period ARR related to base customers by the total ARR from one year ago related to same base customers. ARR is based on USD reported revenue, and fluctuations caused by changes in foreign currency exchange rates and hedge gains or losses have not been eliminated. ARR related to acquired companies is excluded from the calculation for at least one year from integration.
Other Revenue—Consists of revenue from consulting, training and other services, and is recognized over time as the services are performed. Other revenue also includes software license revenue from the sale of products which do not incorporate substantial cloud services and is recognized up front.
Product Subscription—Provides customers the most flexible, cost-effective way to access and manage 3D design, engineering, and entertainment software tools. Our product subscriptions currently represent a hybrid of desktop and cloud functionality, which provides a device-independent, collaborative design workflow for designers and their stakeholders.
Recurring Revenue—Consists of the revenue for the period from our legacy maintenance plans and revenue from our subscription plan offerings. It excludes subscription revenue related to consumer product offerings, select Creative Finishing product offerings, education offerings, and third-party products. Recurring revenue acquired with the acquisition of a business is captured when total subscriptions are captured in our systems and may cause variability in the comparison of this calculation.
Remaining Performance Obligations (RPO)—The sum of total short-term, long-term, and unbilled deferred revenue. Current remaining performance obligations is the amount of revenue we expect to recognize in the next twelve months.
Spend—The sum of cost of revenue and operating expenses.
Subscription Plan—Comprises our term-based product subscriptions, cloud service offerings, and EBAs. Subscriptions represent a combined hybrid offering of desktop software and cloud functionality which provides a device-independent, collaborative design workflow for designers and their stakeholders. With subscription, customers can use our software anytime, anywhere, and get access to the latest updates to previous versions.
Subscription Revenue—Includes subscription fees from product subscriptions, cloud service offerings, and EBAs.
Unbilled Deferred Revenue—Unbilled deferred revenue represents contractually stated or committed orders under early renewal and multi-year billing plans for subscription, services and maintenance for which the associated deferred revenue has not been recognized. Under FASB Accounting Standards Codification ("ASC") Topic 606, unbilled deferred revenue is not included as a receivable or deferred revenue on our Consolidated Balance Sheet.
ITEM 1A. RISK FACTORS
We operate in a rapidly changing environment that involves significant risks, a number of which are beyond our control. In addition to the other information contained in this Form 10-K, the following discussion highlights some of these risks and the possible impact of these factors on our business, financial condition, and future results of operations. If any of the following risks actually occur, our business, financial condition, or results of operations may be adversely impacted, causing the trading price of our common stock to decline. In addition, these risks and uncertainties may impact the “forward-looking” statements described elsewhere in this Form 10-K and in the documents incorporated herein by reference. They could affect our actual results of operations, causing them to differ materially from those expressed in “forward-looking” statements.
Global economic and political conditions may further impact our industries, business and financial results.
Our overall performance depends largely upon domestic and worldwide economic and political conditions. The United States and other international economies have experienced cyclical downturns from time to time in which economic activity was impacted by falling demand for a variety of goods and services, restricted credit, poor liquidity, decreased government spending, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies and overall uncertainty with respect to the economy. These economic conditions can occur abruptly. For example, the recent Coronavirus disease (COVID-19) has caused additional uncertainty in the global economy. The extent to which COVID-19 may impact our financial condition or results of operations is currently uncertain and will depend on developments such as the impact on our customers, vendors, distributors and resellers. Due to our subscription-based business model, the effect of COVID-19 may not be fully reflected in our results of operations until future periods, if at all. If economic growth in countries where we do business slows or if such countries experience further economic recessions, customers may delay or reduce technology
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purchases. Our customers include government entities, including the U.S. federal government, and if spending cuts impede the ability of governments to purchase our products and services, our revenue could decline. In addition, a number of our customers rely, directly and indirectly, on government spending.
As described elsewhere in this Risk Factors section, we are dependent on international revenue and operations and are subject to related risks of conducting business globally. Geopolitical trends toward nationalism and protectionism and the weakening or dissolution of international trade pacts may increase the cost of, or otherwise interfere with, conducting business. These trends have increased levels of political and economic unpredictability globally, and may increase the volatility of global financial markets; the impact of such developments on the global economy remains uncertain. Political instability or adverse political developments in any of the countries in which we do business could harm our business, results of operations and financial condition.
A financial sector credit crisis could impair credit availability and the financial stability of our customers, including our distribution partners and channels. A disruption in the financial markets may also have an effect on our derivative counter-parties and could also impair our banking partners, on which we rely for operating cash management. Any of these events could harm our business, results of operations and financial condition.
Our strategy to develop and introduce new products and services exposes us to risks such as limited customer acceptance, costs related to product defects, and large expenditures, each of which may not result in additional net revenue or could result in decreased net revenue.
Rapid technological changes, as well as changes in customer requirements and preferences, characterize the software industry. Just as the transition from mainframes to personal computers transformed the industry over 30 years ago, the software industry has undergone a transition from developing and selling perpetual licenses and on-premises products to subscriptions and cloud enabled technologies. Customers are also reconsidering how they purchase software products, which requires us to constantly evaluate our business model and strategy. In response, we are focused on providing solutions to enable our customers to be more agile and collaborative on their projects. We devote significant resources to the development of new technologies. In addition, we frequently introduce new business models or methods that require a considerable investment of technical and financial resources such as our introduction of flexible subscription and service offerings. For example, in fiscal 2021, we are transitioning multi-subscription plans to named user plans. It is uncertain whether these strategies, including our product and pricing changes, will prove successful or whether we will be able to develop the necessary infrastructure and business models more quickly than our competitors. We are making such investments through further development and enhancement of our existing products and services, as well as through acquisitions. Such investments may not result in sufficient revenue generation to justify their costs and could result in decreased net revenue or profitability. If we are not able to meet customer requirements, either with respect to our software or the manner in which we provide such products, or if we are not able to adapt our business model to meet our customers' requirements, our business, financial condition or results of operations may be adversely impacted.
In particular, a critical component of our growth strategy is to have customers of our AutoCAD and AutoCAD LT products expand their portfolios to include our other offerings and cloud-based functionality. We want customers using individual Autodesk products to expand their portfolio with our other offerings and cloud-based functionality, and we are taking steps to accelerate this migration. At times, sales of our AutoCAD and AutoCAD LT or individual Autodesk flagship products have decreased without a corresponding increase in Industry Collections or cloud-based functionality revenue or without purchases of customer seats to our Industry Collections. Should this continue, our results of operations will be adversely affected.
Our executive management team must act quickly, continuously, and with vision, given the rapidly changing customer expectations and technology advancements inherent in the software industry, the extensive and complex efforts required to create useful and widely accepted products and the rapid evolution of cloud computing, mobile devices, new computing platforms, and other technologies, such as consumer products. Although we have articulated a strategy that we believe will fulfill these challenges, if we fail to execute properly on that strategy or adapt that strategy as market conditions evolve, we may fail to meet our customers' expectations, fail to compete with our competitors' products and technology, and lose the confidence of our channel partners and employees. This in turn could adversely affect our business and financial performance.
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Our business could suffer as a result of risks, costs, charges and integration risks associated with strategic acquisitions and investments such as the recent acquisitions of Assemble Systems, Inc., PlanGrid, Inc. and BuildingConnected, Inc.
We regularly acquire or invest in businesses, software solutions and technologies that are complementary to our business through acquisitions, strategic alliances or equity or debt investments. For example, we recently acquired Assemble Systems, PlanGrid and BuildingConnected. The risks associated with such acquisitions include, among others, the difficulty of assimilating solutions, operations and personnel, inheriting liabilities such as intellectual property infringement claims, the failure to realize anticipated revenue and cost projections, the requirement to test and assimilate the internal control processes of the acquired business in accordance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, and the diversion of management's time and attention.
In addition, such acquisitions and investments involve other risks such as:
• | the inability to retain customers, key employees, vendors, distributors, business partners, and other entities associated with the acquired business; |
• | the potential that due diligence of the acquired business or solution does not identify significant problems; |
• | exposure to litigation or other claims in connection with, or inheritance of claims or litigation risk as a result of, an acquisition, including but not limited to, claims from terminated employees, customers, or other third parties; |
• | the potential for incompatible business cultures; |
• | significantly higher than anticipated transaction or integration-related costs; |
• | the potential additional exposure to fluctuations in currency exchange rates; and |
• | the potential impact on relationships with existing customers, vendors, and distributors as business partners as a result of acquiring another business. |
We may not be successful in overcoming such risks, and such acquisitions and investments may negatively impact our business. In addition, such acquisitions and investments have in the past and may in the future contribute to potential fluctuations in our quarterly financial results. These fluctuations could arise from transaction-related costs and charges associated with eliminating redundant expenses or write-offs of impaired assets recorded in connection with acquisitions and investments. These costs or charges could negatively impact our financial results for a given period, cause quarter to quarter variability in our financial results or negatively impact our financial results for several future periods.
We are dependent on international revenue and operations, exposing us to significant regulatory, global economic, intellectual property, collections, currency exchange rate, taxation, political instability and other risks, which could adversely impact our financial results.
We are dependent on our international operations for a significant portion of our revenue. International net revenue represented 66% of our net revenue in both fiscal 2020 and 2019, respectively. Our international revenue, including that from emerging economies, is subject to general economic and political conditions in foreign markets, including conditions in foreign markets resulting from economic and political conditions in the U.S. Our revenue is also impacted by the relative geographical and country mix of our revenue over time. At times, these factors adversely impact our international revenue, and consequently our business as a whole. Our dependency on international revenue makes us much more exposed to global economic and political trends, which can negatively impact our financial results, even if our results in the U.S. are strong for a particular period.
We anticipate that our international operations will continue to account for a significant portion of our net revenue, and, as we expand our international development, sales and marketing expertise, will provide significant support to our overall efforts in countries outside of the U.S.
Risks inherent in our international operations include:
• | economic volatility; |
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• | tariffs, quotas, and other trade barriers and restrictions; |
• | fluctuating currency exchange rates, including devaluations, currency controls and inflation, and risks related to any hedging activities we undertake; |
• | unexpected changes in regulatory requirements and practices; |
• | delays resulting from difficulty in obtaining export licenses for certain technology; |
• | different purchase patterns as compared to the developed world; |
• | operating in locations with a higher incidence of corruption and fraudulent business practices, particularly in emerging economies; |
• | increasing enforcement by the U.S. under the Foreign Corrupt Practices Act, and adoption of stricter anti-corruption laws in certain countries, including the United Kingdom; |
• | difficulties in staffing and managing foreign sales and development operations; |
• | local competition; |
• | longer collection cycles for accounts receivable; |
• | U.S. and foreign tax law changes impacting how multinational companies are taxed and the complexities of tax reporting; |
• | laws regarding the management of and access to data and public networks; |
• | possible future limitations upon foreign owned businesses; |
• | increased financial accounting and reporting burdens and complexities; |
• | inadequate local infrastructure; |
• | greater difficulty in protecting intellectual property; |
• | software piracy; and |
• | other factors beyond our control, including popular uprisings, terrorism, war, natural disasters, and diseases, such as COVID-19. |
Some of our business partners also have international operations and are subject to the risks described above.
The "Brexit" vote has exacerbated and may further exacerbate many of the risks and uncertainties described above. The United Kingdom officially left the European Union pursuant to Brexit on January 31, 2020, with a transitional period set to end on December 31, 2020. The withdrawal of the United Kingdom from the European Union could, among other potential outcomes, adversely affect the tax, tax treaty, banking, operational, legal and regulatory regimes to which our businesses in the region are subject. The withdrawal could also, among other potential outcomes, create currency volatility, disrupt the free movement of goods, services and people between the United Kingdom and the European Union and significantly disrupt trade between the United Kingdom and the European Union and other parties. While the United Kingdom left the European Union as of January 31, 2020, it has until December 31, 2020 to negotiate a new trade agreement addressing customs and trade matters. Further, uncertainty around these and related issues could lead to adverse effects on the United Kingdom economy, the European Union economies, and the other economies in which we operate.
In addition, the current U.S. administration has instituted or proposed changes to foreign trade policy including the negotiation or termination of trade agreements, the imposition of tariffs on products imported from certain countries, economic sanctions on individuals, corporations or countries and other government regulations affecting trade between the United States and other countries in which we do business. New or increased tariffs and other changes in U.S. trade policy could trigger
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retaliatory actions by affected countries, and certain foreign governments, including the Chinese government, have instituted or are considering imposing trade sanctions on certain U.S. manufactured goods. The escalation of protectionist or retaliatory trade measures in either the United States or any other countries in which we do business, such as a change in tariff structures, export compliance or other trade policies, may increase the cost of, or otherwise interfere with, conducting our business.
Even if we are able to successfully manage the risks of international operations, our business may be adversely affected if our business partners are not able to successfully manage these risks.
Security incidents may compromise the integrity of our or our customers’ offerings, services, data or intellectual property, harm our reputation, damage our competitiveness, create additional liability and adversely impact our financial results.
As we digitize Autodesk and use cloud and web-based technologies to leverage customer data to deliver the total customer experience, we are exposed to increased security risks and the potential for unauthorized access to, or improper use of, our and our customers' information. Like other software offerings and systems, ours are vulnerable to security incidents. We devote resources to maintain the security and integrity of our systems, offerings, services and applications (online, mobile and desktop). We accomplish this by enhancing security features, conducting penetration tests, code hardening, releasing security vulnerability updates and accelerating our incident response time. Despite these efforts, we may not prevent security incidents, and we may face delays or other difficulties in identifying or responding to security incidents.
Hackers regularly have targeted our systems, offerings, services and applications, and we expect them to do so in the future. Security incidents could disrupt the proper functioning of our systems, solutions or services; cause errors in the output of our customers' work; allow unauthorized access to sensitive data or intellectual property, including proprietary or confidential information of ours or our customers; or cause other destructive outcomes.
The risk of a security incident, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. These threats include but are not limited to identity theft, unauthorized access, DNS attacks, wireless network attacks, viruses and worms, advanced persistent threat (APT), application centric attacks, peer-to-peer attacks, phishing, malicious file uploads, backdoor trojans and distributed denial of service (DDoS) attacks. In addition, third parties may attempt to fraudulently induce our employees, vendors, partners or users to disclose information to gain access to our data or our users’ data and there is the risk of employee, contractor, or vendor error or malfeasance. Despite efforts to create security barriers to such threats, it is impossible for us to entirely eliminate these risks.
If any of the foregoing security incidents were to occur or to be perceived to have occurred, our reputation may suffer, our competitive position may be diminished, customers may stop paying for our solutions and services, we could be required to expend significant capital and other resources to evaluate and alleviate the security incident and in an effort to prevent further or additional incidents, and we could face regulatory inquiry, lawsuits and potential liability. We could incur significant costs and liabilities, including due to litigation, indemnity obligations, damages for contract breach, penalties for violation of applicable laws or regulations, and costs for remediation and other incentives offered to customers or other business partners in an effort to maintain business relationships after a breach, and our financial performance could be negatively impacted.
We cannot assure you that any limitations of liability provisions in our contracts would be enforceable or adequate or would otherwise protect us from any liabilities or damages with respect to any particular claim relating to a security breach or other security incident. We also cannot be sure that our existing insurance coverage will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large claims related to a security breach, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, operating results, and reputation.
The effect of the novel coronavirus COVID-19 on Autodesk’s business is currently unknown but it may adversely affect our business and results of operations.
The impacts of the global emergence of COVID-19 on our business and financial results are currently unknown. We are conducting business with substantial modifications to employee travel, employee work locations, and virtualization or cancellation of certain sales and marketing events, among other modifications. We have observed other companies as well as many governments taking precautionary and preemptive actions to address COVID-19, and they may take further actions that alter their normal business operations. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities, or that we determine are in the best interests of
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our employees, customers, partners, suppliers and stockholders. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our customers and prospects, or on our financial results.
Increasing regulatory focus on privacy issues and expanding laws may impact our business or expose us to increased liability.
Our strategy to digitize Autodesk involves increasing our use of cloud and web-based technologies and applications to leverage customer data to improve our offerings for the benefit of our customers. To accomplish this strategy, we must collect and otherwise process customer data, which may include personal data. Federal, state and foreign government privacy and data security laws apply to the treatment of personal data. Governments, regulators, the plaintiffs’ bar, privacy advocates and customers have increased their focus on how companies collect, process, use, store, share and transmit personal data.
The General Data Protection Regulation ("GDPR") is applicable in all European Union member states and introduced new data protection requirements in the European Union and substantial fines for non-compliance. We have modified our privacy practices to comply with GDPR. We have self-certified under the EU-U.S. Privacy Shield program and make use of model contractual clauses approved by the European Commission in relation to the transfer of personal data from the European Union to the United States. The Privacy Shield and the European Commission’s model contractual clauses are currently the subject of legal challenges in the European Union, however, and it is unclear whether these will serve as appropriate means for us to transfer personal data from the European Union to the United States. We have also self-certified to the Swiss-U.S. Privacy Shield program in relation to the transfer of personal data from Switzerland to the United States. This Privacy Shield program also may no longer be valid due to possible legal challenges. Additionally, in June 2016, the United Kingdom voted to leave the European Union, which could also lead to further legislative and regulatory changes with regard to personal data. The United Kingdom Data Protection Act that substantially implements the GDPR became law in May 2018. It remains unclear, however, how United Kingdom data protection laws or regulations will develop in the medium to longer term and how data transfers to and from the United Kingdom will be regulated at the time, if any, that Brexit is effectuated.
In addition, in June 2018, California enacted the California Consumer Privacy Act (the "CCPA"), which took effect in January 2020. The CCPA, among other things, gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA was amended in September 2018 and November 2019, and modifications were proposed in February 2020. It is unclear whether further modifications will be made to this law. Additionally, in October 2019, the California Department of Justice published a notice of proposed rulemaking action with respect to draft regulations to implement the CCPA. We cannot yet predict the impact of the CCPA on our business or operations, but it may require us to modify our data processing practices and policies and to incur substantial costs and expenses in to comply.
The GDPR, CCPA and other state and global laws and regulations increased our responsibility and potential liability in relation to personal data, and we have and will continue to put in place additional processes and programs to demonstrate compliance. New privacy laws and regulations are under development at the U.S. Federal and state level and many international jurisdictions. Any actual or perceived failure to comply with the GDPR, the CCPA or other data privacy laws or regulations, or related contractual or other obligations, or any perceived privacy rights violation, could lead to investigations, claims, and proceedings by governmental entities and private parties, damages for contract breach, and other significant costs, penalties, and other liabilities, as well as harm to our reputation and market position.
Additionally, we store customer information and content and if our customers fail to comply with contractual obligations or applicable laws, it could result in litigation or reputational harm to us. The GDPR, CCPA and other laws and self-regulatory codes may affect our ability to reach current and prospective customers, to understand how our offerings and services are being used, to respond to customer requests allowed under the laws, and to implement our new business models effectively. These new laws and regulations would similarly affect our competitors as well as our customers. These requirements could impact demand for our offerings and services and result in more onerous contract obligations.
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We rely on third parties to provide us with a number of operational and technical services; third-party security incidents could expose us to liability, harm our reputation, damage our competitiveness and adversely impact our financial performance.
We rely on third parties, such as Amazon Web Services, to provide us with operational and technical services. These third parties may have access to our systems, provide hosting services, or otherwise process data about us or our customers, employees, or partners. Any third-party security incident could compromise the integrity of, or availability or result in the theft of, data. In addition, our operations, or the operations of our customers or partners, could be negatively affected in the event of a security breach, and could be subject to the loss or theft of confidential or proprietary information, including source code. Unauthorized access to data and other confidential or proprietary information may be obtained through break-ins, network breaches by unauthorized parties, employee theft or misuse, or other misconduct. If any of the foregoing were to occur or to be perceived to occur, our reputation may suffer, our competitive position may be diminished, customers may buy fewer of our offerings and services, we could face lawsuits and potential liability, and our financial performance could be negatively impacted.
Delays in service from third-party service providers could expose us to liability, harm our reputation, damage our competitiveness and adversely impact our financial performance.
From time to time, we may rely on a single or limited number of suppliers, or upon suppliers in a single country, for the provision of services and materials that we use in the operation of our business and production of our solutions. The inability of such third parties to satisfy our requirements could disrupt our business operations or make it more difficult for us to implement our business strategy. If any of these situations were to occur, our reputation could be harmed, we could be subject to third-party liability, including under data protection and privacy laws in certain jurisdictions, and our financial performance could be negatively impacted.
We are investing in resources to update and improve our information technology systems to digitize Autodesk and support our customers. Should our investments not succeed, or if delays or other issues with new or existing information technology systems disrupt our operations, our business could be harmed.
We rely on our network and data center infrastructure, technology systems and our websites for our development, marketing, operational, support, sales, accounting and financial reporting activities. We continually invest resources to update and improve these systems in order to meet the evolving requirements of our business and customers. In particular, our transition to cloud-based products and a subscription-only business model involves considerable investment in the development of technologies, as well as back-office systems for technical, financial, compliance and sales resources.
Such improvements are often complex, costly and time consuming. In addition, such improvements can be challenging to integrate with our existing technology systems, or may uncover problems with our existing technology systems. Unsuccessful implementation of hardware or software updates and improvements could result in disruption in our business operations, loss of customers, loss of revenue, errors in our accounting and financial reporting or damage to our reputation, all of which could harm our business.
We may not be able to predict subscription renewal rates and their impact on our future revenue and operating results.
Our customers are not obligated to renew their subscriptions for our offerings, and they may elect not to renew. We cannot assure renewal rates, or the mix of subscriptions renewals. Customer renewal rates may decline or fluctuate due to a number of factors, including offering pricing, competitive offerings, customer satisfaction, and reductions in customer spending levels or customer activity due to economic downturns or financial markets uncertainty. If our customers do not renew their subscriptions or if they renew on less favorable terms, our revenues may decline.
Our software is highly complex and may contain undetected errors, defects or vulnerabilities, each of which could harm our business and financial performance.
The software solutions that we offer are complex and, despite extensive testing and quality control, may contain errors, defects or vulnerabilities. Some errors, defects and vulnerabilities in our software solutions may only be discovered after they have been released. Any errors, defects or vulnerabilities could result in the need for corrective releases to our software solutions, damage to our reputation, loss of revenue, an increase in subscription cancellations or lack of market acceptance of our offerings, any of which would likely harm our business and financial performance.
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Existing and increased competition and rapidly evolving technological changes may reduce our revenue and profits.
The software industry has limited barriers to entry, and the availability of computing devices with continually expanding performance at progressively lower prices contributes to the ease of market entry. The software industry has undergone a transition from developing and selling perpetual licenses and on-premises products to subscriptions and cloud-enabled technologies. This shift further lowers barriers to entry and poses a disruptive challenge to established software companies. The markets in which we compete are characterized by vigorous competition, both by entry of competitors with innovative technologies and by consolidation of companies with complementary offerings and technologies. In addition, some of our competitors in certain markets have greater financial, technical, sales and marketing, and other resources. Furthermore, a reduction in the number and availability of compatible third-party applications, or our inability to rapidly adapt to technological and customer preference changes, including those related to cloud computing, mobile devices, and new computing platforms, may adversely affect the sale of our solutions. Because of these and other factors, competitive conditions in the industry are likely to intensify in the future. Increased competition could result in price reductions, reduced net revenue and profit margins and loss of market share, any of which would likely harm our business.
We are subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate the controls.
Our offerings are subject to U.S. export controls and economic sanctions laws and regulations that prohibit the delivery of certain solutions and services without the required export authorizations or export to locations, governments, and persons targeted by U.S. sanctions. While we have processes in place to prevent our offerings from being exported in violation of these laws, including obtaining authorizations as appropriate and screening against U.S. government and international lists of restricted and prohibited persons, we cannot guarantee that these processes will prevent all violations of export control and sanctions laws.
We also note that if our channel partners fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected, through reputational harm as well as other negative consequences including government investigations and penalties. We presently incorporate export control and sanctions compliance requirements in our channel partner agreements. Complying with export control and sanctions regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. Violations of U.S. sanctions or export control laws can result in fines or penalties.
We are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and cash flows.
Because we conduct a substantial portion of our business outside the U.S., we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and economic conditions change. Our exposure to adverse movements in foreign currency exchange rates could have a material adverse impact on our financial results and cash flows.
We use derivative instruments to manage a portion of our cash flow exposure to fluctuations in foreign currency exchange rates. As part of our risk management strategy, we use foreign currency contracts to manage a portion of our exposures of underlying assets, liabilities, and other obligations, which exist as part of our ongoing business operations. These foreign currency instruments have maturities that extend for one to twelve months in the future, and provide us with some protection against currency exposures. However, our attempts to hedge against these risks may not be completely successful, resulting in an adverse impact on our financial results.
The fluctuations of currencies in which we conduct business can both increase and decrease our overall revenue and expenses for any given fiscal period. Although our foreign currency cash flow hedge program extends beyond the current quarter in order to reduce our exposure to foreign currency volatility, we do not attempt to completely mitigate this risk, and in any case, will incur transaction fees in adopting such hedging programs. Such volatility, even when it increases our revenues or decreases our expenses, impacts our ability to accurately predict our future results and earnings.
In addition, Brexit may contribute to volatility in foreign exchange markets with respect to the British Pound and Euro, which we may not be able to effectively manage, and our financial results could be adversely impacted. Additionally, countries in which we operate may be classified as highly inflationary economies, requiring special accounting and financial reporting treatment for such operations, or such countries’ currencies may be devalued, or both, which may adversely impact our business operations and financial results.
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If we do not maintain good relationships with the members of our distribution channel, our ability to generate revenue will be adversely affected. If our distribution channel suffers financial losses, becomes financially unstable or insolvent, or is not provided the right mix of incentives to sell our subscriptions, our ability to generate revenue will be adversely affected.
We sell our software products both directly to end-users and through a network of distributors and resellers. For fiscal 2020 and fiscal 2019, approximately 70% and 71%, respectively, of our revenue was derived from indirect channel sales through distributors and resellers and we expect that the majority of our revenue will continue to be derived from indirect channel sales in the near future. Our ability to effectively distribute our solutions depends in part upon the financial and business condition of our distributor and reseller network. Computer software distributors and resellers typically are not highly capitalized, have previously experienced difficulties during times of economic contraction and experienced difficulties during the past several years. We have processes to ensure that we assess the creditworthiness of distributors and resellers prior to our sales to them. In the past we have taken steps to support them, and may take additional steps in the future, such as extending credit terms and providing temporary discounts. These steps, if taken, could harm our financial results. If our distributors and resellers were to become insolvent, they would not be able to maintain their business and sales, or provide customer support services, which would negatively impact our business and revenue.
We rely significantly upon major distributors and resellers in both the U.S. and international regions, including the distributors Tech Data and Ingram Micro. Tech Data accounted for 35% of our total net revenue for both fiscal 2020 and 2019 and Ingram Micro accounted for 10% and 11% of our total net revenue for fiscal 2020 and 2019, respectively. Should any of our agreements with Tech Data and Ingram Micro be terminated for any reason, we believe the resellers and end users who currently purchase our products through Tech Data and Ingram Micro 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. Consequently, we believe our business is not substantially dependent on either Tech Data or Ingram Micro. However, if either distributor were to experience a significant disruption with its business, or if our relationship with either of them were to significantly deteriorate, it is possible that our ability to sell to end users would be, at least temporarily, negatively impacted. This could in turn negatively impact our financial results. For example, on November 13, 2019, Tech Data announced that it had entered into a definitive agreement to be acquired by an affiliate of funds managed by affiliates of Apollo Global Management, a global alternative investment manager. The transaction is not subject to a financing condition and is expected to close in the first half of calendar year 2020, subject to the satisfaction of customary closing conditions. The transaction has been approved by Tech Data stockholders but has not yet closed. If there is any uncertainty resulting from the transaction between Tech Data and Apollo with the resellers and end users who currently purchase our products through Tech Data, our ability to sell to these resellers and end users could be, at least temporarily, negatively impacted.
Over time, we have modified and will continue to modify aspects of our relationship with our distributors and resellers, such as their incentive programs, pricing to them and our distribution model to motivate and reward them for aligning their businesses with our strategy and business objectives. Changes in these relationships and underlying programs could negatively impact their business and harm our business. Further, our distributors and resellers may lose confidence in our business, move to competitive products, or may not have the skills or ability to support customers. The loss of or a significant reduction in business with those distributors or resellers could harm our business. In particular, if one or more of such distributors or resellers were unable to meet their obligations with respect to accounts payable to us, we could be forced to write off such accounts and may be required to delay the recognition of revenue on future sales to these customers. These events could have a material adverse effect on our financial results.
Our financial results, key metrics and other operating metrics fluctuate within each quarter and from quarter to quarter making our future revenue and financial results difficult to predict.
Our quarterly financial results, key metrics and other operating metrics have fluctuated in the past and will continue to do so in the future. These fluctuations could cause our stock price to change significantly or experience declines. We also provide investors with quarterly and annual financial forward-looking guidance that could prove to be inaccurate as a result of these fluctuations. In addition to the other factors described in this Part I, Item 1A, some of the factors that could cause our financial results, key metrics and other operating metrics to fluctuate include:
• | general market, economic, business, and political conditions in Europe, APAC, and emerging economies; |
• | failure to produce sufficient revenue, ARR, billings, subscription, profitability and cash flow growth; |
• | failure to accurately predict the impact of acquired businesses or to identify and realize the anticipated benefits of acquisitions, and successfully integrate such acquired businesses and technologies; |
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• | potential goodwill impairment charges related to prior acquisitions |
• | failure to manage spend; |
• | changes in billings linearity; |
• | changes in subscription mix, pricing pressure or changes in subscription pricing; |
• | weak or negative growth in one or more of the industries we serve, including AEC, manufacturing, and digital media and entertainment markets; |
• | the success of new business or sales initiatives; |
• | security breaches, related reputational harm, and potential financial penalties to customers and government entities; |
• | restructuring or other accounting charges and unexpected costs or other operating expenses; |
• | timing of additional investments in our technologies or deployment of our services; |
• | changes in revenue recognition or other accounting guidelines employed by us and/or established by the Financial Accounting Standards Board, Securities Exchange Commission or other rule-making bodies; |
• | fluctuations in foreign currency exchange rates and the effectiveness of our hedging activity; |
• | dependence on and the timing of large transactions; |
• | adjustments arising from ongoing or future tax examinations; |
• | the ability of governments around the world to adopt fiscal policies, meet their financial and debt obligations, and to finance infrastructure projects; |
• | failure to expand our AutoCAD and AutoCAD LT customer base to related design products and services; |
• | our ability to rapidly adapt to technological and customer preference changes, including those related to cloud computing, mobile devices and new computing platforms; |
• | the timing of the introduction of new products by us or our competitors; |
• | the financial and business condition of our reseller and distribution channels; |
• | perceived or actual technical or other problems with a product or combination of subscriptions; |
• | unexpected or negative outcomes of matters and expenses relating to litigation or regulatory inquiries; |
• | increases in cloud functionality-related expenses; |
• | timing of releases and retirements of offerings; |
• | changes in tax laws, tax or accounting rules and regulations, such as increased use of fair value measures; |
• | changes in sales compensation practices; |
• | failure to effectively implement and maintain our copyright legalization programs, especially in developing countries; |
• | renegotiation or termination of royalty or intellectual property arrangements; |
• | interruptions or terminations in the business of our consultants or third-party developers; |
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• | the timing and degree of expected investments in growth and efficiency opportunities; |
• | failure to achieve continued success in technology advancements; |
• | catastrophic events, natural disasters, or public health situations, such as pandemics and epidemics, including COVID-19; |
• | regulatory compliance costs; and |
• | failure to appropriately estimate the scope of services under consulting arrangements. |
We have also experienced fluctuations in financial results in interim periods in certain geographic regions due to seasonality or regional economic or political conditions. In particular, our financial results in Europe during our third quarter are usually affected by a slower summer period, and our APAC operations typically experience seasonal slowing in our third and fourth quarters.
Our operating expenses are based in part on our expectations for future revenue and are relatively fixed in the short term. Accordingly, any revenue shortfall below expectations has had, and in the future could have, an immediate and significant adverse effect on our profitability. Greater than anticipated expenses or a failure to maintain rigorous cost controls would also negatively affect profitability.
Because we derive a substantial portion of our net revenue from a small number of solutions, including our AutoCAD-based software products and collections, if these offerings are not successful, our revenue will be adversely affected.
We derive a substantial portion of our net revenue from sales of subscriptions of a limited number of our offerings, including AutoCAD software, solutions based on AutoCAD, which include our collections that serve specific markets and products that are interoperable with AutoCAD. Any factor adversely affecting sales of these subscriptions, including the product release cycle, market acceptance, product competition, performance and reliability, reputation, price competition, economic and market conditions and the availability of third-party applications, would likely harm our financial results. During fiscal 2020 and fiscal 2019, combined revenue from our AutoCAD and AutoCAD LT family products, not including collections having AutoCAD or AutoCAD LT as a component, represented 29% and 28% of our total net revenue, respectively.
Our debt service obligations may adversely affect our financial condition and cash flows from operations.
We have $2.1 billion of debt, consisting of notes due at various times from December 2022 to January 2030, as described in Part 2, Item 8. We also entered into a credit agreement that provides for an unsecured revolving loan facility in the aggregate principal amount of $650.0 million, with an option to be increased up to $1.0 billion, as described in Part 2, Item 8. Maintenance of our indebtedness, contractual restrictions, and additional issuances of indebtedness could:
• | cause us to dedicate a substantial portion of our cash flows from operations towards debt service obligations and principal repayments; |
• | increase our vulnerability to adverse changes in general economic, industry and competitive conditions; |
• | limit our flexibility in planning for, or reacting to, changes in our business and our industry; |
• | impair our ability to obtain future financing for working capital, capital expenditures, acquisitions, general corporate or other purposes; and |
• | due to limitations within the debt instruments, restrict our ability to grant liens on property, enter into certain mergers, dispose of all or substantially all of the assets of Autodesk and its subsidiaries, taken as a whole, materially change our business and incur subsidiary indebtedness, subject to customary exceptions. |
We are required to comply with the covenants set forth in our credit agreement, such as an interest coverage ratio in effect January 31, 2019, and a leverage ratio in effect July 31, 2019. If we breach any of the covenants and do not obtain a waiver from the note holders or lenders, then, subject to applicable cure periods, we would not be able to incur additional indebtedness under the credit agreement described in Part 2, Item 8 and any outstanding indebtedness under the credit agreement may be
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declared immediately due and payable. In addition, changes by any rating agency to our credit rating may negatively impact the value and liquidity of our securities. Under certain circumstances, if our credit ratings are downgraded or other negative action is taken, the interest rate payable by us under our credit agreement could increase. Downgrades in our credit ratings could also restrict our ability to obtain additional financing in the future and could affect the terms of any such financing.
If we are not able to adequately protect our proprietary rights, our business could be harmed.
We rely on a combination of patent, copyright and trademark laws, trade secret protections, confidentiality procedures and contractual provisions to protect our proprietary rights. Despite such efforts to protect our proprietary rights, unauthorized parties from time to time have copied aspects of our software or have obtained and used information that we regard as proprietary. Policing unauthorized use of our software is time-consuming and costly. We are unable to measure the extent to which unauthorized use of our software exists and we expect that unauthorized use of software will remain a persistent problem, particularly in emerging economies. Furthermore, our means of protecting our proprietary rights may not be adequate.
Additionally, we actively protect the secrecy of our confidential information and trade secrets, including our source code. If unauthorized disclosure of our source code occurs, we could potentially lose future trade secret protection for that source code. The loss of future trade secret protection could make it easier for third parties to compete with our offerings by copying functionality, which could adversely affect our financial performance and our reputation. We also seek to protect our confidential information and trade secrets through the use of non-disclosure agreements with our employees, customers, contractors, vendors and partners. However, it is possible that our confidential information and trade secrets may be disclosed or published without our authorization. If this were to occur, it may be difficult and/or costly for us to enforce our rights, and our financial performance and reputation could be negatively impacted.
We may face intellectual property infringement claims that could be costly to defend and result in the loss of significant rights.
As more software patents are granted worldwide, the number of offerings and competitors in our industries grows and the functionality of products in different industries overlaps, we expect that software developers will be increasingly subject to infringement claims. Infringement or misappropriation claims have in the past been, and may in the future be, asserted against us, and any such assertions could harm our business. Additionally, certain patent holders without products have become more aggressive in threatening and pursuing litigation in attempts to obtain fees for licensing the right to use patents. Any such claims or threats, whether with or without merit, have been and could in the future be time-consuming to defend, result in costly litigation and diversion of resources, cause product delays or require us to enter into royalty or licensing agreements. In addition, such royalty or license agreements, if required, may not be available on acceptable terms, if at all, which would likely harm our business.
We rely on software from third parties, and a failure to properly manage our use of third-party software could result in increased costs or loss of revenue.
Many of our products are designed to include software licensed from third parties. Such third-party software includes software licensed from commercial suppliers and software licensed under public open source licenses. We have internal processes to manage our use of such third-party software. However, if we fail to adequately manage our use of third-party software, then we may be subject to copyright infringement or other third-party claims. If we are non-compliant with a license for commercial software, then we may be required to pay penalties or undergo costly audits pursuant to the license agreement. In the case of open-source software licensed under certain “copyleft” licenses, the license itself may require, or a court-imposed remedy for non-compliant use of the open source software may require, that proprietary portions of our own software be publicly disclosed or licensed. This could result in a loss of intellectual property rights, increased costs, damage to our reputation and/or a loss of revenue.
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From time to time we realign or introduce new business and sales initiatives; if we fail to successfully execute and manage these initiatives, our results of operations could be negatively impacted.
As part of our effort to accommodate our customers' needs and demands and the rapid evolution of technology, we from time to time evolve our business and sales initiatives such as realigning our development and marketing organizations, offering software as a service, and realigning our internal resources in an effort to improve efficiency. We may take such actions without clear indications that they will prove successful, and at times, we have been met with short-term challenges in the execution of such initiatives. Market acceptance of any new business or sales initiative is dependent on our ability to match our customers' needs at the right time and price. Often, we have limited prior experience and operating history in these new areas of emphasis. If any of our assumptions about expenses, revenue or revenue recognition principles from these initiatives proves incorrect, or our attempts to improve efficiency are not successful, our actual results may vary materially from those anticipated, and our financial results will be negatively impacted.
Net revenue, ARR, billings, earnings, cash flow or subscriptions shortfalls or the volatility of the market generally may cause the market price of our stock to decline.
The market price for our common stock has experienced significant fluctuations and may continue to fluctuate significantly. The market price for our common stock may be affected by a number of factors, including the other factors described in this Part I, Item 1A and the following:
• | shortfalls in our expected financial results, including net revenue, ARR, billings, earnings and cash flow or key performance metrics, such as subscriptions, and how those results compare to securities analyst expectations, including whether those results fail to meet, exceed, or significantly exceed securities analyst expectations; |
• | quarterly variations in our or our competitors' results of operations; |
• | general socio-economic, political or market conditions; |
• | changes in forward-looking estimates of future results, how those estimates compare to securities analyst expectations, or changes in recommendations or confusion on the part of analysts and investors about the short-term and long-term impact to our business; |
• | uncertainty about certain governments' abilities to repay debt or effect fiscal policy; |
• | the announcement of new offerings or enhancements by us or our competitors; |
• | unusual events such as significant acquisitions, divestitures, regulatory actions, and litigation; |
• | changes in laws, rules, or regulations applicable to our business; |
• | outstanding debt service obligations; and |
• | other factors, including factors unrelated to our operating performance, such as instability affecting the economy or the operating performance of our competitors. |
Significant changes in the price of our common stock could expose us to costly and time-consuming litigation. Historically, after periods of volatility in the market price of a company's securities, a company becomes more susceptible to securities class action litigation. This type of litigation is often expensive and diverts management's attention and resources.
Our business could be adversely affected if we are unable to attract and retain key personnel.
Our success and ability to invest and grow depend largely on our ability to attract and retain highly skilled technical, professional, managerial, sales, and marketing personnel. Historically, competition for these key personnel has been intense. The loss of services of any of our key personnel (including key personnel joining our company through acquisitions), the inability to retain and attract qualified personnel in the future, or delays in hiring required personnel, particularly engineering and sales personnel, could make it difficult to meet key objectives, such as timely and effective product introductions and financial goals.
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Our investment portfolio consists of a variety of investment vehicles that are subject to interest rate trends, market volatility, and other economic factors. If general economic conditions decline, this could cause the credit ratings of our investments to deteriorate, illiquidity in the financial marketplace, and we may experience a decline in interest income and an inability to sell our investments, leading to impairment in the value of our investments.
It is our policy to invest our cash, cash equivalents and marketable securities in highly liquid instruments with, and in the custody of, financial institutions with high credit ratings and to limit the amounts invested with any one institution, type of security and issuer. However, we are subject to general economic conditions, interest rate trends and volatility in the financial marketplace that can affect the income that we receive from our investments, the net realizable value of our investments (including our cash, cash equivalents and marketable securities) and our ability to sell them. Any one of these factors could reduce our investment income, or result in material charges, which in turn could impact our overall net income (loss) and earnings (loss) per share.
From time to time we make direct investments in privately held companies. Privately held company investments are considered inherently risky. The technologies and products these companies have under development are typically in the early stages and may never materialize, which could result in a loss of all or a substantial part of our initial investment in these companies. The evaluation of privately held companies is based on information that we request from these companies, which is not subject to the same disclosure regulations as U.S. publicly traded companies, and as such, the basis for these evaluations is subject to the timing and accuracy of the data received from these companies.
A loss on any of our investments may cause us to record an other-than-temporary impairment charge. The effect of this charge could impact our overall net income (loss) and earnings (loss) per share. In any of these scenarios, our liquidity may be negatively impacted, which in turn may prohibit us from making investments in our business, taking advantage of opportunities and potentially meeting our financial obligations as they come due.
We are subject to legal proceedings and regulatory inquiries, and we may be named in additional legal proceedings or become involved in regulatory inquiries in the future, all of which are costly, distracting to our core business and could result in an unfavorable outcome, or a material adverse effect on our business, financial condition, results of operations, cash flows or the trading prices for our securities.
We are involved in legal proceedings and receive inquiries from regulatory agencies. As the global economy has changed and our business has evolved, we have seen an increase in litigation activity and regulatory inquiries. Like many other high technology companies, the number and frequency of inquiries from U.S. and foreign regulatory agencies we have received regarding our business and our business practices, and the business practices of others in our industry, have increased in recent years. In the event that we are involved in significant disputes or are the subject of a formal action by a regulatory agency, we could be exposed to costly and time-consuming legal proceedings that could result in any number of outcomes. Any claims or regulatory actions initiated by or against us, whether successful or not, could result in expensive costs of defense, costly damage awards, injunctive relief, increased costs of business, fines or orders to change certain business practices, significant dedication of management time, diversion of significant operational resources, or otherwise harm our business. In any of these cases, our financial results, results of operations, cash flows or the trading prices for our securities could be negatively impacted.
Changes in tax rules and regulations, and uncertainties in interpretation and application, could materially affect our tax obligations and effective tax rate.
We are a U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Our effective tax rate is primarily based on our expected geographic mix of earnings, statutory rates, intercompany arrangements, including the manner we develop, value and license our intellectual property, and enacted tax rules. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions on a worldwide basis. While 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 overturned by jurisdictional tax authorities and may have a significant impact on our effective tax rate.
Tax laws in the United States and in foreign tax jurisdictions are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. For example, the U.S. government enacted significant tax law changes in December 2017, the U.S. Tax Cuts and Jobs Act ("Tax Act"), which impacted our tax obligations and effective tax rate beginning in our fiscal 2018 tax year. Due to the complexity and varying interpretations of the Tax Act, the U.S. Department of
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Treasury and other standard-setting bodies have been issuing and will continue to issue regulations and interpretative guidance that could significantly impact how we will apply the law and the ultimate impact to our results of operations from the Tax Act, including for our prior tax years.
Increasingly, governmental tax authorities are scrutinizing existing corporate tax regulatory and legal regimes. Many countries in the European Union, as well as other countries and organizations such as the Organization for Economic Cooperation and Development, are actively considering new taxing regimes and changes to existing tax laws that are contrary to the way in which we have interpreted and historically applied the rules and regulations in our tax returns filed in such jurisdictions. If U.S. or other foreign tax authorities change applicable tax laws or successfully challenge how or where our profits are currently recognized, our overall taxes could increase, and our business, financial condition or results of operations may be adversely impacted.
Changes in existing financial accounting standards or practices, or taxation rules or practices may adversely affect our results of operations.
Changes in existing accounting or taxation rules or practices, new accounting pronouncements or taxation rules, or varying interpretations of current accounting pronouncements or taxation practice could have a significant adverse effect on our results of operations or the way we conduct our business. Further, such changes could potentially affect our reporting of transactions completed before such changes are effective.
We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on our internal control over financial reporting. The report contains, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management.
If our management or independent registered public accounting firm identifies one or more material weaknesses in our internal control over financial reporting, we would be unable to assert that such internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective (or if our independent registered public accounting firm is unable to express an opinion that our internal controls are effective), we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our business and stock price.
In preparing our financial statements we make certain assumptions, judgments and estimates that affect amounts reported in our consolidated financial statements, which, if not accurate, may significantly impact our financial results.
We make assumptions, judgments and estimates for a number of items, including revenue recognition for our hybrid desktop software and cloud service subscriptions, the fair value of financial instruments, goodwill, long-lived assets and other intangible assets, the realizability of deferred tax assets and the fair value of stock awards. We also make assumptions, judgments and estimates in determining the accruals for employee related liabilities including commissions, bonuses, and sabbaticals; and in determining the accruals for uncertain tax positions, partner incentive programs, product returns reserves, allowances for doubtful accounts, asset retirement obligations and legal contingencies. These assumptions, judgments and estimates are drawn from historical experience and various other factors that we believe are reasonable under the circumstances as of the date of the consolidated financial statements. Actual results could differ materially from our estimates, and such differences could significantly impact our financial results.
We rely on third-party technologies and if we are unable to use or integrate these technologies, our solutions and service development may be delayed and our financial results negatively impacted.
We rely on certain software that we license from third parties, including software that is integrated with internally developed software and used in our offerings to perform key functions. These third-party software licenses may not continue to be available on commercially reasonable terms, and the software may not be appropriately supported, maintained or enhanced by the licensors. The loss of licenses to, or inability to support, maintain and enhance any such software could result in
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increased costs or delays until equivalent software can be developed, identified, licensed and integrated, which would likely harm our business.
Disruptions with licensing relationships and third-party developers could adversely impact our business.
We license certain key technologies from third parties. Licenses may be restricted in the term or the use of such technology in ways that negatively affect our business. Similarly, we may not be able to obtain or renew license agreements for key technology on favorable terms, if at all, and any failure to do so could harm our business.
Our business strategy has historically depended in part on our relationships with third-party developers who provide products that expand the functionality of our design software. Some developers may elect to support other products or may experience disruption in product development and delivery cycles or financial pressure during periods of economic downturn. In particular markets, such disruptions have in the past, and would likely in the future, negatively impact these third-party developers and end users, which could harm our business.
Additionally, technology created by outsourced product development, whether outsourced to third parties or developed externally and transferred to us through business or technology acquisitions, has certain additional risks such as effective integration into existing products, adequate transfer of technology know-how and ownership and protection of transferred intellectual property.
As a result of our strategy of partnering with other companies for product development, our product delivery schedules could be adversely affected if we experience difficulties with our product development partners.
We partner with certain independent firms and contractors to perform some of our product development activities. We believe our partnering strategy allows us to, among other things, achieve efficiencies in developing new products and maintaining and enhancing existing product offerings. Our partnering strategy creates a dependency on such independent developers. Independent developers, including those who currently develop solutions for us in the U.S. and throughout the world, may not be able or willing to provide development support to us in the future. In addition, use of development resources through consulting relationships, particularly in non-U.S. jurisdictions with developing legal systems, may be adversely impacted by, and expose us to risks relating to, evolving employment, export and intellectual property laws. These risks could, among other things, expose our intellectual property to misappropriation and result in disruptions to product delivery schedules.
Our business may be significantly disrupted upon the occurrence of a catastrophic event.
Our business is highly automated and relies extensively on the availability of our network and data center infrastructure, our internal technology systems and our websites. We also rely on hosted computer services from third parties for services that we provide to our customers and computer operations for our internal use. The failure of our systems or hosted computer services due to a catastrophic event, such as an earthquake, fire, flood, tsunami, weather event, telecommunications failure, power failure, cyber attack, terrorism, or war, could adversely impact our business, financial results and financial condition. We have developed disaster recovery plans and maintain backup systems in order to reduce the potential impact of a catastrophic event, however there can be no assurance that these plans and systems would enable us to return to normal business operations. In addition, any such event could negatively impact a country or region in which we sell our products. This could in turn decrease that country's or region's demand for our products, thereby negatively impacting our financial results.
If we were required to record an impairment charge related to the value of our long-lived assets, or an additional valuation allowance against our deferred tax assets, our results of operations would be adversely affected.
Our long-lived assets are tested for impairment if indicators of impairment exist. If impairment testing shows that the carrying value of our long-lived assets exceeds their estimated fair values, we would be required to record a non-cash impairment charge, which would decrease the carrying value of our long-lived assets, as the case may be, and our results of operations would be adversely affected. Our deferred tax assets include net operating loss, amortizable tax assets and tax credit carryforwards that can be used to offset taxable income and reduce income taxes payable in future periods. Each quarter, we assess the need for a valuation allowance, considering both positive and negative evidence to determine whether all or a portion of the deferred tax assets are more likely than not to be realized. In fiscal 2016, and in fiscal 2018, we determined that it was more likely than not that Autodesk would not realize our U.S. and Singapore deferred tax assets, respectively, and established a valuation allowance against the deferred tax assets. We continued to have a full valuation allowance against our U.S., Canada and Netherlands and released our valuation allowance against our Singapore deferred tax assets in fiscal 2020. Release of the Singapore valuation allowance resulted in a material benefit in the fourth quarter. Changes in the amount of the U.S. and
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foreign jurisdictions valuation allowance could also result in a material non-cash expense or benefit in the period in which the valuation allowance is adjusted and our results of operations could be materially affected. We will continue to perform these tests on our worldwide deferred tax assets, incorporating the complex interplays of U.S. global taxation of earnings under the Tax Act, any future adjustments to the realizability of our deferred tax assets may have a material effect on our financial condition and results of operations.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 2. | PROPERTIES |
We lease approximately 2,200,000 square feet of office space in 106 locations in the United States and internationally through our foreign subsidiaries. Our executive offices are in leased office space in San Francisco, California, and our corporate headquarters are in leased office space in San Rafael, California. Our San Rafael facilities consist of approximately 162,000 square feet under leases that have expiration dates ranging from January 2023 to December 2024. Our San Francisco facilities consist of approximately 328,000 square feet under leases that have expiration dates ranging from December 2020 to June 2026. We and our foreign subsidiaries lease additional space in various locations throughout the world for local sales, product development, and technical support personnel.
All facilities are in good condition. Our facilities are operating at capacities averaging 85% occupancy worldwide as of January 31, 2020. We believe that our existing facilities and offices are adequate to meet our requirements for the foreseeable future. See Note 9, “Leases,” in the Notes to Consolidated Financial Statements for more information about our lease commitments.
ITEM 3. | LEGAL PROCEEDINGS |
We are involved in a variety of claims, suits, investigations, inquiries and proceedings in the normal course of business activities including claims of alleged infringement of intellectual property rights, commercial, employment, tax, prosecution of unauthorized use, business practices, and other matters. In our opinion, resolution of pending matters is not expected to have a material adverse impact on our consolidated results of operations, cash flows, or 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 our results of operations, cash flows, or financial position in a particular period, however, based on the information known by us as of the date of this filing and the rules and regulations applicable to the preparation of our financial statements, any such amount is either immaterial or it is not possible to provide an estimated amount of any such potential loss.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
MARKET INFORMATION FOR COMMON STOCK
Our common stock is traded on the Nasdaq Global Select Market under the symbol ADSK.
DIVIDEND POLICY
We anticipate that, for the foreseeable future, we will not pay any cash or stock dividends.
STOCKHOLDERS
As of January 31, 2020, the number of common stockholders of record was 352. Because many of our shares of common stock are held by brokers or other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by the record holders.
ISSUER PURCHASES OF EQUITY SECURITIES
Autodesk's stock repurchase program provides Autodesk with the ability to offset the dilution from the issuance of stock under our employee stock plans and reduce shares outstanding over time, and has the effect of returning excess cash generated from our business to stockholders. Under the share repurchase program, Autodesk may repurchase shares from time to time in open market transactions, privately-negotiated transactions, accelerated share repurchase programs, tender offers, or by other means. The share repurchase program does not have an expiration date and the pace and timing of repurchases will depend on factors such as cash generation from operations, available surplus, the volume of employee stock plan activity, remaining shares available in the authorized pool, cash requirements for acquisitions, economic and market conditions, stock price and legal and regulatory requirements.
The following table provides information about the repurchase of common stock in open-market transactions during the quarter ended January 31, 2020:
(Shares in millions) | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(2) | ||||||||
November 1 - November 30 | — | $ | — | — | 15.7 | |||||||
December 1 - December 31 | 0.4 | 182.41 | 0.4 | 15.3 | ||||||||
January 1 - January 31 | 0.6 | 193.71 | 0.6 | 14.7 | ||||||||
Total | 1.0 | $ | 189.52 | 1.0 | ||||||||
____________________
(1) | Represents shares purchased in open-market transactions under the stock repurchase program approved by the Board of Directors. |
(2) | These amounts correspond to the plan publicly announced and approved by the Board of Directors in September 2016 that authorizes the repurchase of 30.0 million shares. The plan does not have a fixed expiration date. |
SALES OF UNREGISTERED SECURITIES
There were no sales of unregistered securities during the three months ended January 31, 2020.
2020 Form 10-K 31
COMPANY STOCK PERFORMANCE
The following graph shows a five-year comparison of cumulative total return (equal to dividends plus stock appreciation) for our Common Stock, the Standard & Poor’s 500 Stock Index, and the Dow Jones U.S. Software Index. The following graph and related information will not be deemed to be “soliciting material” or to be “filed” with the SEC, nor will such information be incorporated by reference into any filing pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate it by reference into such filing.
Comparison of Five Year Cumulative Total Stockholder Return (1)
___________________
(1) | Assumes $100 invested on January 31, 2015, in Autodesk’s stock, the Standard & Poor’s 500 Stock Index, and the Dow Jones U.S. Software Index, with reinvestment of all dividends. Total stockholder returns for prior periods are not an indication of future investment returns. |
2020 Form 10-K 32
ITEM 6. | SELECTED FINANCIAL DATA |
The following selected consolidated financial data is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes thereto included in Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the information presented below. The financial data for the fiscal years ended January 31, 2020 and 2019, are derived from, and are qualified by reference to, the audited consolidated financial statements that are included in this Form 10-K. The Consolidated Statements of Operations and the Consolidated Statements of Cash Flows data for the fiscal year ended January 31, 2018, are derived from, and are qualified by reference to, the audited consolidated financial statements that are included in this Form 10-K. The Consolidated Balance Sheet data for the fiscal year ended January 31, 2018, and the remaining financial data for the fiscal years ended January 31, 2017 and 2016, are derived from audited, consolidated financial statements which are not included in this Form 10-K.
Fiscal Year Ended January 31, | |||||||||||||||||||
2020 (1) | 2019 (2) | 2018 | 2017 | 2016 | |||||||||||||||
(In millions, except per share data) | |||||||||||||||||||
Net revenue | $ | 3,274.3 | $ | 2,569.8 | $ | 2,056.6 | $ | 2,031.0 | $ | 2,504.1 | |||||||||
Income (loss) from operations | 343.0 | (25.0 | ) | (509.1 | ) | (499.6 | ) | 1.3 | |||||||||||
Net income (loss) | 214.5 | (80.8 | ) | (566.9 | ) | (582.1 | ) | (330.5 | ) | ||||||||||
Cash flow from operations | $ | 1,415.1 | $ | 377.1 | $ | 0.9 | $ | 169.7 | $ | 414.0 | |||||||||
Common stock data: | |||||||||||||||||||
Basic net income (loss) per share | $ | 0.98 | $ | (0.37 | ) | $ | (2.58 | ) | $ | (2.61 | ) | $ | (1.46 | ) | |||||
Diluted net income (loss) per share | $ | 0.96 | $ | (0.37 | ) | $ | (2.58 | ) | $ | (2.61 | ) | $ | (1.46 | ) | |||||
Balance sheet data: | |||||||||||||||||||
Total assets | $ | 6,179.3 | $ | 4,729.2 | $ | 4,113.6 | $ | 4,798.1 | $ | 5,515.3 | |||||||||
Long-term liabilities | 3,099.2 | 2,638.9 | 2,246.4 | 1,879.1 | 2,304.7 | ||||||||||||||
Stockholders’ (deficit) equity | $ | (139.1 | ) | $ | (210.9 | ) | $ | (256.0 | ) | $ | 733.6 | $ | 1,619.6 | ||||||
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(1) | Reflects the impact of the adoption of a new accounting standard in fiscal year 2020, Accounting Standards Codification ("ASC") Topic 842. See Part II, Item 8, Note 1, Business and Summary of Significant Accounting Policies, Accounting Standards Adopted, of our consolidated financial statements for additional information. Prior periods were not adjusted. |
(2) | Reflects the impact of the adoption of new accounting standards in fiscal year 2019 related to ASC Topic 606 and ASC Topic 340. Prior periods were not adjusted. |
2020 Form 10-K 33
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The discussion in our MD&A and elsewhere in this Form 10-K 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” and “Overview of Fiscal 2020” below, in “Results of Operations-Impacts of COVID-19 to Autodesk’s Business,” future net revenue, operating expenses, recurring revenue, annualized recurring revenue, net revenue retention rate, cash flow, remaining performance obligations, other future financial results (by product type and geography), subscriptions and annualized revenue per subscription, the effectiveness of our efforts to successfully manage transitions to new markets, our ability to increase our subscription base, expected market trends, the impact of planned and past acquisitions and investment activities, the effects of global economic conditions, the effects of revenue recognition, the effects of recently issued accounting standards, expectations regarding our cash needs, the effects of fluctuations in exchange rates and our hedging activities on our financial results, our ability to successfully expand adoption of our products, our ability to gain market acceptance of new business and sales initiatives, the impact of economic volatility and geopolitical activities in certain countries, particularly emerging economy countries, the timing and amount of purchases under our stock buy-back plan, and the effects of potential non-cash charges on our financial results and the resulting effect on our financial results. In addition, forward-looking statements also consist of statements involving expectations regarding product capability and acceptance, 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 Annual Report on Form 10-K 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 a number of factors, including those set forth above in Part I, 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.
STRATEGY
Autodesk makes software for people who make things. If you have ever driven a high-performance car, admired a towering skyscraper, used a smartphone, or watched a great film, chances are you have experienced what millions of Autodesk customers are doing with our software. We empower innovators to achieve the new possible - enabling them to discover first-in-kind solutions to complex design challenges, deliver tangible outcomes in record time, and make data-powered decisions for sustainable outcomes.
Our strategy is to build enduring relationships with customers, delivering innovative technology that provides valuable automation and insight into their design and make process. To drive execution of our strategy, we are focused on three strategic priorities: delivering on the promise of subscription, digitizing the company, and reimagining construction, manufacturing, and production.
We equip and inspire our users with the tailored tools, services, and access they need for success today and tomorrow. At every step, we help users harness the power of data to build upon their ideas and explore new ways of imagining, collaborating, and creating to achieve better outcomes for their customers, for society, and for the world. And because creativity can’t flourish in silos, we connect what matters - from steps in a project to collaborators on a unified platform.
Autodesk was founded during the platform transition from mainframe computers 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 over 30 years ago, the software industry has undergone a transition from developing and selling perpetual licenses and on-premises products to subscriptions and cloud-enabled technologies.
Product Evolution
To address this shift, Autodesk made a strategic decision to shift its business model from selling perpetual licenses and maintenance plans to selling subscriptions.
Today, we offer subscriptions for individual products and Industry Collections, EBAs, and cloud service offerings (collectively referred to as "subscription plan"). Subscription plans are designed to give our customers more flexibility with how they use our offerings and to attract a broader range of customers, such as project-based users and small businesses.
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Our subscription plans currently represent a hybrid of desktop software and cloud functionality, which provides a device-independent, collaborative design workflow for designers and their stakeholders. Our cloud offerings, for example, BIM 360, Shotgun, AutoCAD web app and AutoCAD mobile app, provide tools, including mobile and collaboration capabilities, to streamline design, collaboration, building and manufacturing and data management processes. We believe that customer adoption of these new offerings will continue to grow as customers across a range of industries begin to take advantage of the scalable computing power and flexibility provided through these new services.
Industry Collections provide our customers with increased access to a broader selection of Autodesk solutions and services that exceeds those previously available in suites - simplifying the customers' ability to get access to a complete set of tools for their industry.
We discontinued the sale of new commercial licenses of most individual software products in fiscal 2016. Additionally, in fiscal 2018, we commenced a program to incentivize maintenance plan customers to move to subscription plan offerings, maintenance-to-subscription ("M2S"), while at the same time increasing maintenance plan pricing over time for customers that remain on maintenance plans. Since launching the program, a substantial majority of maintenance plan customers have converted to subscription plan offerings. We will be retiring maintenance offerings as of Augest 7, 2021. Customers will have a one-year period starting August 7, 2020, to convert a maintenance seat to subscription plan offerings.
To support our strategic priority of re-imagining construction, in fiscal 2019, we strengthened the foundation of our construction solutions with both organic and inorganic investments. In addition to investing in our BIM 360 portfolio, we acquired Assemble Systems for quantity take off functionality, PlanGrid for document-centric workflows and field execution, and BuildingConnected for bidding and estimation processes. The broadened product portfolio, the Autodesk Construction Cloud, has helped us expand our presence with sub-contractors, trades people, and building owners.
As part of our manufacturing strategy, we continue to attract both global manufacturing leaders and disruptive startups with our generative design and our Fusion 360 technology enhancements.
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. For example, in fiscal 2019, we acquired Assemble Systems, a leading provider of key workflow software solutions, PlanGrid, a leading provider of construction productivity software, and BuildingConnected, a leading pre-construction platform. We believe that these acquisitions have enabled us to offer a more comprehensive, cloud-based construction platform. 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 factors in making decisions regarding acquisitions. We currently anticipate that we will continue to acquire products, technology, and businesses as compelling opportunities become available.
We evaluate annualized recurring revenue ("ARR"), growth of billings, and remaining performance obligations in determining business momentum. To analyze progress, we have disaggregated our growth between the original maintenance model and the subscription plan model. Maintenance plan subscriptions peaked in the fourth quarter of fiscal 2016 as we discontinued selling new maintenance plan subscriptions in fiscal 2017, and we expect the number of these subscriptions to keep declining over time as maintenance plan customers continue to convert to our subscription plans. We will be retiring maintenance offerings as of August 7, 2021. Customers will have a one-year period starting August 7, 2020 to convert a maintenance seat to subscription plan offerings.
Global Reach
We sell our products and services globally, through a combination of indirect and direct channels. Our indirect channels include value added resellers, direct market resellers, distributors, computer manufacturers, and other software developers. Our direct channels include internal sales resources dedicated to selling in our largest accounts, our highly specialized solutions, and business transacted through our online Autodesk branded store. See Note 2, "Revenue Recognition" in the Notes to the Consolidated Financial Statements for further detail on the results of our indirect and direct channel sales for the fiscal years ended January 31, 2020, 2019, and 2018.
We anticipate that our channel mix will continue to change as we scale our online Autodesk branded store business and our largest accounts shift towards direct-only business models. However, we expect our indirect channel will continue to transact and support the majority of our customers and revenue. We employ a variety of incentive programs and promotions to
2020 Form 10-K 35
align our direct and indirect channels with our business strategies. In addition, we have a worldwide user group organization and we have created online user communities dedicated to the exchange of information related to the use of our products.
One of our key strategies is to maintain an open-architecture design of our software products to facilitate third-party development of complementary products and industry-specific software solutions. This approach enables customers and third parties to customize solutions for a wide variety of highly specific uses. We offer several programs that provide strategic investment funding, technological platforms, user communities, technical support, forums, and events to developers who develop add-on applications for our products. For example, we have established the Autodesk Forge developer program to support innovators that build solutions to facilitate the development of a single connected ecosystem for the future of how things are designed, made, and used as well as support ideas that push the boundaries of 3D printing.
In addition to the competitive advantages afforded by our technology, our large global network of distributors, resellers, third-party developers, customers, educational institutions, educators, and students is a key competitive advantage which has been cultivated over an extensive period. This network of partners and 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 solutions quickly and easily. We have a significant number of registered third-party developers who create products that work well with our solutions and extend them for a variety of specialized applications.
Better World
To help our customers imagine, design, and make a better world, our sustainability initiatives focus our efforts on the areas where we can have the greatest positive impact: products and support, catalyzing impact and innovation in our future markets, and leading by example with our 100% renewable and sustainable business practices. Through our products and services, we are supporting our customers to better understand and improve the environmental performance of everything they make and mitigate the causes and effects of climate change.
The Autodesk Foundation (the "Foundation"), a privately funded 501(c)(3) charity organization established and solely funded by us, leads our philanthropic efforts. The purpose of the Foundation is twofold: to support employees to make a better world by matching employees' volunteer time and/or donations to nonprofit organizations; and to support organizations and individuals using design to drive positive social and environmental impact. On our behalf, the Foundation also administers a discounted software donation program to nonprofit organizations, social and environmental entrepreneurs, and others who are developing design solutions that will shape a more sustainable future.
Assumptions Behind Our Strategy
Our strategy depends upon a number of assumptions, including: making our technology available to mainstream markets; leveraging our large global network of distributors, resellers, third-party developers, customers, educational institutions, and students; improving the performance and functionality of our products; and adequately protecting 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 I, Item 1A, “Risk Factors.”
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles. In preparing our Consolidated Financial Statements, we make assumptions, judgments, and estimates that can have a significant impact on amounts reported in our Consolidated Financial Statements. We evaluate our estimates and assumptions on an ongoing basis. 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.
Our significant accounting policies are described in Part II, Item 8, Note 1, “Business and Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. We believe that of all our significant accounting policies, the following accounting policies and specific estimates involve a greater degree of judgment and complexity. Accordingly, these
2020 Form 10-K 36
are the accounting policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition - Judgments with Multiple Performance Obligations. Our contracts with customers may include promises to transfer multiple products and services to a customer. A performance obligation is a promise in a contract with a customer to transfer products or services that are distinct. Determining whether products and services are distinct performance obligations that should be accounted for separately or combined as a single performance obligation may require significant judgment that requires us to assess the nature of the promise and value delivered to the customer and the interaction of the desktop applications and cloud functionalities.
For our product subscriptions, cloud service offerings, and flexible enterprise business arrangements, the functional nature of the promise, as well as the customers' value expectations, led us to conclude desktop applications and cloud functionalities are not distinct in the context of the contract and should be accounted for as a single performance obligation. There is a high degree of interaction of the desktop applications and cloud functionalities, which is not available with the desktop applications alone or in conjunction with third-party cloud service providers. Furthermore, customers are not able to use the desktop applications for its intended purpose without our cloud functionalities.
For contracts with more than one performance obligation, the transaction price is allocated among the performance obligations in an amount that depicts the relative standalone selling price ("SSP") of each obligation. Judgment is required to determine the SSP for each distinct performance obligation. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount that should be allocated based on the relative SSP of the various products and services.
In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that includes market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customer and circumstance. In these instances, we use relevant information such as the sales channel and geographic region to determine the SSP.
Privately Held Company Investments. Privately held debt and equity securities are valued using significant unobservable inputs or data in an inactive market and the valuation requires our judgment due to the absence of market prices and inherent lack of liquidity. The carrying value is adjusted for our privately held equity securities if there are observable price changes in a same or similar security from the same issuer or if there are identified events or changes in circumstances that may indicate impairment, as discussed below. The determination of whether an orderly transaction is for a same or similar investment requires significant management judgment including the nature of rights and obligations of the investments, the extent to which differences in those rights and obligations would affect the fair values of those investments, and the impact of any differences based on the stage of operational development of the investee.
These assumptions are inherently subjective and involve significant management judgment. Whenever possible, we use observable market data and rely on unobservable inputs only when observable market data is not available, when determining fair value.
We assess our privately held debt and equity securities strategic investment portfolio quarterly for impairment. Our impairment analysis encompasses an assessment of the severity and duration of the impairment and qualitative and quantitative analysis of other key factors including the investee’s financial metrics, the investee’s products and technologies meeting or exceeding predefined milestones, market acceptance of the product or technology, other competitive products or technology in the market, general market conditions, management and governance structure of the investee, the investee’s liquidity, debt ratios and the rate at which the investee is using its cash. If the investment is impaired, we record the investment at fair value by recognizing an impairment through the consolidated statement of operations and establishing a new carrying value for the investment.
Business Combinations. The assets acquired and liabilities assumed in a business combination are recorded based on their estimated fair values at the acquisition date. Any residual purchase price is recorded as goodwill. Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets and deferred revenue obligations.
Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain and unpredictable. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such
2020 Form 10-K 37
assumptions, estimates or actual results. Examples of critical estimates used in valuing certain of the intangible assets and in determining the assets' useful lives for the assets we have acquired or may acquire in the future include but are not limited to:
• | future expected cash flows from sales, subscriptions and maintenance agreements, and acquired developed technologies; |
• | the acquired company's trade name, trademark and existing customer relationship, as well as assumptions about the period of time the acquired trade name and trademark will continue to be used in our product portfolio; |
• | expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed; |
• | uncertain tax positions and tax related valuation allowances assumed; and |
• | discount rates used to determine the present value of estimated future cash flows. |
Realizability of Long-Lived Assets. We assess the realizability of our long-lived assets and related intangible assets, other than goodwill, quarterly, or sooner should events or changes in circumstances indicate the carrying values of such assets may not be recoverable. We consider the following factors important in determining when to perform an impairment review: significant under-performance of a business or product line relative to budget; shifts in business strategies which affect the continued uses of the assets; significant negative industry or economic trends; and the results of past impairment reviews. When such events or changes in circumstances occur, we assess recoverability of these assets.
We assess recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If impairment indicators were present based on our undiscounted cash flow models, which include assumptions regarding projected cash flows, we would perform a discounted cash flow analysis to assess impairments on long-lived assets.
The key assumptions that we use in our discounted cash flow model include the amount and timing of estimated future cash flows to be generated by the asset over an extended period of time and a rate of return that considers the relative risk of achieving the cash flows and the time value of money. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows. We also make judgments about the remaining useful lives of acquired intangible assets and other long-lived assets that have finite lives.
Variances in these assumptions could have a significant impact on our conclusion as to whether an asset is impaired or the amount of any impairment charge. Impairment charges, if any, result in situations where any fair values of these assets are less than their carrying values.
Income Taxes. We account for income taxes under the asset and liability approach. Under this method, deferred tax assets, including those related to tax loss carryforwards and credits, and deferred tax liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We recognize the tax benefit for an uncertain tax position when it meets the more likely than not threshold for recognition. We recognize potential accrued interest and penalties related to unrecognized tax benefits as income tax expense.
A valuation allowance is recorded to reduce deferred tax assets when management cannot conclude that it is more likely than not that the deferred tax asset will be recovered. The valuation allowance is determined by assessing both positive and negative evidence to determine whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis. Significant judgment is required in determining whether the valuation allowance should be recorded against deferred tax assets. In assessing the need for valuation allowance, we consider all available evidence including past operating results and estimates of future taxable income. As a result of cumulative losses arising from our transition to a subscription model, we considered cumulative losses as a significant source of negative evidence and recorded a valuation allowance against our deferred tax attributes in Canada, Netherlands and the U.S. jurisdictions. We released the valuation allowance against our deferred tax attributes in Singapore in fiscal year 2020 as a result of positive earnings in that jurisdiction.
As we continually strive to optimize our overall business model, tax planning strategies may become feasible and prudent whereby management may determine that it is more likely than not that the federal and state deferred tax assets will be realized.
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Each quarter we will continue to evaluate the positive and negative evidence of our ability to utilize our U.S. and foreign deferred tax assets.
Loss Contingencies. As described in Part I, Item 3, “Legal Proceedings” and Part II, Item 8, Note 10, “Commitments and Contingencies,” in the Notes to Consolidated Financial Statements, we are periodically involved in various legal claims and proceedings. We routinely review the status of each significant matter and assess our potential financial exposure. If the potential loss from any matter is considered probable and the amount can be reasonably estimated, we record a liability for the estimated loss. Significant judgment is required to determine both the likelihood of there being, and the estimated amount of, a loss related to such matters. Due to inherent uncertainties related to these matters, we base our loss accruals on the best information available at the time. Until the final resolution of such matters, there may be an exposure to loss in excess of the amount recorded. As additional information becomes available, we reassess our potential liability and may revise our estimates. Such revisions could have a material impact on future quarterly or annual results of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Part II, Item 8, Note 1, “Business and Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition.
OVERVIEW OF FISCAL 2020
• | Total net revenue was $3.27 billion during fiscal 2020, an increase of 27% compared to the prior fiscal year. |
• | Total ARR was $3.43 billion, an increase of 25% compared to the prior fiscal year. |
• | Subscription plan ARR was $3.11 billion, an increase of 41% compared to the prior fiscal year. |
• | Deferred revenue was $3.01 billion, an increase of 44% compared to the prior fiscal year. |
• | Remaining performance obligations ("RPO") was $3.56 billion, an increase of approximately 33% compared to prior fiscal year. |
Revenue Analysis
During fiscal 2020, net revenue increased 27%, as compared to the prior fiscal year, primarily due to a 53% increase in subscription revenue. The increase in subscription revenue was partially offset by a 39% decrease in maintenance revenue.
Further discussion of the drivers of these results are discussed below under the heading “Results of Operations.”
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”). Total sales to Tech Data accounted for 35%, 35%, and 31% of Autodesk's total net revenue during fiscal 2020, 2019, and 2018, respectively. During fiscal 2020, 2019, and 2018, Ingram Micro accounted for 10%, 11%, and 8% of Autodesk's total net revenue. Should any of our agreements with Tech Data and Ingram Micro be terminated for any reason, we believe the resellers and end users who currently purchase our products through Tech Data and Ingram Micro 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. Consequently, we believe our business is not substantially dependent on Tech Data and Ingram Micro.
Recurring Revenue, ARR and Net Revenue Retention Rate
In order to help better understand our financial performance we use several key performance metrics including recurring revenue, ARR and NR3. These metrics are key performance metrics and should be viewed independently of revenue and deferred revenue as these metrics are not intended to be combined with those items. We use these metrics to monitor the strength of our recurring business. We believe these metrics are useful to investors because they can help in monitoring the long-term health of our business. Our determination and presentation of these metrics may differ from that of other companies. The presentation of these metrics is meant to be considered in addition to, not as a substitute for or in isolation from, our financial measures prepared in accordance with GAAP. Please refer to the "Glossary of Terms" for the definitions of these metrics in Part I, Item 1 Business.
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The following table outlines our recurring revenue metric for the fiscal years ended January 31, 2020, 2019, and 2018:
Fiscal Year Ended January 31, 2020 | Change compared to prior fiscal year end | Fiscal Year Ended January 31, 2019 | Change compared to prior fiscal year end | Fiscal Year Ended January 31, 2018 | |||||||||||||||||||||
$ | % | $ | % | ||||||||||||||||||||||
Recurring Revenue (in millions) (1) | $ | 3,138.5 | $ | 701.3 | 29 | % | $ | 2,437.2 | $ | 554.9 | 29 | % | $ | 1,882.3 | |||||||||||
As a percentage of net revenue | 96 | % | 95 | % | 92 | % | |||||||||||||||||||
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(1) | The acquisition of a business may cause variability in the comparison of recurring revenue in this table above and recurring revenue derived from the revenue reported in the Consolidated Statements of Operations. |
The following table outlines our ARR metric as of fiscal years ended January 31, 2020 and 2019.
(in millions, except percentages) | Change compared to prior fiscal year | Management Comments | ||||||||||||||
January 31, 2020 | $ | % | January 31, 2019 | |||||||||||||
Subscription plan ARR | $ | 3,109.3 | $ | 909.2 | 41 | % | $ | 2,200.1 | Up due to growth in all subscription plan types, led by renewal product subscription, which benefited from the success of the M2S program. | |||||||
Maintenance plan ARR | 319.8 | (229.5 | ) | (42 | )% | 549.3 | Down primarily due to the migration of maintenance plan subscriptions to subscription plan subscriptions with the M2S program. | |||||||||
Total ARR (1) | $ | 3,429.1 | $ | 679.7 | 25 | % | $ | 2,749.4 | ||||||||
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(1) | The acquisition of a business may cause variability in the comparison of ARR reported in this table above and ARR derived from the revenue reported in the Consolidated Statements of Operations. |
NR3 was within the approximate range of 110% and 120% as of January 31, 2020 and 2019.
Foreign Currency Analysis
We generate a significant amount of our revenue in the United States, Japan, Germany, the United Kingdom and Finland.
The following table shows the impact of foreign exchange rate changes on our net revenue and total spend:
Fiscal Year Ended January 31, 2020 | |||||||
Percent change compared to prior fiscal year (as reported) | Constant currency percent change compared to prior fiscal year (1) | Positive/negative/neutral impact from foreign exchange rate changes | |||||
Net revenue | 27 | % | 28 | % | Negative | ||
Total spend | 13 | % | 14 | % | Positive | ||
________________
(1) | Please refer to the "Glossary of Terms" in Part I, Item 1 Business for the definitions of our constant currency growth rates. |
Changes in the value of the U.S. dollar may have a significant effect on net revenue, total spend, and income (loss) 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 fluctuations of such foreign currency against the U.S. dollar.
Remaining Performance Obligations
RPO represents deferred revenue and contractually stated or committed orders under early renewal and multi-year billing plans for subscription, services, license and maintenance for which the associated deferred revenue has not yet been recognized.
2020 Form 10-K 40
Unbilled deferred revenue is not included as a receivable or deferred revenue on our Consolidated Balance Sheets. See Part II, Item 8, Note 2, “Revenue Recognition” for more details on Autodesk's performance obligations.
(in millions) | January 31, 2020 | January 31, 2019 | |||||
Deferred revenue | $ | 3,007.1 | $ | 2,091.4 | |||
Unbilled deferred revenue | 549.6 | 591.0 | |||||
RPO | $ | 3,556.7 | $ | 2,682.4 | |||
We expect that the amount of RPO will change from quarter to quarter for several reasons, including the specific timing, duration and size of customer subscription and support agreements, varying billing cycles of such agreements, the specific timing of customer renewals, and foreign currency fluctuations.
Balance Sheet and Cash Flow Items
At January 31, 2020, we had $1,843.7 million in cash and marketable securities. Our cash flow from operations increased to $1,415.1 million for the fiscal year ended January 31, 2020, from $377.1 million for the fiscal year ended January 31, 2019. We repurchased 2.7 million shares of our common stock for $455.5 million during fiscal 2020. Comparatively, we repurchased 2.2 million shares of our common stock for $292.5 million during fiscal 2019. Further discussion regarding the balance sheet and cash flow activities are discussed below under the heading “Liquidity and Capital Resources.”
RESULTS OF OPERATIONS
Impacts of COVID-19 to Autodesk’s Business
The impacts of the global emergence of COVID-19 on our business and financial results are currently unknown. We are conducting business with substantial modifications to employee travel, employee work locations, and virtualization or cancellation of certain sales and marketing events, among other modifications. We have observed other companies as well as many governments taking precautionary and preemptive actions to address COVID-19, and they may take further actions that alter their normal business operations. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers and stockholders. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our customers and prospects, or on our financial results.
Presentation of Operating Results and Other Financial Information
The revenue and spend balances included in the tables below during the fiscal years ended January 31, 2020 and 2019, are calculated under Accounting Standard Update No. 2014-09, which codified new revenue recognition guidance under ASC Topic 606.
Net Revenue by Income Statement Presentation
Subscription revenue consists of our term-based product subscriptions, cloud service offerings, and flexible enterprise
business arrangements. Revenue from these arrangements is recognized ratably over the contract term commencing when delivered to our customers and when all other revenue recognition criteria have been satisfied.
Maintenance revenue consists of renewal fees for existing maintenance plan agreements that were initially purchased with a perpetual software license. Under our maintenance plan, customers are eligible to receive unspecified upgrades, when and if available, and technical support. We recognize maintenance revenue ratably over the term of the agreements, which is generally one year.
Other revenue consists of revenue from consulting, training and other services, and is recognized over time as the services are performed. Other revenue also includes software license revenue from the sale of certain products which do not incorporate substantial cloud functionalities and are recognized as the licenses are delivered to our customers.
2020 Form 10-K 41
Fiscal Year Ended January 31, 2020 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2019 | Management Comments | |||||||||||||
(in millions, except percentages) | $ | % | ||||||||||||||
Net revenue: | ||||||||||||||||
Subscription | $ | 2,751.9 | $ | 949.6 | 53 | % | $ | 1,802.3 | Up due to growth across all subscription plan types, led by renewal product subscription revenue, which benefited from the success of the M2S program. Also contributing to the increase was growth in new product subscriptions, cloud service offerings (which benefited from our acquisitions in the fourth quarter of fiscal year 2019) and EBA offerings. | |||||||
Maintenance (1) | 386.6 | (248.5 | ) | (39 | )% | 635.1 | Down primarily due to the migration of maintenance plan subscriptions to subscription plan subscriptions with the M2S program. | |||||||||
Total subscription and maintenance revenue | 3,138.5 | 701.1 | 29 | % | 2,437.4 | |||||||||||
Other | 135.8 | 3.4 | 3 | % | 132.4 | |||||||||||
$ | 3,274.3 | $ | 704.5 | 27 | % | $ | 2,569.8 | |||||||||
Fiscal Year Ended January 31, 2019 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2018 | Management Comments | ||||||||||||
(in millions, except percentages) | $ | % | |||||||||||||
Net revenue: | |||||||||||||||
Subscription | $ | 1,802.3 | $ | 908.0 | 102 | % | $ | 894.3 | Up due to growth across all subscription types, led by product subscription renewal revenue, which benefited from the success of the M2S program. Also contributing to the growth was an increase in revenue from new product subscriptions and EBA offerings. | ||||||
Maintenance (1) | 635.1 | (354.5 | ) | (36 | )% | 989.6 | Down primarily due to the migration of maintenance plan subscriptions to subscription plan subscriptions with the M2S program. | ||||||||
Total subscription and maintenance revenue | 2,437.4 | 553.5 | 29 | % | 1,883.9 | ||||||||||
Other | 132.4 | (40.3 | ) | (23 | )% | 172.7 | |||||||||
$ | 2,569.8 | $ | 513.2 | 25 | % | $ | 2,056.6 | ||||||||
____________________
(1) | We expect maintenance revenue will continue to decline; however, the rate of decline will vary based on the number of renewals, the renewal rate, and our ability to incentivize maintenance plan customers to switch over to subscription plan offerings. |
2020 Form 10-K 42
Net Revenue by Product Family
Our product offerings are focused in four primary product families: Architecture, Engineering and Construction ("AEC"), AutoCAD and AutoCAD LT, Manufacturing ("MFG"), and Media and Entertainment ("M&E").
Fiscal Year Ended January 31, 2020 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2019 | Management Comments | |||||||||||||
(in millions, except percentages) | $ | % | ||||||||||||||
Net revenue by product family: | ||||||||||||||||
AEC | $ | 1,377.1 | 355.5 | 35 | % | $ | 1,021.6 | Up due to an increases in revenue from AEC collections, PlanGrid, EBAs, and BIM 360. | ||||||||
AutoCAD and AutoCAD LT | 948.2 | 216.4 | 30 | % | 731.8 | Up due to increases in revenue from both AutoCAD and AutoCAD LT. | ||||||||||
MFG | 726.1 | 109.9 | 18 | % | 616.2 | Up due to increases in revenue from MFG Collections and EBAs. | ||||||||||
M&E | 199.2 | 17.2 | 9 | % | 182.0 | Up due to increases in revenue from Maya, M&E Collections and 3DS Max. | ||||||||||
Other | 23.7 | 5.5 | 30 | % | 18.2 | |||||||||||
$ | 3,274.3 | $ | 704.5 | 27 | % | $ | 2,569.8 | |||||||||
Fiscal Year Ended January 31, 2019 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2018 | Management Comments | |||||||||||||
(in millions, except percentages) | $ | % | ||||||||||||||
Net revenue by product family: | ||||||||||||||||
AEC | $ | 1,021.6 | $ | 234.1 | 30 | % | $ | 787.5 | Up due to an increase in AEC collections as well as an increase in revenue from EBAs and our individual product offering, Revit. | |||||||
AutoCAD and AutoCAD LT | 731.8 | 170.4 | 30 | % | 561.4 | Up due to increases in revenue from both AutoCAD and AutoCAD LT. | ||||||||||
MFG | 616.2 | 87.4 | 17 | % | 528.8 | Up due to an increase in MFG collections as well as an increase in revenue from EBAs. | ||||||||||
M&E | 182.0 | 29.9 | 20 | % | 152.1 | Up due to an increase in revenue from our individual product offerings 3DS Max and Maya. | ||||||||||
Other | 18.2 | (8.6 | ) | (32 | )% | 26.8 | ||||||||||
$ | 2,569.8 | $ | 513.2 | 25 | % | $ | 2,056.6 | |||||||||
2020 Form 10-K 43
Net Revenue by Geographic Area
Fiscal Year Ended January 31, 2020 | Change compared to prior fiscal year | Constant currency change compared to prior fiscal year | Fiscal Year Ended January 31, 2019 | Change compared to prior fiscal year | Constant currency change compared to prior fiscal year | Fiscal Year Ended January 31, 2018 | |||||||||||||||||||||||||
(in millions, except percentages) | $ | % | % | $ | % | % | |||||||||||||||||||||||||
Net revenue: | |||||||||||||||||||||||||||||||
Americas | |||||||||||||||||||||||||||||||
U.S. | $ | 1,108.9 | $ | 234.3 | 27 | % | * | $ | 874.6 | $ | 134.2 | 18 | % | * | $ | 740.4 | |||||||||||||||
Other Americas | 226.9 | 51.6 | 29 | % | * | 175.3 | 44.6 | 34 | % | * | 130.7 | ||||||||||||||||||||
Total Americas | 1,335.8 | 285.9 | 27 | % | 27 | % | 1,049.9 | 178.8 | 21 | % | 20 | % | 871.1 | ||||||||||||||||||
EMEA | 1,303.5 | 269.2 | 26 | % | 26 | % | 1,034.3 | 218.9 | 27 | % | 24 | % | 815.4 | ||||||||||||||||||
APAC | 635.0 | 149.4 | 31 | % | 32 | % | 485.6 | 115.5 | 31 | % | 31 | % | 370.1 | ||||||||||||||||||
Total net revenue | $ | 3,274.3 | $ | 704.5 | 27 | % | 28 | % | $ | 2,569.8 | $ | 513.2 | 25 | % | 24 | % | $ | 2,056.6 | |||||||||||||
Emerging economies | $ | 396.2 | $ | 88.8 | 29 | % | 29 | % | $ | 307.4 | $ | 80.9 | 36 | % | 34 | % | $ | 226.5 | |||||||||||||
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* Constant currency data not provided at this level.
We believe that international revenue will continue to comprise a majority of our net revenue. Unfavorable economic conditions in the countries that contribute a significant portion of our net revenue, including in emerging economies such as Brazil, Russia, India, and China, may have an adverse effect on our business in those countries and our overall financial performance. Changes in the value of the U.S. dollar relative to other currencies have significantly affected, and could continue to significantly affect, our financial results for a given period even though we hedge a portion of our current and projected revenue. Increases to the levels of political and economic unpredictability in the global market may impact our future financial results.
2020 Form 10-K 44
Net Revenue by Sales Channel
Fiscal Year Ended January 31, 2020 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2019 | Management Comments | |||||||||||||
(in millions, except percentages) | $ | % | ||||||||||||||
Net revenue by sales channel: | ||||||||||||||||
Indirect | $ | 2,282.2 | $ | 451.4 | 25 | % | $ | 1,830.8 | Up due to an increase in subscription revenue offset by lower maintenance plan subscriptions as we continue to migrate customers to subscriptions through the M2S program. | |||||||
Direct | 992.1 | 253.1 | 34 | % | 739.0 | Up due to an increase in revenue from our acquisitions in the fourth quarter of fiscal year 2019, EBAs, and our online Autodesk branded store | ||||||||||
Total net revenue | $ | 3,274.3 | $ | 704.5 | 27 | % | $ | 2,569.8 | ||||||||
Fiscal Year Ended January 31, 2019 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2018 | Management Comments | |||||||||||||
(in millions, except percentages) | $ | % | ||||||||||||||
Net revenue by sales channel: | ||||||||||||||||
Indirect | $ | 1,830.8 | $ | 387.0 | 27 | % | $ | 1,443.8 | Up due to an increase in subscription revenue. | |||||||
Direct | 739.0 | 126.2 | 21 | % | 612.8 | Up due to an increase in revenue from EBAs and our online Autodesk branded store. | ||||||||||
Total net revenue | $ | 2,569.8 | $ | 513.2 | 25 | % | $ | 2,056.6 | ||||||||
Cost of Revenue and Operating Expenses
Cost of subscription and maintenance revenue includes the labor costs of providing product support to our subscription and maintenance customers, including allocated IT and facilities costs, professional services fees related to operating our network and cloud infrastructure, royalties, depreciation expense and operating lease payments associated with computer equipment, data center costs, salaries, related expenses of network operations, and stock-based compensation expense.
Cost of other revenue includes labor costs associated with product setup, costs of consulting and training services contracts, and collaborative project management services contracts. Cost of other revenue also includes stock-based compensation expense, direct material and overhead charges, allocated IT and facilities costs, professional services fees and royalties. Direct material and overhead charges include the cost associated with electronic and physical fulfillment.
Cost of revenue, at least over the near term, is affected by labor costs, the volume and mix of product sales, fluctuations in consulting costs, amortization of developed technology, new customer support offerings, royalty rates for licensed technology embedded in our products and employee stock-based compensation expense.
Marketing and sales expenses include salaries, bonuses, benefits and stock-based compensation expense for our marketing and sales employees, the expense of travel, entertainment and training for such personnel, sales and dealer commissions, and the costs of programs aimed at increasing revenue, such as advertising, trade shows and expositions, and various sales and promotional programs. Marketing and sales expenses also include payment processing fees, the cost of supplies and equipment, gains and losses on our operating expense cash flow hedges, allocated IT and facilities costs, and labor costs associated with sales and order management.
2020 Form 10-K 45
Research and development expenses, which are expensed as incurred, consist primarily of salaries, bonuses, benefits and stock-based compensation expense for research and development employees, the expense of travel, entertainment and training for such personnel, professional services such as fees paid to software development firms and independent contractors, gains and losses on our operating expense cash flow hedges, and allocated IT and facilities costs.
General and administrative expenses include salaries, bonuses, acquisition-related transition costs, benefits and stock-based compensation expense for our CEO, finance, human resources and legal employees, as well as professional fees for legal and accounting services, certain foreign business taxes, gains and losses on our operating expense cash flow hedges, expense of travel, entertainment and training, net IT and facilities costs, and the cost of supplies and equipment.
Fiscal Year Ended January 31, 2020 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2019 | Management Comments | |||||||||||||
(In millions, except percentages) | $ | % | ||||||||||||||
Cost of revenue: | ||||||||||||||||
Subscription and maintenance | $ | 223.9 | $ | 7.9 | 4 | % | $ | 216.0 | Up due to an increase in cloud hosting and employee-related costs driven by higher headcount. | |||||||
Other | 66.5 | 12.1 | 22 | % | 54.4 | Up due to an increase in employee-related costs due to higher headcount. | ||||||||||
Amortization of developed technology | 34.5 | 19.0 | 123 | % | 15.5 | Up due to an increase in amortization expense from acquired developed technologies as a result of our acquisitions in the fourth quarter of fiscal year 2019. | ||||||||||
Total cost of revenue | $ | 324.9 | $ | 39.0 | 14 | % | $ | 285.9 | ||||||||
Operating expenses: | ||||||||||||||||
Marketing and sales | $ | 1,310.3 | $ | 126.4 | 11 | % | $ | 1,183.9 | Up primarily due to increased employee-related costs driven by higher headcount as well as an increase in stock-based compensation expense driven by awards granted and assumed through our acquisitions in the fourth quarter of fiscal 2019. | |||||||
Research and development | 851.1 | 126.1 | 17 | % | 725.0 | Up primarily due to increased employee-related costs driven by higher headcount as well as an increase in stock-based compensation expense driven by awards granted and assumed through our acquisitions in the fourth quarter of fiscal 2019. | ||||||||||
General and administrative | 405.6 | 65.5 | 19 | % | 340.1 | Up primarily due to an increase in stock-based compensation expense driven by awards granted and assumed through our acquisitions in the fourth quarter of fiscal 2019 as well as increased employee-related costs driven by higher headcount. | ||||||||||
Amortization of purchased intangibles | 38.9 | 20.9 | 116 | % | 18.0 | Up due to an increase in amortization expense from acquired purchased intangibles as a result of our acquisitions in the fourth quarter of fiscal year 2019. | ||||||||||
Restructuring and other exit costs, net | 0.5 | (41.4 | ) | (99 | )% | 41.9 | Decreased as we substantially completed the actions authorized under the Fiscal 2018 restructuring plan. | |||||||||
Total operating expenses | $ | 2,606.4 | $ | 297.5 | 13 | % | $ | 2,308.9 | ||||||||
2020 Form 10-K 46
Fiscal Year Ended January 31, 2019 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2018 | Management comments | |||||||||||||
(In millions, except percentages) | $ | % | ||||||||||||||
Cost of revenue: | ||||||||||||||||
Subscription and maintenance | $ | 216.0 | $ | 1.6 | 1 | % | $ | 214.4 | Up primarily due to an increase in cloud hosting costs partially offset by a decrease in royalty and depreciation expense. | |||||||
Other | 54.4 | (18.2 | ) | (25 | )% | 72.6 | Down primarily due to lower employee-related costs from reduced headcount associated with the Fiscal 2018 Plan restructuring and lower professional fees. | |||||||||
Amortization of developed technology | 15.5 | (0.9 | ) | (5 | )% | 16.4 | Down as previously acquired developed technologies continue to become fully amortized. | |||||||||
Total cost of revenue | $ | 285.9 | $ | (17.5 | ) | (6 | )% | $ | 303.4 | |||||||
Operating expenses: | ||||||||||||||||
Marketing and sales | $ | 1,183.9 | $ | 96.6 | 9 | % | $ | 1,087.3 | Up due to increased employee-related costs driven by higher headcount, as well as higher cloud hosting costs and professional fees. | |||||||
Research and development | 725.0 | (30.5 | ) | (4 | )% | 755.5 | Down due to a decrease in employee-related costs from lower headcount associated with the Fiscal 2018 plan restructuring partially offset by higher professional fees. | |||||||||
General and administrative | 340.1 | 34.9 | 11 | % | 305.2 | Up primarily due to higher professional fees, employee-related costs and facilities costs, partially offset by lower employee benefits costs. | ||||||||||
Amortization of purchased intangibles | 18.0 | (2.2 | ) | (11 | )% | 20.2 | Down as previously acquired intangible assets continue to become fully amortized. | |||||||||
Restructuring and other exit costs, net | 41.9 | (52.2 | ) | (55 | )% | 94.1 | Down as we substantially completed the reduction in force and facilities consolidation of the Fiscal 2018 Plan. | |||||||||
Total operating expenses | $ | 2,308.9 | $ | 46.6 | 2 | % | $ | 2,262.3 | ||||||||
The following table highlights our expectation for the absolute dollar change and percent of revenue change for fiscal 2021 as compared to fiscal 2020:
Absolute dollar impact | Percent of net revenue impact | ||
Cost of revenue | increase | decrease | |
Marketing and sales | increase | decrease | |
Research and development | increase | decrease | |
General and administrative | increase | decrease | |
Amortization of purchased intangibles | decrease | decrease | |
2020 Form 10-K 47
Interest and Other Expense, Net
The following table sets forth the components of interest and other expense, net:
Fiscal year ended January 31, | |||||||||||
2020 | 2019 | 2018 | |||||||||
(in millions) | |||||||||||
Interest and investment expense, net | $ | (54.0 | ) | $ | (52.1 | ) | $ | (34.5 | ) | ||
Gain (loss) on foreign currency | 3.9 | 5.1 | (3.3 | ) | |||||||
(Loss) gain on strategic investments | (3.3 | ) | 12.5 | (16.4 | ) | ||||||
Other income | 5.2 | 16.8 | 6.0 | ||||||||
Interest and other expense, net | $ | (48.2 | ) | $ | (17.7 | ) | $ | (48.2 | ) | ||
Interest and other expense, net, increased by $30.5 million during fiscal 2020, as compared to fiscal 2019. This was primarily driven by losses in the current year versus gains in the previous year for unrealized gain (loss) on our privately-held strategic investments, curtailment gains on our pension plans in the prior period and an increase in interest expense resulting from our term loan entered into on December 17, 2018, in aggregate principal amount of $500.0 million, which has been paid in full as of January 31, 2020. The increase in interest and other expense, net, was partially offset by mark-to-market gains in the current year versus losses in the prior year on marketable securities.
Interest and other expense, net, positively changed $30.5 million during fiscal 2019, as compared to fiscal 2018, primarily driven by curtailment gains on our pension plans, mark-to-market gains on certain of our privately-held strategic investments, realized gains on sales of strategic investments, offset by an increase in interest expense resulting from our term loan entered into on December 17, 2018 in aggregate principal amount of $500 million and mark-to-market losses on marketable securities.
Interest expense and investment income fluctuates based on average cash, marketable securities and debt balances, average maturities and interest rates.
Gains and losses on foreign currency are primarily due to the impact of re-measuring foreign currency transactions and net monetary assets into the functional currency of the corresponding entity. The amount of the gain or loss on foreign currency is driven by the volume of foreign currency transactions and the foreign currency exchange rates for the year.
Provision for Income Taxes
We account for income taxes and the related accounts under the liability method. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted rates expected to be in effect during the year in which the basis differences reverse.
Income tax expense was $80.3 million and $38.1 million for fiscal 2020 and 2019, respectively, relative to pre-tax income of $294.8 million and pre-tax losses of $42.7 million, respectively, for the same periods. Tax expense for fiscal 2020 consists primarily of foreign tax expense, including withholding tax, and U.S. tax amortization on indefinite-lived intangibles offset by a benefit for the release of the Singapore valuation allowance. Tax expense for fiscal 2019 consisted of foreign tax expense, including withholding tax, and U.S. tax amortization on indefinite-lived intangibles offset by a tax benefit from the release of valuation allowance from acquired deferred tax liabilities and a tax benefit for the release of uncertain tax positions upon finalization of IRS examination. We recorded a tax benefit of the Tax Act in our financial statements as of January 31, 2018 of approximately $32.3 million mainly driven by the corporate rate re-measurement of the indefinite-lived intangible deferred tax liability.
The Tax Act provided broad and significant changes to the U.S. corporate income tax regime. In light of our fiscal year-end, the Tax Act reduced the statutory federal corporate rate from 35% to 34% for fiscal 2018 and to 21% for fiscal 2019 and forward. The Tax Act also, among many other provisions, imposed a one-time mandatory tax on accumulated earnings of foreign subsidiaries (commonly referred to as the "transition tax") to which we were subject in our fiscal year 2018, subjects the deemed intangible income of our foreign subsidiaries to current U.S. taxation (commonly referred to as "GILTI"), provides for a full dividends received deduction upon repatriation of untaxed earnings of our foreign subsidiaries, imposes a minimum taxation (without most tax credits) on modified taxable income, which is generally taxable income without deductions for payments to related foreign companies (commonly referred to as “BEAT”), modifies the accelerated depreciation deduction
2020 Form 10-K 48
rules, and made updates to the deductibility of certain expenses. We have completed our determination of the accounting implications of the Tax Act on our tax accruals. The U.S. global taxation resulting from the significant changes of the Tax Act could have a material effect on our future judgment of the realization of the net U.S. deferred tax assets.
As of January 31, 2018, we estimated taxable income associated with offshore earnings of $831.5 million, and as of January 31, 2019, we adjusted the taxable income to $819.6 million for transition tax. We had an incremental adjustment to our transition tax in our fiscal year 2020 of $45.5 million, as a result of additional Treasury Regulations published this year. Transition tax related to adjustments in the offshore earnings or correlated foreign tax credits resulted in no impact to the effective tax rate as it is primarily offset by net operating losses that are subject to a full valuation allowance. As a result of transition tax, we recorded a deferred tax asset of approximately $43.2 million for foreign tax credits, which are also subject to a full valuation allowance.
We have not had a GILTI inclusion in fiscal 2019 and fiscal 2020 resulting in no impact to the effective tax rate. We anticipate we will be subject to GILTI in fiscal 2021, resulting in utilization of carryforward net operating losses. Given the increase in our global earnings in the current year and expectation of continued increase in global earnings, the Company anticipates a significant increase in U.S. taxable income beginning fiscal 2021. Moreover, if we are subject to GILTI in fiscal 2021, the inclusion of foreign earnings will be positive evidence in our evaluation of our need for a valuation allowance on the U.S. deferred tax assets.
We anticipate that the U.S. Department of Treasury and other standard-setting bodies will continue to interpret or issue guidance on how provisions of the Tax Act will be applied or otherwise administered. As future guidance is issued, we may make adjustments to amounts that we have previously recorded that may materially impact our financial statements in the period in which the adjustments are made.
A valuation allowance is recorded to reduce deferred tax assets when management cannot conclude that it is more likely than not that the net deferred tax asset will be recovered. The valuation allowance is determined by assessing both positive and negative evidence to determine whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis. Significant judgment is required in determining whether the valuation allowance should be recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence including past operating results and estimates of future taxable income. In our fiscal year 2016, we considered cumulative losses in the U.S. from our business model transition as a significant source of negative evidence. Considering this negative evidence and the absence of sufficient positive objective evidence that we would generate sufficient taxable income in the U.S. to realize the deferred tax assets, we determined that it was more likely than not that we would not realize the U.S. federal and state deferred tax assets and recorded a full valuation allowance. Foreign operation in the Netherlands and Canada that generated non-deductible interest expense and future creditable research and development in excess of earnings, respectively, also resulted in the historic recording of a full valuation under the more-likely-than-not realizability criteria. Furthermore, in the first quarter of fiscal 2018, our Singapore operation, similar to the U.S. incurred cumulative losses and recorded a full valuation allowance against the net deferred tax asset. As a result of positive earnings in Singapore, our valuation allowance was released in our fiscal year 2020 resulting in a $42.0 million non-cash benefit to earnings. Future sources of taxable income from book earning trends and reversal of deferred temporary taxable differences, including the interplays of the Tax Act on U.S. global taxable income, will continue to be monitored by the company for future release of our valuation allowances. As we continually strive to optimize our overall business model, tax planning strategies may become feasible whereby management may determine, based on all available evidence, both positive and negative, that it is more likely than not that the federal and state deferred tax assets will be realized.
As of January 31, 2020, we had $220.6 million of gross unrecognized tax benefits, of which $203.7 million would reduce our valuation allowance, if recognized. The remaining $16.9 million would impact the effective tax rate. 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.
Our future effective annual tax rate may be materially impacted by the amount of benefits and charges from tax amounts associated with our foreign earnings that are taxed at rates different from the federal statutory rate, changes in valuation allowances, level of profit before tax, accounting for uncertain tax positions, business combinations, closure of statute of limitations or settlement of tax audits, and changes in tax laws including impacts of the Tax Act. A significant amount of our earnings is generated by our Europe and Asia Pacific subsidiaries. Our future effective tax rates may be adversely affected to the extent earnings are lower than anticipated in countries where we have lower statutory tax rates.
2020 Form 10-K 49
At January 31, 2020, we had non-current foreign net deferred tax assets of $56.4 million that management believes are more likely than not to be realized in future years.
For additional information regarding our income tax provision and reconciliation of our effective rate to the federal statutory rate of 21%, see Part II, Item 8, Note 5, “Income Taxes,” in the Notes to Consolidated Financial Statements.
OTHER FINANCIAL INFORMATION
In addition to our results determined under U.S. generally accepted accounting principles (“GAAP”) discussed above, we believe the following non-GAAP measures are useful to investors in evaluating our operating performance. For the fiscal years ended January 31, 2020, 2019, and 2018, our gross profit, gross margin, income (loss) from operations, operating margin, net income (loss), diluted net income (loss) per share and diluted shares used in per share calculation on a GAAP and non-GAAP basis were as follows (in millions except for gross margin, operating margin, and per share data):
Fiscal Year Ended January 31, | |||||||||||
2020 | 2019 | 2018 | |||||||||
(Unaudited) | |||||||||||
Gross profit | $ | 2,949.4 | $ | 2,283.9 | $ | 1,753.2 | |||||
Non-GAAP gross profit | $ | 3,004.0 | $ | 2,317.0 | $ | 1,785.5 | |||||
Gross margin | 90 | % | 89 | % | 85 | % | |||||
Non-GAAP gross margin | 92 | % | 90 | % | 87 | % | |||||
Income (loss) from operations | $ | 343.0 | $ | (25.0 | ) | $ | (509.1 | ) | |||
Non-GAAP income (loss) from operations | $ | 802.6 | $ | 316.0 | $ | (112.0 | ) | ||||
Operating margin | 10 | % | (1 | )% | (25 | )% | |||||
Non-GAAP operating margin | 25 | % | 12 | % | (5 | )% | |||||
Net income (loss) | $ | 214.5 | $ | (80.8 | ) | $ | (566.9 | ) | |||
Non-GAAP net income (loss) | $ | 621.2 | $ | 223.3 | $ | (106.3 | ) | ||||
Diluted net income (loss) per share | $ | 0.96 | $ | (0.37 | ) | $ | (2.58 | ) | |||
Non-GAAP diluted net income (loss) per share | $ | 2.79 | $ | 1.01 | $ | (0.48 | ) | ||||
GAAP diluted weighted average shares used in per share calculation | 222.5 | 218.9 | 219.5 | ||||||||
Non-GAAP diluted weighted average shares used in per share calculation | 222.5 | 222.0 | 219.5 | ||||||||
For our internal budgeting and resource allocation process and as a means to provide consistency in period-to-period comparisons, we use non-GAAP measures to supplement our consolidated financial statements presented on a GAAP basis. These non-GAAP measures do not include certain items that may have a material impact upon our reported financial results. We also use non-GAAP measures in making operating decisions because we believe those measures provide meaningful supplemental information regarding our earning potential and performance for management by excluding certain benefits, credits, expenses and charges that may not be indicative of our core business operating results. For the reasons set forth below, we believe these non-GAAP financial measures are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and (2) they are used by our institutional investors and the analyst community to help them analyze the health of our business. This allows investors and others to better understand and evaluate our operating results and future prospects in the same manner as management, compare financial results across accounting periods and to those of peer companies and to better understand the long-term performance of our core business. We also use some of these measures for purposes of determining company-wide incentive compensation.
There are limitations in using non-GAAP financial measures because non-GAAP financial measures are not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. The non-GAAP financial measures included above are limited in value because they exclude certain items that may have a material impact upon our reported financial results. In addition, they are subject to inherent limitations as they reflect the exercise of judgments by management about which charges are excluded from the non-GAAP financial measures. We compensate for these limitations by analyzing current and future results on a GAAP basis as well as a non-GAAP basis and also by providing GAAP measures in our public disclosures. The presentation of non-GAAP financial information is meant to be considered in addition to, not as a substitute for or in isolation from, the directly comparable financial measures prepared in accordance with GAAP. We urge investors to
2020 Form 10-K 50
review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures included below, and not to rely on any single financial measure to evaluate our business.
2020 Form 10-K 51
RECONCILATION OF GAAP FINANCIAL MEASURES TO NON-GAAP FINANCIAL MEASURES
(In millions except for gross margin, operating margin, and per share data) (1):
Fiscal Year Ended January 31, | |||||||||||
2020 | 2019 | 2018 | |||||||||
(Unaudited) | |||||||||||
Gross profit | $ | 2,949.4 | $ | 2,283.9 | $ | 1,753.2 | |||||
Stock-based compensation expense | 19.6 | 17.6 | 15.9 | ||||||||
Acquisition related costs | 0.5 | — | — | ||||||||
Amortization of developed technologies | 34.5 | 15.5 | 16.4 | ||||||||
Non-GAAP gross profit | $ | 3,004.0 | $ | 2,317.0 | $ | 1,785.5 | |||||
Gross margin | 90 | % | 89 | % | 85 | % | |||||
Stock-based compensation expense | 1 | % | 1 | % | 1 | % | |||||
Amortization of developed technologies | 1 | % | 1 | % | 1 | % | |||||
Non-GAAP gross margin (1) | 92 | % | 90 | % | 87 | % | |||||
Income (loss) from operations | $ | 343.0 | $ | (25.0 | ) | $ | (509.1 | ) | |||
Stock-based compensation expense | 362.4 | 249.5 | 245.0 | ||||||||
Amortization of developed technologies | 34.5 | 15.5 | 16.4 | ||||||||
Amortization of purchased intangibles | 38.9 | 18.0 | 20.2 | ||||||||
CEO transition costs (2) | — | (0.1 | ) | 21.4 | |||||||
Acquisition related costs | 23.3 | 16.2 | — | ||||||||
Restructuring and other exit costs, net | 0.5 | 41.9 | 94.1 | ||||||||
Non-GAAP income (loss) from operations | $ | 802.6 | $ | 316.0 | $ | (112.0 | ) | ||||
Operating margin | 10 | % | (1 | )% | (25 | )% | |||||
Stock-based compensation expense | 11 | % | 10 | % | 12 | % | |||||
Amortization of developed technologies | 1 | % | 1 | % | 1 | % | |||||
Amortization of purchased intangibles | 1 | % | 1 | % | 1 | % | |||||
CEO transition costs (2) | — | % | — | % | 1 | % | |||||
Acquisition related costs | 1 | % | 1 | % | — | % | |||||
Restructuring and other exit costs, net | — | % | 1 | % | 5 | % | |||||
Non-GAAP operating margin (1) | 25 | % | 12 | % | (5 | )% | |||||
Net income (loss) | $ | 214.5 | $ | (80.8 | ) | $ | (566.9 | ) | |||
Stock-based compensation expense | 362.4 | 249.5 | 245.0 | ||||||||
Amortization of developed technologies | 34.5 | 15.5 | 16.4 | ||||||||
Amortization of purchased intangibles | 38.9 | 18.0 | 20.2 | ||||||||
CEO transition costs (2) | — | (0.1 | ) | 21.4 | |||||||
Acquisition related costs | 23.3 | 16.2 | — | ||||||||
Restructuring and other exit costs, net | 0.5 | 31.7 | 94.1 | ||||||||
Loss (gain) on strategic investments | 3.2 | (12.5 | ) | 16.5 | |||||||
Release of valuation allowance on deferred tax assets (3) | (40.4 | ) | (16.8 | ) | — | ||||||
Discrete tax provision items | 2.1 | (14.6 | ) | (20.7 | ) | ||||||
Income tax effect of non-GAAP adjustments | (17.8 | ) | 17.2 | 67.7 | |||||||
Non-GAAP net income (loss) | $ | 621.2 | $ | 223.3 | $ | (106.3 | ) | ||||
2020 Form 10-K 52
Fiscal Year Ended January 31, | |||||||||||
2020 | 2019 | 2018 | |||||||||
(Unaudited) | |||||||||||
Diluted net income (loss) per share | $ | 0.96 | $ | (0.37 | ) | $ | (2.58 | ) | |||
Stock-based compensation expense | 1.63 | 1.12 | 1.11 | ||||||||
Amortization of developed technologies | 0.16 | 0.08 | 0.08 | ||||||||
Amortization of purchased intangibles | 0.17 | 0.08 | 0.09 | ||||||||
CEO transition costs (2) | — | — | 0.09 | ||||||||
Acquisition related costs | 0.11 | 0.07 | — | ||||||||
Restructuring and other exit costs, net | — | 0.14 | 0.43 | ||||||||
Loss (gain) on strategic investments | 0.01 | (0.05 | ) | 0.08 | |||||||
Release of valuation allowance on deferred tax assets (3) | (0.18 | ) | (0.08 | ) | — | ||||||
Discrete tax provision items | 0.01 | (0.06 | ) | (0.09 | ) | ||||||
Income tax effect of non-GAAP adjustments | (0.08 | ) | 0.08 | 0.31 | |||||||
Non-GAAP diluted net income (loss) per share | $ | 2.79 | $ | 1.01 | $ | (0.48 | ) | ||||
_______________
(1) | Totals may not sum due to rounding. |
(2) | CEO transition costs include stock-based compensation of $16.4 million related to the acceleration of eligible stock awards in conjunction with the Company's former CEOs' transition agreements for the fiscal year ended January 31, 2018. |
(3) | Fiscal year 2019 balances previously presented in "Discrete tax provision items." |
Our non-GAAP financial measures may exclude the following:
Stock-based compensation expenses. We exclude stock-based compensation expenses from non-GAAP measures primarily because they are non-cash expenses and management finds it useful to exclude certain non-cash charges to assess the appropriate level of various operating expenses to assist in budgeting, planning and forecasting future periods. Moreover, because of varying available valuation methodologies, subjective assumptions and the variety of award types that companies can use under FASB ASC Topic 718, we believe excluding stock-based compensation expenses allows investors to make meaningful comparisons between our recurring core business operating results and those of other companies.
Amortization of developed technologies and purchased intangibles. We incur amortization of acquisition-related developed technology and purchased intangibles in connection with acquisitions of certain businesses and technologies. Amortization of developed technologies and purchased intangibles is inconsistent in amount and frequency and is significantly affected by the timing and size of our acquisitions. Management finds it useful to exclude these variable charges from our cost of revenues to assist in budgeting, planning and forecasting future periods. Investors should note that the use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of developed technologies and purchased intangible assets will recur in future periods.
CEO transition costs. We exclude amounts paid to the Company's former CEOs upon departure under the terms of their transition agreements, including severance payments, acceleration of restricted stock units, and continued vesting of performance stock units, and legal fees incurred with the transition. Also excluded from our non-GAAP measures are recruiting costs related to the search for a new CEO. These costs represent non-recurring expenses and are not indicative of our ongoing operating expenses. We further believe that excluding the CEO transition costs from our non-GAAP results is useful to investors in that it allows for period-over-period comparability.
Goodwill impairment. This is a non-cash charge to write-down goodwill to fair value when there was an indication that the asset was impaired. As explained above, management finds it useful to exclude certain non-cash charges to assess the appropriate level of various operating expenses to assist in budgeting, planning and forecasting future periods.
Restructuring and other exit costs, net. These expenses are associated with realigning our business strategies based on current economic conditions. In connection with these restructuring actions or other exit actions, we recognize costs related to termination benefits for former employees whose positions were eliminated, the closure of facilities and cancellation of certain contracts. We exclude these charges because these expenses are not reflective of ongoing business and operating results. We believe it is useful for investors to understand the effects of these items on our total operating expenses.
2020 Form 10-K 53
Acquisition related costs. We exclude certain acquisition related costs, including due diligence costs, professional fees in connection with an acquisition, certain financing costs, and certain integration related expenses. These expenses are unpredictable, and dependent on factors that may be outside of our control and unrelated to the continuing operations of the acquired business, or our Company. In addition, the size and complexity of an acquisition, which often drives the magnitude of acquisition related costs, may not be indicative of such future costs. We believe excluding acquisition related costs facilitates the comparison of our financial results to the Company's historical operating results and to other companies in our industry.
(Gain) loss on strategic investments and dispositions. We exclude gains and losses related to our strategic investments and dispositions from our non-GAAP measures primarily because management finds it useful to exclude these variable gains and losses on these investments and dispositions in assessing our financial results. Included in these amounts are non-cash unrealized gains and losses on the derivative components, dividends received, realized gains and losses on the sales or losses on the impairment of these investments and dispositions. We believe excluding these items is useful to investors because these excluded items do not correlate to the underlying performance of our business and these losses or gains were incurred in connection with strategic investments and dispositions which do not occur regularly.
Discrete tax items. We exclude the GAAP tax provision, including discrete items, from the non-GAAP measure of net (loss) income, and include a non-GAAP tax provision based upon the projected annual non-GAAP effective tax rate. Discrete tax items include income tax expenses or benefits that do not relate to ordinary income from continuing operations in the current fiscal year, unusual or infrequently occurring items, or the tax impact of certain stock-based compensation. Examples of discrete tax items include, but are not limited to, certain changes in judgment and changes in estimates of tax matters related to prior fiscal years, certain costs related to business combinations, certain changes in the realizability of deferred tax assets or changes in tax law. Management believes this approach assists investors in understanding the tax provision and the effective tax rate related to ongoing operations. We believe the exclusion of these discrete tax items provides investors with useful supplemental information about our operational performance.
Establishment (release) of a valuation allowance on certain net deferred tax assets. These are a non-cash charge to record or to release a valuation allowance on certain deferred tax assets. As explained above, management finds it useful to exclude certain non-cash charges to assess the appropriate level of various cash expenses to assist in budgeting, planning and forecasting future periods.
Income tax effects on the difference between GAAP and non-GAAP costs and expenses. The income tax effects that are excluded from the non-GAAP measures relate to the tax impact on the difference between GAAP and non-GAAP expenses, primarily due to stock-based compensation, amortization of purchased intangibles and restructuring charges and other exit costs (benefits) for GAAP and non-GAAP measures.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of cash is from the sale of our software and related services. Our primary use of cash is payment of our operating costs, which consist primarily of employee-related expenses, such as compensation and benefits, as well as general operating expenses for marketing, facilities and overhead costs. In addition to operating expenses, we also use cash to fund our stock repurchase program, repay existing debt and invest in our growth initiatives, which include acquisitions of products, technology and businesses. See further discussion of these items below.
At January 31, 2020, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $1,843.7 million and net accounts receivable of $652.3 million. On March 4, 2020, we redeemed in full $450.0 million in aggregate principal amount of our outstanding 3.125% senior notes due June 15, 2020. See Note 17, "Subsequent Events," for further discussion on the repayment.
On December 17, 2018, Autodesk entered into a new Credit Agreement (the “Credit Agreement”) for an unsecured revolving loan facility in the aggregate principal amount of $650.0 million, with an option to request increases in the amount of the credit facility by up to an additional $350.0 million. The maturity date on the line of credit facility is December 2023. At January 31, 2020, Autodesk had no outstanding borrowings on this line of credit. As of March 19, 2020, we have no amounts outstanding under the credit facility. See Part II, Item 8, Note 8, "Borrowing Arrangements," in the Notes to Consolidated Financial Statements for further discussion on our covenant requirements. If we are unable to remain in compliance with the covenants, we will not be able to draw on our credit facility.
2020 Form 10-K 54
On December 17, 2018, we also entered into a Term Loan Agreement (the “Term Loan Agreement”) which provided for a delayed draw term loan facility in the aggregate principal amount of $500.0 million. On December 19, 2018, we borrowed a $500.0 million term loan under the Term Loan Agreement in connection with the acquisition of PlanGrid in December 2018. See Part II, Item 8, Note 8, "Borrowing Arrangements," in the Notes to Consolidated Financial Statements for further discussion on the Term Loan Agreement terms and Part II, Item 8, Note 6, "Acquisitions" for further discussion on the PlanGrid acquisition. At January 31, 2020, the Term Loan Agreement was paid in full.
As of January 31, 2020, we have $2.1 billion aggregate principal amount of long-term notes payable outstanding, of which $449.7 million is classified as "Current portion of long-term notes payable, net" in the Consolidated Balance Sheets in Part II, Item 8. See Part II, Item 8, Note 8, "Borrowing Arrangements," in the Notes to Consolidated Financial Statements for further discussion.
Our cash and cash equivalents are held by diversified financial institutions globally. Our primary commercial banking relationship is with Citigroup and its global affiliates. In addition, Citibank N.A., an affiliate of Citigroup, is one of the lead lenders and agent in the syndicate of our $650.0 million line of credit.
Long-term cash requirements for items other than normal operating expenses are anticipated for the following: repayment of debt; common stock repurchases; the acquisition of businesses, software products, or technologies complementary to our business; and capital expenditures, including the purchase and implementation of internal-use software applications.
Our cash, cash equivalents, and marketable securities balances are concentrated in a few locations around the world, with substantial amounts held outside of the United States. As of January 31, 2020, approximately 54% of our total cash or cash equivalents and marketable securities are located in foreign jurisdictions and that percentage will fluctuate subject to business needs. There are several factors that can impact our ability to utilize foreign cash balances, such as foreign exchange restrictions, foreign regulatory restrictions, company law restrictions such as negative distributable reserves, or adverse tax costs. We regularly review our capital structure and consider a variety of potential financing alternatives and planning strategies to ensure we have the proper liquidity available in the locations in which it is needed. We expect to meet our liquidity needs through a combination of current cash balances, ongoing cash flows, and external borrowings.
Cash from operations could also be affected by various risks and uncertainties, including, but not limited to the risks detailed in Part I, Item 1A titled “Risk Factors.” However, based on our current business plan and revenue prospects, we believe that our existing balances, our anticipated cash flows from operations and our available credit facility will be sufficient to meet our working capital and operating resource expenditure requirements for at least the next 12 months from the date of this Annual Report.
Our revenue, earnings, cash flows, receivables, and payables are subject to fluctuations due to changes in foreign currency exchange rates, for which we have put in place foreign currency contracts as part of our risk management strategy. See Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” for further discussion.
Fiscal year ended January 31, | |||||||||||
(in millions) | 2020 | 2019 | 2018 | ||||||||
Net cash provided by operating activities | $ | 1,415.1 | $ | 377.1 | $ | 0.9 | |||||
Net cash (used in) provided by investing activities | (57.3 | ) | (710.4 | ) | 506.4 | ||||||
Net cash (used in) provided by financing activities | (466.8 | ) | 151.9 | (656.6 | ) | ||||||
Net cash provided by operating activities of $1.42 billion for fiscal 2020 consisted of $712.0 million of cash flow provided by changes in operating assets and liabilities, $488.6 million of non-cash expenses, including stock-based compensation expense, and depreciation, amortization and accretion expense, and our net income of $214.5 million.
The primary working capital source of cash was an increase in deferred revenue of $916.7 million from fiscal 2019. The primary working capital uses of cash were increases in accounts receivable of $178.5 million, and decreases in accounts payable and accrued liabilities of $90.8 million from fiscal 2019.
Net cash provided by operating activities of $377.1 million for fiscal 2019 consisted of $371.8 million of non-cash expenses, including stock-based compensation expense, restructuring charges, net, depreciation, amortization and accretion expense, offsetting our net loss of $80.8 million, and included $86.1 million of cash flow provided by changes in operating assets and liabilities.
2020 Form 10-K 55
Net cash used in investing activities was $57.3 million for fiscal 2020 and was primarily due to capital expenditures and purchases of marketable securities. These cash outflows were partially offset by sales and maturities of marketable securities.
At January 31, 2020, our short-term investment portfolio had an estimated fair value of $69.0 million and a cost basis of $59.9 million. The portfolio fair value consisted of $69.0 million of trading securities that were invested in a defined set of mutual funds as directed by the participants in our Deferred Compensation Plan (see Note 7, “Deferred Compensation,” in the Notes to Consolidated Financial Statements for further discussion).
Net cash used in investing activities was $710.4 million for fiscal 2019 and was primarily due to acquisitions, net of cash acquired and purchases of marketable securities. These cash outflows were partially offset by sales and maturities of marketable securities.
Net cash used in financing activities was $466.8 million in fiscal 2020 and was primarily due to repayment of debt and repurchases of our common stock and taxes paid related to net share settlement of equity awards. These cash outflows were partially offset by proceeds from debt issuance, net of discount and proceeds from issuance of common stock.
Net cash provided by financing activities was $151.9 million in fiscal 2019 and was primarily due to proceeds from debt issuance, net of discount and proceeds from issuance of stock. These cash inflows were partially offset by repurchases of our common stock and taxes paid related to net share settlement of equity awards.
2020 Form 10-K 56
CONTRACTUAL OBLIGATIONS
The following table summarizes our significant financial contractual obligations at January 31, 2020, and the effect such obligations are expected to have on our liquidity and cash flows in future periods.
(in millions) | Total | Fiscal year 2021 | Fiscal years 2022-2023 | Fiscal years 2024-2025 | Thereafter | Management Comments | ||||||||||||||
Notes payable | $ | 2,483.1 | $ | 512.7 | $ | 463.5 | $ | 89.8 | $ | 1,417.1 | Notes payable consist of the notes issued in December 2012, June 2015, June 2017 and January 2020 including interest. See Part II, Item 8, Note 8, "Borrowing Arrangements," in the Notes to Consolidated Financial Statements for further discussion. | |||||||||
Operating leases | 526.9 | 60.4 | 175.3 | 123.6 | 167.6 | Operating lease obligations consist primarily of obligations for real estate, vehicles and certain equipment. | ||||||||||||||
Purchase obligations | 402.0 | 89.3 | 133.1 | 176.1 | 3.5 | Purchase obligations are contractual obligations for purchase of goods or services and are defined as agreements that are enforceable and legally binding to Autodesk and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations relate primarily to acquisition of cloud services, IT infrastructure, marketing, and software development services, as well as commitments related to our investment agreements with limited liability partnership funds. | ||||||||||||||
Deferred compensation obligations | 69.0 | 5.3 | 10.7 | 11.0 | 42.0 | Deferred compensation obligations relate to amounts held in a rabbi trust under our non-qualified deferred compensation plan. See Part II, Item 8, Note 7, “Deferred Compensation,” in our Notes to Consolidated Financial Statements for further information regarding this plan. | ||||||||||||||
Pension obligations | 23.9 | 2.3 | 4.2 | 5.0 | 12.4 | Pension obligations relate to our obligations for pension plans outside of the U.S. See Part II, Item 8, Note 15, “Retirement Benefit Plans,” in our Notes to Consolidated Financial Statements for further information regarding these obligations. | ||||||||||||||
Asset retirement obligations | 10.2 | 1.0 | 6.1 | 2.3 | 0.8 | Asset retirement obligations represent the estimated costs to bring certain office buildings that we lease back to their original condition after the termination of the lease. | ||||||||||||||
Total (1) | $ | 3,515.1 | $ | 671.0 | $ | 792.9 | $ | 407.8 | $ | 1,643.4 | ||||||||||
____________________
(1) | This table generally excludes amounts already recorded on the balance sheet as current liabilities, certain purchase obligations as discussed below, long term deferred revenue, and amounts related to income tax liabilities for uncertain tax positions, since we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities (see Part II, Item 8, Note 5, “Income Taxes” in the Notes to Consolidated Financial Statements). |
Purchase orders or contracts for the purchase of supplies and other goods and services are not included in the table above. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current procurement or development needs and are fulfilled by our vendors within short time horizons. We do not have significant agreements for the purchase of supplies or other goods specifying minimum quantities or set prices that exceed our expected requirements for three months. In addition, we have certain software royalty commitments associated with the shipment and licensing of certain products.
The expected timing of payment of the obligations discussed above is estimated based on current information. Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations.
2020 Form 10-K 57
We provide indemnifications of varying scopes and certain guarantees, including limited product warranties. Historically, costs related to these warranties and indemnifications have not been significant, but because potential future costs are highly variable, we are unable to estimate the maximum potential impact of these guarantees on our future results of operations.
ISSUER PURCHASES OF EQUITY SECURITIES
Autodesk's stock repurchase program provides Autodesk with the ability to offset the dilution from the issuance of stock under our employee stock plans and reduce shares outstanding over time and has the effect of returning excess cash generated from our business to stockholders. Under the share repurchase program, Autodesk may repurchase shares from time to time in open market transactions, privately-negotiated transactions, accelerated share repurchase programs, tender offers, or by other means. The share repurchase program does not have an expiration date and the pace and timing of repurchases will depend on factors such as cash generation from operations, available surplus, the volume of employee stock plan activity, remaining shares available in the authorized pool, cash requirements for acquisitions, economic and market conditions, stock price and legal and regulatory requirements.
During the three and twelve months ended January 31, 2020, we repurchased 1.0 million and 2.7 million shares of our common stock, respectively. At January 31, 2020, 14.7 million shares remained available for repurchase under the repurchase program approved by the Board of Directors. This program does not have a fixed expiration date. See Part II, Item 8, Note 11, “Stock Repurchase Program,” in the Notes to Consolidated Financial Statements for further discussion.
OFF-BALANCE SHEET ARRANGEMENTS
As of January 31, 2020, we did not have any significant off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
2020 Form 10-K 58
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
FOREIGN CURRENCY EXCHANGE RISK
Our revenue, earnings, cash flows, receivables, and payables are subject to fluctuations due to changes in foreign currency exchange rates. Our risk management strategy utilizes foreign currency contracts to manage our exposure to foreign currency volatility that exists as part of our ongoing business operations. We utilize cash flow hedge contracts to reduce the exchange rate impact on a portion of the net revenue or operating expense of certain anticipated transactions. In addition, we use balance sheet hedge contracts to reduce the exchange rate risk associated primarily with foreign currency denominated receivables and payables. As of January 31, 2020 and 2019, we had open cash flow and balance sheet hedge contracts with future settlements generally within one to twelve months. Contracts were primarily denominated in euros, Japanese yen, British pounds, Canadian dollars, Australian dollars, Singapore dollars, Swiss francs, Swedish krona, and Czech koruna. We do not enter into foreign exchange derivative instruments for trading or speculative purposes. The notional amount of our option and forward contracts was $1.72 billion and $1.38 billion at January 31, 2020 and 2019, respectively.
We use foreign currency contracts to reduce the exchange rate impact on the net revenue and operating expenses of certain anticipated transactions. A sensitivity analysis performed on our hedging portfolio as of January 31, 2020, indicated that a hypothetical 10% appreciation of the U.S. dollar from its value at January 31, 2020 and 2019, would increase the fair value of our foreign currency contracts by $158.8 million and $123.4 million, respectively. A hypothetical 10% depreciation of the dollar from its value at January 31, 2020 and 2019, would decrease the fair value of our foreign currency contracts by $119.2 million and $98.3 million, respectively.
INTEREST RATE RISK
Interest rate movements affect both the interest income we earn on our short-term investments and the market value of certain longer term securities. At January 31, 2020, we had $1.25 billion of cash equivalents and marketable securities, including $69.0 million classified as short-term marketable securities. If interest rates were to move up by 50 or 100 basis points over a twelve-month period, the market value change of our marketable securities would not have a material impact on our results of operations.
OTHER MARKET RISK
From time to time we make direct investments in privately held companies. Privately held company investments generally are considered inherently risky. The technologies and products these companies have under development are typically in the early stages and may never materialize, which could result in a loss of all or a substantial part of our initial investment in these companies. The evaluation of privately held companies is based on information that we request from these companies, which is not subject to the same disclosure regulations as U.S. publicly traded companies, and as such, the basis for these evaluations is subject to the timing and accuracy of the data received from these companies. See Part II, Item 8, Note 3, "Financial Instruments" in the Notes to Consolidated Financial Statements for further discussion regarding our privately held investments.
For information about exposure to counter-party credit-related losses, see Part II, Item 8, Note 1, “Business and Summary of Significant Accounting Policies - Concentration of Credit Risk."
2020 Form 10-K 59
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
AUTODESK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Fiscal year ended January 31, | |||||||||||
2020 | 2019 | 2018 | |||||||||
Net revenue: | |||||||||||
Subscription | $ | 2,751.9 | $ | 1,802.3 | $ | 894.3 | |||||
Maintenance | 386.6 | 635.1 | 989.6 | ||||||||
Total subscription and maintenance revenue | 3,138.5 | 2,437.4 | 1,883.9 | ||||||||
Other | 135.8 | 132.4 | 172.7 | ||||||||
Total net revenue | 3,274.3 | 2,569.8 | 2,056.6 | ||||||||
Cost of revenue: | |||||||||||
Cost of subscription and maintenance revenue | 223.9 | 216.0 | 214.4 | ||||||||
Cost of other revenue | 66.5 | 54.4 | 72.6 | ||||||||
Amortization of developed technology | 34.5 | 15.5 | 16.4 | ||||||||
Total cost of revenue | 324.9 | 285.9 | 303.4 | ||||||||
Gross profit | 2,949.4 | 2,283.9 | 1,753.2 | ||||||||
Operating expenses: | |||||||||||
Marketing and sales | 1,310.3 | 1,183.9 | 1,087.3 | ||||||||
Research and development | 851.1 | 725.0 | 755.5 | ||||||||
General and administrative | 405.6 | 340.1 | 305.2 | ||||||||
Amortization of purchased intangibles | 38.9 | 18.0 | 20.2 | ||||||||
Restructuring and other exit costs, net | 0.5 | 41.9 | 94.1 | ||||||||
Total operating expenses | 2,606.4 | 2,308.9 | 2,262.3 | ||||||||
Income (loss) from operations | 343.0 | (25.0 | ) | (509.1 | ) | ||||||
Interest and other expense, net | (48.2 | ) | (17.7 | ) | (48.2 | ) | |||||
Income (loss) before income taxes | 294.8 | (42.7 | ) | (557.3 | ) | ||||||
Provision for income taxes | (80.3 | ) | (38.1 | ) | (9.6 | ) | |||||
Net income (loss) | $ | 214.5 | $ | (80.8 | ) | $ | (566.9 | ) | |||
Basic net income (loss) per share | $ | 0.98 | $ | (0.37 | ) | $ | (2.58 | ) | |||
Diluted net income (loss) per share | $ | 0.96 | $ | (0.37 | ) | $ | (2.58 | ) | |||
Weighted average shares used in computing basic net income (loss) per share | 219.7 | 218.9 | 219.5 | ||||||||
Weighted average shares used in computing diluted net income (loss) per share | 222.5 | 218.9 | 219.5 | ||||||||
See accompanying Notes to Consolidated Financial Statements.
2020 Form 10-K 60
AUTODESK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
Fiscal year ended January 31, | |||||||||||
2020 | 2019 | 2018 | |||||||||
Net income (loss) | $ | 214.5 | $ | (80.8 | ) | $ | (566.9 | ) | |||
Other comprehensive income (loss), net of reclassifications: | |||||||||||
Net (loss) gain on derivative instruments (net of tax effect of ($1.1), ($1.1), and $3.2) | (6.6 | ) | 31.6 | (31.2 | ) | ||||||
Change in net unrealized gain (loss) on available-for-sale securities (net of tax effect of ($0.4), $0.0, and $0.1) | 1.4 | 2.0 | (0.2 | ) | |||||||
Change in defined benefit pension items (net of tax effect of $1.6, ($2.0), and ($0.7)) | (6.5 | ) | 13.0 | 4.5 | |||||||
Net change in cumulative foreign currency translation (loss) gain (net of tax effect of $0.1, $0.5, and ($4.8)) | (13.6 | ) | (57.8 | ) | 81.6 | ||||||
Total other comprehensive (loss) income | (25.3 | ) | (11.2 | ) | 54.7 | ||||||
Total comprehensive income (loss) | $ | 189.2 | $ | (92.0 | ) | $ | (512.2 | ) | |||
See accompanying Notes to Consolidated Financial Statements.
2020 Form 10-K 61
AUTODESK, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
January 31, 2020 | January 31, 2019 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 1,774.7 | $ | 886.0 | |||
Marketable securities | 69.0 | 67.6 | |||||
Accounts receivable, net | 652.3 | 474.3 | |||||
Prepaid expenses and other current assets | 163.3 | 192.1 | |||||
Total current assets | 2,659.3 | 1,620.0 | |||||
Computer equipment, software, furniture, and leasehold improvements, net | 161.7 | 149.7 | |||||
Operating lease right-of-use assets | 438.8 | — | |||||
Developed technologies, net | 70.9 | 105.6 | |||||
Goodwill | 2,445.0 | 2,450.8 | |||||
Deferred income taxes, net | 56.4 | 65.3 | |||||
Other assets | 347.2 | 337.8 | |||||
Total assets | $ | 6,179.3 | $ | 4,729.2 | |||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 83.7 | $ | 101.6 | |||
Accrued compensation | 272.1 | 280.8 | |||||
Accrued income taxes | 21.2 | 13.2 | |||||
Deferred revenue | 2,176.1 | 1,763.3 | |||||
Operating lease liabilities | 48.1 | — | |||||
Current portion of long-term notes payable, net | 449.7 | — | |||||
Other accrued liabilities | 168.3 | 142.3 | |||||
Total current liabilities | 3,219.2 | 2,301.2 | |||||
Long-term deferred revenue | 831.0 | 328.1 | |||||
Long-term operating lease liabilities | 411.7 | — | |||||
Long-term income taxes payable | 19.1 | 21.5 | |||||
Long-term deferred income taxes | 82.5 | 79.8 | |||||
Long-term notes payable, net | 1,635.1 | 2,087.7 | |||||
Long-term other liabilities | 119.8 | 121.8 | |||||
Commitments and contingencies | |||||||
Stockholders’ deficit: | |||||||
Preferred stock, $0.01 par value; shares authorized 2.0; none issued or outstanding at January 31, 2020 and 2019 | — | — | |||||
Common stock and additional paid-in capital, $0.01 par value; shares authorized 750.0; 219.4 outstanding at January 31, 2020 and 2019 | 2,317.0 | 2,071.5 | |||||
Accumulated other comprehensive loss | (160.3 | ) | (135.0 | ) | |||
Accumulated deficit | (2,295.8 | ) | (2,147.4 | ) | |||
Total stockholders’ deficit | (139.1 | ) | (210.9 | ) | |||
Total liabilities and stockholders' deficit | $ | 6,179.3 | $ | 4,729.2 | |||
See accompanying Notes to Consolidated Financial Statements.
2020 Form 10-K 62
AUTODESK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Fiscal year ended January 31, | |||||||||||
2020 | 2019 | 2018 | |||||||||
Operating activities | |||||||||||
Net income (loss) | $ | 214.5 | $ | (80.8 | ) | $ | (566.9 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
Depreciation, amortization, and accretion | 127.3 | 95.2 | 108.4 | ||||||||
Stock-based compensation expense | 362.4 | 249.5 | 261.4 | ||||||||
Deferred income taxes | 10.3 | (6.8 | ) | (39.1 | ) | ||||||
Restructuring and other exit costs, net | 0.5 | 31.7 | 94.1 | ||||||||
Other operating activities | (11.9 | ) | 2.2 | 7.3 | |||||||
Changes in operating assets and liabilities, net of business combinations: | |||||||||||
Accounts receivable | (178.5 | ) | (25.4 | ) | 13.3 | ||||||
Prepaid expenses and other current assets | 58.5 | 7.5 | (9.9 | ) | |||||||
Accounts payable and accrued liabilities | (90.8 | ) | (58.5 | ) | (13.9 | ) | |||||
Deferred revenue | 916.7 | 197.0 | 168.3 | ||||||||
Accrued income taxes | 6.1 | (34.5 | ) | (22.1 | ) | ||||||
Net cash provided by operating activities | 1,415.1 | 377.1 | 0.9 | ||||||||
Investing activities | |||||||||||
Purchases of marketable securities | (19.9 | ) | (138.2 | ) | (514.0 | ) | |||||
Sales of marketable securities | 22.4 | 319.6 | 489.0 | ||||||||
Maturities of marketable securities | 5.0 | 211.4 | 594.3 | ||||||||
Acquisitions, net of cash acquired | — | (1,040.2 | ) | — | |||||||
Capital expenditures | (53.2 | ) | (67.0 | ) | (50.7 | ) | |||||
Other investing activities | (11.6 | ) | 4.0 | (12.2 | ) | ||||||
Net cash (used in) provided by investing activities | (57.3 | ) | (710.4 | ) | 506.4 | ||||||
Financing activities | |||||||||||
Proceeds from issuance of common stock | 93.7 | 90.9 | 94.4 | ||||||||
Taxes paid related to net share settlement of equity awards | (112.5 | ) | (143.4 | ) | (143.1 | ) | |||||
Repurchase and retirement of common shares | (442.5 | ) | (293.5 | ) | (699.0 | ) | |||||
Proceeds from debt, net of discount | 498.9 | 500.0 | 496.9 | ||||||||
Repayments of debt | (500.0 | ) | — | (400.0 | ) | ||||||
Other financing activities | (4.4 | ) | (2.1 | ) | (5.8 | ) | |||||
Net cash (used in) provided by financing activities | (466.8 | ) | 151.9 | (656.6 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (2.3 | ) | (10.6 | ) | 14.2 | ||||||
Net increase (decrease) in cash and cash equivalents | 888.7 | (192.0 | ) | (135.1 | ) | ||||||
Cash and cash equivalents at beginning of fiscal year | 886.0 | 1,078.0 | 1,213.1 | ||||||||
Cash and cash equivalents at end of fiscal year | $ | 1,774.7 | $ | 886.0 | $ | 1,078.0 | |||||
Supplemental cash flow information: | |||||||||||
Cash paid during the year for interest | $ | 67.8 | $ | 59.0 | $ | 54.6 | |||||
Cash paid for income taxes, net of tax refunds | $ | 60.3 | $ | 78.0 | $ | 84.5 | |||||
Non-cash investing and financing activities: | |||||||||||
Fair value of common stock issued to settle liability-classified restricted stock units | $ | 23.5 | $ | — | $ | — | |||||
Fair value of equity awards assumed (See Note 6) | $ | — | $ | 10.3 | $ | — | |||||
Fair value of common stock issued as consideration for business combination (See Note 6) | $ | — | $ | 44.8 | $ | — | |||||
See accompanying Notes to Consolidated Financial Statements.
2020 Form 10-K 63
AUTODESK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
(In millions)
Common stock and additional paid-in capital | Accumulated other comprehensive loss | Accumulated deficit | Total stockholders' (deficit) equity | |||||||||||||||
Shares | Amount | |||||||||||||||||
Balances, January 31, 2017 | 220.3 | $ | 1,876.3 | $ | (178.5 | ) | $ | (964.2 | ) | $ | 733.6 | |||||||
Common shares issued under stock plans | 4.9 | (48.7 | ) | — | — | (48.7 | ) | |||||||||||
Stock-based compensation expense | — | 261.4 | — | — | 261.4 | |||||||||||||
Net loss | — | — | — | (566.9 | ) | (566.9 | ) | |||||||||||
Other comprehensive income | — | — | 54.7 | — | 54.7 | |||||||||||||
Repurchase and retirement of common shares | (6.9 | ) | (136.3 | ) | — | (553.8 | ) | (690.1 | ) | |||||||||
Balances, January 31, 2018 | 218.3 | 1,952.7 | (123.8 | ) | (2,084.9 | ) | (256.0 | ) | ||||||||||
Common shares issued under stock plans | 3.0 | (52.5 | ) | — | — | (52.5 | ) | |||||||||||
Stock-based compensation expense | — | 249.5 | — | — | 249.5 | |||||||||||||
Pre-combination expense related to equity awards assumed | — | 10.3 | — | — | 10.3 | |||||||||||||
Cumulative effect of adoption of accounting standards | — | — | — | 177.5 | 177.5 | |||||||||||||
Net loss | — | — | — | (80.8 | ) | (80.8 | ) | |||||||||||
Other comprehensive loss | — | — | (11.2 | ) | — | (11.2 | ) | |||||||||||
Shares issued as consideration for business combination | 0.3 | 44.8 | — | — | 44.8 | |||||||||||||
Repurchase and retirement of common shares | (2.2 | ) | (133.3 | ) | — | (159.2 | ) | (292.5 | ) | |||||||||
Balances, January 31, 2019 | 219.4 | 2,071.5 | (135.0 | ) | (2,147.4 | ) | (210.9 | ) | ||||||||||
Common shares issued under stock plans | 2.7 | (18.6 | ) | — | — | (18.6 | ) | |||||||||||
Stock-based compensation expense | — | 332.7 | — | — | 332.7 | |||||||||||||
Settlement of liability-classified restricted stock units | — | 23.5 | — | — | 23.5 | |||||||||||||
Pre-combination expense related to equity awards assumed | — | 1.2 | — | — | 1.2 | |||||||||||||
Cumulative effect of adoption of accounting standards | — | — | — | (0.7 | ) | (0.7 | ) | |||||||||||
Net income | — | — | — | 214.5 | 214.5 | |||||||||||||
Other comprehensive loss | — | — | (25.3 | ) | — | (25.3 | ) | |||||||||||
Repurchase and retirement of common shares | (2.7 | ) | (93.3 | ) | — | (362.2 | ) | (455.5 | ) | |||||||||
Balances, January 31, 2020 | 219.4 | $ | 2,317.0 | $ | (160.3 | ) | $ | (2,295.8 | ) | $ | (139.1 | ) | ||||||
See accompanying Notes to Consolidated Financial Statements.
2020 Form 10-K 64
AUTODESK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2020
(Tables in millions of dollars, except per share data, unless otherwise indicated)
1. Business and Summary of Significant Accounting Policies
Business
Autodesk, Inc. (“Autodesk” or the “Company”) is a world leading design software and services company, offering customers productive business solutions through powerful technology products and services. The Company serves customers in the architecture, engineering, and construction; manufacturing; and digital media, consumer, and entertainment industries. The Company’s sophisticated software products, offered through a hybrid of desktop and cloud functionality, enable its customers to experience their ideas before they are real by allowing them to imagine, design, and create their ideas and to visualize, simulate, and analyze real-world performance early in the design process by creating digital prototypes. These capabilities allow Autodesk’s customers to foster innovation, optimize and improve their designs, help save time and money, improve quality, and collaborate with others. Autodesk software products are sold globally, both directly to customers and through a network of resellers and distributors.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Autodesk and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in Autodesk’s consolidated financial statements and notes thereto. These estimates are based on information available as of the date of the consolidated financial statements. On a regular basis, management evaluates these estimates and assumptions. Actual results may differ materially from these estimates.
Examples of significant estimates and assumptions made by management involve revenue recognition for product subscriptions and EBAs, the determination of the fair value of acquired assets and liabilities, goodwill, financial instruments including strategic investments, long-lived assets and other intangible assets, the realizability of deferred tax assets, and the fair value of stock awards. The Company also makes assumptions, judgments, and estimates in determining the liabilities for uncertain tax positions, variable compensation, partner incentive programs, product returns reserves, allowances for doubtful accounts, asset retirement obligations, legal contingencies and operating lease liabilities.
2020 Form 10-K 65
Segments
Autodesk operates in one operating segment and accordingly, all required financial segment information is included in the consolidated financial statements. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision makers ("CODM") in deciding how to allocate resources and assess performance. Autodesk reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions, allocating resources and assessing performance as the source of the Company’s reportable segments. The Company's CODM allocates resources and assesses the operating performance of the Company as a whole.
Information regarding Autodesk's long-lived assets by geographic area is as follows:
January 31, | |||||||
2020 | 2019 | ||||||
Long-lived assets (1): | |||||||
Americas | |||||||
U.S. | $ | 434.2 | $ | 97.5 | |||
Other Americas | 33.2 | 17.5 | |||||
Total Americas | 467.4 | 115.0 | |||||
Europe, Middle East, and Africa | 75.8 | 23.0 | |||||
Asia Pacific | 57.3 | 11.7 | |||||
Total long-lived assets | $ | 600.5 | $ | 149.7 | |||
____________________
(1) | Long-lived assets exclude deferred tax assets, marketable securities, goodwill, and other intangible assets. |
Revenue Recognition
Autodesk’s revenue is divided into three categories: subscription revenue, maintenance revenue, and other revenue. Subscription revenue consists of our term-based product subscriptions, cloud service offerings, and flexible enterprise business arrangements. Maintenance revenue consists of renewal fees for existing maintenance plan agreements that were initially purchased with a perpetual software license. Under our maintenance plan, customers are eligible to receive unspecified upgrades, when and if available, and technical support. Other revenue consists of revenue from consulting, training and other services. Other revenue also includes software license revenue from the sale of certain products which do not incorporate substantial cloud functionalities. Revenue is recognized when control for these offerings is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for products and services.
Autodesk's contracts with customers may include promises to transfer multiple products and services to a customer. Determining whether the products and services are considered distinct performance obligations that should be accounted for separately or as one combined performance obligation may require significant judgment. Judgment is required to determine the level of integration and interdependency between individual components of desktop software applications and cloud functionalities. This determination influences whether the desktop software is considered distinct and accounted for separately as a license performance obligation recognized at the time of delivery, or not distinct and accounted for together with the cloud functionalities as a single subscription performance obligation recognized over time.
For product subscriptions and flexible enterprise business agreement ("EBA") subscriptions in which the desktop software and related cloud functionalities are highly interrelated, the combined performance obligation is recognized ratably over the contract term as the subscription is delivered. For contracts involving distinct desktop software licenses, the license performance obligation is satisfied when delivered to our customers. For standalone maintenance subscriptions, cloud subscriptions, and technical support services, the performance obligation is satisfied ratably over the contract term as those services are delivered. For consulting services, the performance obligation is satisfied over a period of time as those services are delivered.
When an arrangement includes multiple performance obligations which are concurrently delivered and have the same pattern of transfer to the customer (the services transfer to the customer over the contract period), we account for those performance obligations as a single performance obligation.
2020 Form 10-K 66
For contracts with more than one performance obligation, the transaction price is allocated among the performance obligations in an amount that depicts the relative standalone selling price ("SSP") of each obligation. Judgment is required to determine the SSP for each distinct performance obligation. See Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, subsection "Critical Accounting Policies and Estimates," for details of the judgments made for SSP.
Our indirect channel model includes both a two-tiered distribution structure, where Autodesk sells to distributors that subsequently sell to resellers, and a one-tiered structure where Autodesk sells directly to resellers. For these arrangements, transfer of control begins at the time access to our subscriptions is made available electronically to our customer, provided all other criteria for revenue recognition are met. Judgment is required to determine whether our distributors and resellers have the ability to honor their commitment to pay, regardless of whether they collect payment from their customers. If we were to change this assessment, it could cause a material increase or decrease in the amount of revenue that we report in a particular period.
Costs To Obtain a Contract With a Customer
Sales commissions earned by our internal sales personnel and our reseller partners are considered incremental and recoverable costs of obtaining a contract with a customer. The commission costs are capitalized and included in "Prepaid expenses and other current assets" and "Other assets" on our Consolidated Balance Sheets. The deferred costs are then amortized over the period of benefit. Autodesk determined that sales commissions earned by internal sales personnel that are related to contract renewals are commensurate with sales commissions earned on the initial contracts, and we determined the period of benefit to be the term of the respective customer contract. Commissions paid to our reseller partners that are related to contract renewals are not commensurate with commissions earned on the initial contract, and we determined the estimated period of benefit by taking into consideration customer retention data, customer contracts, our technology and other factors. Deferred costs are periodically reviewed for impairment. Amortization expense is included in sales and marketing expenses in the Consolidated Statements of Operations.
Fair Value Measurement
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In determining the fair value of our investments, we are sometimes required to use various alternative valuation techniques. Inputs to valuation techniques are either observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs have created the following fair value hierarchy:
Level 1 - Quoted prices for identical instruments in active markets;
Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3 - Unobservable inputs for which there is little or no market data, which require Autodesk to develop its own assumptions.
This hierarchy requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. This is generally true for our cash and cash equivalents and the majority of our marketable securities, which we consider to be Level 1 and Level 2 assets.
Key inputs for currency derivatives are spot rates, forward rates, interest rates, volatility, and credit default rates. The spot rate for each currency is the same spot rate used for all balance sheet translations at the measurement date. Autodesk reviews for any potential changes on a quarterly basis, in conjunction with our fiscal quarter-end close. It is Autodesk's assessment that the leveling best reflects current market activity when observing the pricing information for these assets. Autodesk's Level 2 securities and derivatives are valued primarily using observable inputs other than quoted prices in active markets for identical assets and liabilities. The Company has elected to use the income approach to value derivatives using the observable Level 2 market expectations at measurement date and standard valuation techniques to convert future amounts to a single present amount (discounted). Mid-market pricing is used as a practical expedient and when required, rates are interpolated from commonly quoted intervals published by market sources. See Note 3, "Financial Instruments" for information.
2020 Form 10-K 67
Cash and Cash Equivalents
Autodesk considers all highly liquid investments with insignificant interest rate risk and remaining maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents are stated at estimated fair value.
Marketable Securities and Privately Held Company Investments
Autodesk classifies its marketable securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Generally, 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.
Marketable securities are stated at fair value. Marketable securities maturing within one year that are not restricted are classified as current assets.
Autodesk determines the appropriate classification of its marketable securities at the time of purchase and re-evaluates such classification as of each balance sheet date. Autodesk carries all “available-for-sale securities” at fair value, with unrealized gains and losses, net of tax, reported in stockholders’ equity (deficit) until disposition or maturity. Autodesk carries all “trading securities” at fair value, with unrealized gains and losses, recorded in “Interest and other expense, net” in the Company’s Consolidated Statements of Operations. The cost of securities sold is based on the specific-identification method.
Privately held debt and equity securities (Level 3) are valued using significant unobservable inputs or data in an inactive market and the valuation requires the Company's judgment due to the absence of market prices and inherent lack of liquidity. These assumptions are inherently subjective and involve significant management judgment. Whenever possible, we use observable market data and rely on unobservable inputs only when observable market data is not available, when determining fair value.
The carrying value is not adjusted for the Company's privately held equity securities if there are no observable price changes in a same or similar security from the same issuer or if there are no identified events or changes in circumstances that may indicate impairment, as discussed below. Under the measurement alternative method, these investments are measured at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer in the current period. To determine if a transaction is deemed a similar investment, Autodesk considers the rights and obligations between the investments and the extent to which those differences would affect the fair values of those investments with additional consideration for the stage of development of the investee company. The fair value would then be adjusted positively or negatively based on available information such as pricing in recent rounds of financing.
In determining the estimated fair value of its strategic investments in privately held companies, the Company utilizes the most recent data available to the Company. In addition, the determination of whether an orderly transaction is for a same or similar investment requires significant management judgment including: the rights and obligations of the investments, the extent to which those differences would affect the fair values of those investments, and the impact of any differences based on the stage of operational development of the investee.
All of Autodesk’s marketable securities and privately held company investments are subject to a periodic impairment review. Non-marketable equity securities investments are assessed based on available information such as current cash positions, earnings and cash flow positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. For any marketable debt securities, declines in fair value judged to be other-than-temporary on securities available for sale are included as a reduction to investment income. To determine whether a decline in value is other-than-temporary, the Company evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value and its intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. For the purposes of computing realized and unrealized gains and losses, the cost of securities sold is based on the specific-identification method. Interest on securities classified as available for sale is also included as a component of investment income.
For Autodesk's quarterly impairment assessment of privately held debt and equity securities strategic investment portfolio, the analysis encompasses an assessment of the severity and duration of the impairment and qualitative and quantitative analysis
2020 Form 10-K 68
of other key factors including: the investee’s financial metrics, the investee’s products and technologies meeting or exceeding predefined milestones, market acceptance of the product or technology, other competitive products or technology in the market, general market conditions, management and governance structure of the investee, the investee’s liquidity, debt ratios and the rate at which the investee is using its cash. If the investment is impaired, the Company will record the investment at fair value by recognizing an impairment through the consolidated statement of operations and establishing a new carrying value for the investment.
For additional information, see “Concentration of Credit Risk” within this Note 1 and Note 3, “Financial Instruments.”
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 that exist as part of ongoing business operations. Autodesk's general practice is to hedge a portion of transaction exposures primarily denominated in euros, Japanese yen, British pounds, Canadian dollars, Australian dollars, Singapore dollars, Swiss francs, Swedish krona and Czech koruna. These instruments generally have maturities between one and twelve months in the future. Autodesk uses foreign currency contracts not designated as hedging instruments and foreign currency contracts designated as cash flow hedging but Autodesk does not enter into derivative instrument transactions for trading or speculative purposes.
The bank counterparties to the derivative contracts potentially expose Autodesk to credit-related losses in the event of their nonperformance. However, to mitigate that risk, Autodesk only contracts with counterparties who meet the Company's minimum requirements under its counterparty risk assessment process. Autodesk monitors counterparty risk on at least a quarterly basis and will adjust its exposure to various counterparties as necessary. Autodesk generally enters into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. Autodesk does not have any master netting arrangements in place with collateral features.
Autodesk accounts for these derivative instruments as either assets or liabilities on the balance sheet and carries them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. Derivatives that do not qualify for hedge accounting are adjusted to fair value through earnings.
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 “Interest and other expense, net”.
Foreign Currency Translation and Transactions
The assets and liabilities of Autodesk’s foreign subsidiaries are translated from their respective functional currencies into U.S. dollars at the rates in effect at the balance sheet date, and revenue and expense amounts are translated at exchange rates that approximate those rates in effect during the period in which the underlying transactions occur. Foreign currency translation adjustments are recorded as other comprehensive income (loss).
Gains and losses realized from foreign currency transactions, those transactions denominated in currencies other than the foreign subsidiary’s functional currency, are included in "Interest and other expense, net". Monetary assets and liabilities are remeasured using foreign currency exchange rates at the end of the period, and non-monetary assets are remeasured based on historical exchange rates.
Foreign Currency Contracts Designated as Cash Flow Hedges
Autodesk uses foreign currency contracts to reduce the exchange rate impact on a portion of the net revenue or operating expense of certain anticipated transactions. These currency collars and forward contracts are designated and documented as cash flow hedges. The effectiveness of the cash flow hedge contracts is assessed quantitatively using regression at inception and thereafter. To receive cash flow hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge relationship and the hedges are expected to be highly effective in offsetting changes to future cash flows on hedged transactions. The gains and losses on these hedges are included in “Accumulated other comprehensive loss” and are reclassified into earnings at the time the forecasted revenue or expense is recognized. In the event the underlying forecasted transaction
2020 Form 10-K 69
does not occur, or it becomes probable that it will not occur, Autodesk reclassifies and discloses the gain or loss on the related cash flow hedge from “Accumulated other comprehensive loss” to “Interest and other expense, net” in the Company's Consolidated Financial Statements at that time. Derivative contracts and related gain (loss) are presented within "Net cash provided by operating activities" in the Company's Consolidated Statements of Cash Flow. See Note 3, "Financial Instruments" for additional information.
Derivatives Not Designated as Hedging Instruments
Autodesk uses foreign currency contracts that are not designated as hedging instruments to reduce the exchange rate risk associated primarily with foreign currency denominated receivables, payables, and cash. These forward contracts are marked-to-market at the end of each fiscal quarter with gains and losses recognized as “Interest and other expense, net”. These derivative instruments do not subject the Company to material balance sheet risk due to exchange rate movements because gains and losses on these derivative instruments are intended to offset the gains or losses resulting from the revaluation and settlement of the underlying foreign currency denominated receivables, payables, and cash.
Accounts Receivable, Net
Accounts receivable, net, consisted of the following as of January 31:
2020 | 2019 | ||||||
Trade accounts receivable | $ | 716.1 | $ | 529.3 | |||
Less: Allowance for doubtful accounts | (4.9 | ) | (4.9 | ) | |||
Product returns reserve | (0.5 | ) | (0.3 | ) | |||
Partner programs and other obligations | (58.4 | ) | (49.8 | ) | |||
Accounts receivable, net | $ | 652.3 | $ | 474.3 | |||
Allowances for uncollectible trade receivables are based upon historical loss patterns, the number of days that billings are past due, and an evaluation of the potential risk of loss associated with problem accounts.
As part of the indirect channel model, Autodesk has a partner incentive program that uses quarterly attainment of monetary rewards to motivate distributors and resellers to achieve mutually agreed upon business goals in a specified time period. The majority of these incentives are recorded as a reduction to deferred revenue in the period the transaction is billed and subsequently recognized as a reduction to subscription or maintenance revenue over the contract period. The remainder reduces subscription or maintenance revenue in the current period.
These incentive balances do not require significant assumptions or judgments. Depending on how the payments are made, the reserves associated with the partner incentive program are treated on the balance sheet as either a reduction to accounts receivable or accounts payable.
Concentration of Credit Risk
Autodesk places its cash, cash equivalents, and marketable securities in highly liquid instruments with, and in the custody of, multiple diversified financial institutions globally with high credit ratings and limits the amounts invested with any one institution, type of security, and issuer. Autodesk’s primary commercial banking relationship is with Citigroup Inc. and its global affiliates. Citibank, N.A., an affiliate of Citigroup, is one of the lead lenders and an agent in the syndicate of Autodesk’s $650.0 million line of credit facility.
The bank counterparties to the derivative contracts potentially expose Autodesk to credit-related losses in the event of their nonperformance. However, to mitigate that risk, Autodesk only contracts with counterparties who meet the Company's minimum requirements under its counterparty risk assessment process. Autodesk monitors counterparty risk on at least a quarterly basis and will adjust its exposure to various counterparties as necessary. 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.
Autodesk’s accounts receivable are derived from sales to a large number of resellers, distributors, and direct customers in the Americas, EMEA, and APAC geographies. Autodesk performs ongoing evaluations of these partners' and customers'
2020 Form 10-K 70
financial condition and limits the amount of credit extended when deemed necessary, but generally does not require collateral from such parties. Total sales to the Company's largest distributor Tech Data Corporation, and its global affiliates (“Tech Data”), accounted for 35%, 35%, and 31% of Autodesk's net revenue for fiscal years ended January 31, 2020, 2019, and 2018, respectively. The majority of the net revenue from sales to Tech Data is for sales made outside of the United States. In addition, Tech Data accounted for 31% and 29% of trade accounts receivable as of January 31, 2020, and 2019, respectively. Ingram Micro Inc. ("Ingram Micro"), our second largest distributor, accounted for 10%, 11%, 8% of Autodesk's total net revenue for fiscal years ended January 31, 2020, 2019, and 2018. No other customer accounted for more than 10% of Autodesk's total net revenue or trade accounts receivable for each of the respective periods.
Computer Equipment, Software, Furniture, and Leasehold Improvements, Net
Computer equipment, software, and furniture are depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the lease term. Depreciation expense was $51.0 million in fiscal 2020, $59.2 million in fiscal 2019, and $67.6 million in fiscal 2018.
Computer equipment, software, furniture, leasehold improvements and the related accumulated depreciation at January 31 were as follows:
2020 | 2019 | ||||||
Computer hardware, at cost | $ | 159.7 | $ | 190.2 | |||
Computer software, at cost | 64.0 | 66.7 | |||||
Leasehold improvements, land and buildings, at cost | 284.0 | 247.8 | |||||
Furniture and equipment, at cost | 69.0 | 67.2 | |||||
Computer software, hardware, leasehold improvements, furniture, and equipment, at cost | 576.7 | 571.9 | |||||
Less: Accumulated depreciation | (415.0 | ) | (422.2 | ) | |||
Computer software, hardware, leasehold improvements, furniture, and equipment, net | $ | 161.7 | $ | 149.7 | |||
Costs incurred for computer software developed or obtained for internal use are capitalized for application development activities, if material, and immediately expensed for preliminary project activities and post-implementation activities. These capitalized costs are amortized straight-line over the software’s expected useful life, which is generally three years.
Software Development Costs
Software development costs incurred prior to the establishment of technological feasibility are included in research and development expenses. Autodesk defines establishment of technological feasibility as the completion of a working model. Software development costs incurred subsequent to the establishment of technological feasibility through the period of general market availability of the products are capitalized and generally amortized over a three-year period, if material. Autodesk had no material capitalized software development costs at January 31, 2020, and January 31, 2019.
Cloud Computing Arrangements
Autodesk enters into certain cloud-based software hosting arrangements that are accounted for as service contracts. Costs incurred for these arrangements are capitalized for application development activities, if material, and immediately expensed for preliminary project activities and post-implementation activities. Autodesk amortizes the capitalized development costs straight-line over the fixed, non-cancellable term of the associated hosting arrangement plus any reasonably certain renewal periods. The capitalized costs are included in "Prepaid expenses and other current assets" and "Other assets" on our Consolidated Balance Sheets. Capitalized costs were $22.3 million and $4.9 million at January 31, 2020, and January 31, 2019, respectively. Amortization expense was $1.2 million and nil at January 31, 2020 and January 31, 2019, respectively.
Other Intangible Assets, Net
Other intangible assets include developed technologies, customer relationships, trade names, patents, user lists and the related accumulated amortization. These assets are shown as “Developed technologies, net” and as part of “Other assets” in the Consolidated Balance Sheet. The majority of Autodesk’s other intangible assets are amortized to expense over the estimated economic life of the product, which ranges from two to ten years. Amortization expense for developed technologies, customer
2020 Form 10-K 71
relationships, trade names, patents, and user lists was $73.7 million in fiscal 2020, $33.5 million in fiscal 2019 and $36.6 million in fiscal 2018.
Other intangible assets and related accumulated amortization at January 31 were as follows:
2020 | 2019 | ||||||
Developed technologies, at cost | $ | 647.1 | $ | 670.2 | |||
Customer relationships, trade names, patents, and user lists, at cost (1) | 532.2 | 533.1 | |||||
Other intangible assets, at cost (2) | 1,179.3 | 1,203.3 | |||||
Less: accumulated amortization | (972.2 | ) | (922.5 | ) | |||
Other intangible assets, net | $ | 207.1 | $ | 280.8 | |||
_______________
(1) | Included in “Other assets” in the accompanying Consolidated Balance Sheets. |
(2) | Includes the effects of foreign currency translation. |
The weighted average amortization period for developed technologies, customer relationships, trade names, patents, and user lists during fiscal 2020 was 5.5 years. Excluding in-process research and development, expected future amortization expense for developed technologies, customer relationships, trade names, patents, and user lists for each of the fiscal years ended thereafter is as follows:
Fiscal Year ended January 31, | |||
2021 | $ | 64.7 | |
2022 | 49.0 | ||
2023 | 37.6 | ||
2024 | 19.2 | ||
2025 | 13.0 | ||
Thereafter | 23.6 | ||
Total | $ | 207.1 | |
Impairment of Long-Lived Assets
At least annually or more frequently as circumstances dictate, Autodesk reviews its long-lived assets for impairment whenever impairment indicators exist. Autodesk continually monitors events and changes in circumstances that could indicate the carrying amounts of its long-lived assets may not be recoverable. When such events or changes in circumstances occur, Autodesk assesses recoverability of these assets. Recoverability is measured by comparison of the carrying amounts of the assets to the future undiscounted cash flow the assets are expected to generate. If the long-lived assets are impaired, the impairment to be recognized is equal to the amount by which the carrying value of the assets exceeds its fair market value. Autodesk did not recognize any material impairments of long-lived assets during the fiscal years ended January 31, 2020, 2019, and 2018, respectively.
In addition to the recoverability assessments, Autodesk routinely reviews the remaining estimated useful lives of its long-lived assets. Any reduction in the useful life assumption will result in increased depreciation and amortization expense in the quarter when such determinations are made, as well as in subsequent quarters.
Goodwill
Goodwill consists of the excess of the consideration transferred over the fair value of net assets acquired in business combinations. Autodesk tests goodwill for impairment annually in its fourth fiscal quarter or more often if circumstances indicate a potential impairment may exist, or if events have affected the composition of reporting units.
When goodwill is assessed for impairment, Autodesk has the option to perform an assessment of qualitative factors of impairment (“optional assessment”) prior to necessitating a quantitative impairment test. Should the optional assessment be used for any given fiscal year, qualitative factors to consider include cost factors; financial performance; legal, regulatory, contractual, political, business, or other factors; entity specific factors; industry and market considerations, macroeconomic
2020 Form 10-K 72
conditions, and other relevant events and factors affecting the reporting unit. If, after assessing the totality of events or circumstances, it is more likely than not that the fair value of the reporting unit is greater than its carrying value, then performing the quantitative impairment test is unnecessary.
The quantitative impairment test is necessary when either Autodesk does not use the optional assessment or, as a result of the optional assessment, it is not more likely than not that the fair value of the reporting unit is greater than its carrying value. In situations in which an entity's reporting unit is publicly traded, the fair value of the Company may be approximated by its market capitalization, in performing the quantitative impairment test.
Goodwill impairment exists when the estimated fair value of goodwill is less than its carrying value. If impairment exists, the carrying value of the goodwill is reduced to fair value through an impairment charge recorded in the Company's statements of operations. The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. The value of Autodesk’s goodwill could also be impacted by future adverse changes such as: (i) declines in Autodesk’s actual financial results, (ii) a sustained decline in Autodesk’s market capitalization, (iii) a significant slowdown in the worldwide economy or the industries Autodesk serves, or (iv) changes in Autodesk’s business strategy.
For the annual impairment test, Autodesk's market capitalization was substantially in excess of the carrying value of the Company as of January 31, 2020. Accordingly, Autodesk has determined there was no goodwill impairment during the fiscal year ended January 31, 2020. In addition, Autodesk did not recognize any goodwill impairment losses in fiscal 2019 or 2018.
The following table summarizes the changes in the carrying amount of goodwill during the fiscal years ended January 31, 2020 and 2019:
January 31, 2020 | January 31, 2019 | ||||||
Goodwill, beginning of the year | $ | 2,600.0 | $ | 1,769.4 | |||
Less: accumulated impairment losses, beginning of the year | (149.2 | ) | (149.2 | ) | |||
Additions arising from acquisitions during the year | — | 866.9 | |||||
Effect of foreign currency translation and measurement period adjustments (1) | (5.8 | ) | (36.3 | ) | |||
Goodwill, end of the year | $ | 2,445.0 | $ | 2,450.8 | |||
_______________
(1) | Measurement period adjustments reflect revisions made to the Company's preliminary determination of estimated fair value of assets and liabilities assumed. |
Deferred Tax Assets
Deferred tax assets arise primarily from tax credits, net operating losses, and timing differences for reserves, accrued liabilities, stock options, deferred revenue, purchased technologies, and capitalized intangibles, partially offset by U.S. deferred tax liabilities on acquired intangibles, and valuation allowances against U.S. and foreign deferred tax assets. Autodesk performed a quarterly assessment of the recoverability of these net deferred tax assets and believes it will generate sufficient future taxable income in appropriate tax jurisdictions to realize the net deferred tax assets. They are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Valuation allowances are established when necessary to reduce gross deferred tax assets to the amount that is more likely than not to be realized.
2020 Form 10-K 73
Stock-based Compensation Expense
The following table summarizes stock-based compensation expense for fiscal 2020, 2019, and 2018, respectively, as follows:
Fiscal Year Ended January 31, | |||||||||||
2020 | 2019 | 2018 | |||||||||
Cost of subscription and maintenance revenue | $ | 13.8 | $ | 13.2 | $ | 11.9 | |||||
Cost of other revenue | 5.8 | 4.3 | 4.0 | ||||||||
Marketing and sales | 149.0 | 109.4 | 107.3 | ||||||||
Research and development | 120.8 | 82.6 | 82.9 | ||||||||
General and administrative | 73.0 | 40.0 | 55.3 | ||||||||
Stock-based compensation expense related to stock awards and Employee Qualified Stock Purchase Plan ("ESPP") purchases | 362.4 | 249.5 | 261.4 | ||||||||
Tax benefit | (1.1 | ) | (2.6 | ) | (2.6 | ) | |||||
Stock-based compensation expense related to stock awards and ESPP purchases, net | $ | 361.3 | $ | 246.9 | $ | 258.8 | |||||
Autodesk measures stock-based compensation cost at the grant date fair value of the award, and recognizes expense ratably over the requisite service period, which is generally the vesting period. Autodesk determines the estimated fair value of stock-based payment awards for stock options and grants of employee stock purchases related to the employee stock purchase plan using either the Black-Scholes-Merton option-pricing model or a binomial-lattice model (e.g., Monte Carlo simulation model). To determine the grant-date fair value of our stock-based payment awards for restricted stock units and performance stock units, we use the quoted stock price on the date of grant, unless the awards are subject to market conditions, in which case we use the Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input variables to estimate the probability that market conditions will be achieved. These variables include our expected stock price volatility over the expected term of the award, actual and projected employee stock option exercise behaviors, the risk-free interest rate for the expected term of the award, and expected dividends. The variables used in these models are reviewed on a quarterly basis and adjusted, as needed. Share-based compensation cost for restricted stock is measured on the closing fair market value of our common stock on the date of grant. Autodesk uses the following assumptions to estimate the fair value of stock-based awards:
Fiscal Year Ended | Fiscal Year Ended | Fiscal Year Ended | |||||||||||
January 31, 2020 | January 31, 2019 | January 31, 2018 | |||||||||||
Performance Stock Unit | ESPP | Stock Option Plans | Performance Stock Unit | ESPP | Performance Stock Unit | ESPP | |||||||
Range of expected volatilities | 36% | 33 - 40% | 37 - 42% | 36% | 33 - 38% | 32% | 31 - 34% | ||||||
Range of expected lives (in years) | N/A | 0.5 - 2.0 | 0.5 - 3.8 | N/A | 0.5 - 2.0 | N/A | 0.5 - 2.0 | ||||||
Expected dividends | —% | —% | —% | —% | —% | —% | —% | ||||||
Range of risk-free interest rates | 2.5% | 1.7 - 2.5% | 2.3 - 2.7% | 2.0% | 1.9 - 2.8% | 1.0 - 1.2% | 0.9 - 1.4% | ||||||
Autodesk estimates expected volatility for stock-based awards based on the average of the following two measures: (1) a measure of historical volatility in the trading market for the Company’s common stock, and (2) the implied volatility of traded forward call options to purchase shares of the Company’s common stock. The expected volatility for performance stock units subject to market conditions includes the expected volatility of companies within the S&P North American Technology Software Index with a market capitalization over $2.00 billion, depending on the award type.
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. The range of expected lives of ESPP awards are based upon the four, six-month exercise periods within a 24-month offering period.
Autodesk did not pay cash dividends in fiscal 2020, 2019, or 2018 and does not anticipate paying any cash dividends in the foreseeable future. Consequently, an expected dividend yield of zero is used in the BSM option pricing model and the Monte Carlo simulation model.
2020 Form 10-K 74
The risk-free interest rate used in the BSM option pricing model and the Monte Carlo simulation model for stock-based awards is the historical yield on U.S. Treasury securities with equivalent remaining lives.
Autodesk recognizes expense only for the stock-based awards that ultimately vest. Autodesk accounts for forfeitures of stock-based awards as those forfeitures occur.
Advertising Expenses
Advertising costs are expensed as incurred. Total advertising expenses incurred were $42.2 million in fiscal 2020, $37.5 million in fiscal 2019, and $31.1 million in fiscal 2018.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed based on the weighted average number of shares of common stock outstanding for the period, excluding stock options and restricted stock. Diluted net income (loss) per share is computed based upon the weighted average shares of common shares outstanding for the period and potentially dilutive common shares, including the effect of stock options and restricted stock units under the treasury stock method.
Defined Benefit Pension Plans
The funded status of Autodesk's defined benefit pension plans is recognized in the Consolidated Balance Sheets. The funded status is measured as the difference between the fair value of plan assets and the projected benefit obligation for the fiscal years presented. The projected benefit obligation represents the actuarial present value of benefits expected to be paid upon retirement based on employee services already rendered and estimated future compensation levels. The fair value of plan assets represents the current market value of Autodesk's cumulative company and participant contributions made to the various plans in effect.
Net periodic benefit cost is recorded in the Consolidated Statements of Operations and includes service cost, interest cost, expected return on plan assets, amortization of prior service costs, and gains or losses previously recognized as a component of other comprehensive loss. Certain events, such as changes in the employee base, plan amendments, and changes in actuarial assumptions may result in a change in the defined benefit obligation and the corresponding change to other comprehensive loss.
Gains and losses and prior service costs not recognized as a component of net periodic benefit cost in the Consolidated Statements of Operations as they arise are recognized as a component of other comprehensive income (loss) in the Consolidated Statements of Comprehensive Income (Loss). Those gains and losses and prior service costs are subsequently amortized as a component of net periodic benefit cost over the average remaining service lives of the plan participants using a corridor approach to determine the portion of gain or loss subject to amortization.
The measurement of projected benefit obligations and net periodic benefit cost is based on estimates and assumptions that reflect the terms of the plans and use participant-specific information such as compensation, age and years of services, as well as certain assumptions, including estimates of discount rates, expected return of plan assets, rate of compensation increases, interest rates, and mortality rates.
Accounting Standards in Fiscal 2020
With the exception of those discussed below, there have been no recent changes in accounting pronouncements issued by FASB or adopted by the Company during the fiscal year ended January 31, 2020, that are applicable to the Company.
Accounting Standards Adopted
Autodesk adopted ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" on February 1, 2019. The amendment helps simplify certain aspects of hedge accounting and results in a more accurate portrayal of the economics of an entity’s risk management activities in its financial statements. For cash flow and net investment hedges as of the adoption date, the guidance required a modified retrospective approach. The amended presentation and disclosure guidance is required only prospectively. The transition impact was immaterial and no substantive changes were made to Autodesk’s current processes, accounting, or disclosures for cash flow hedges.
2020 Form 10-K 75
Autodesk adopted ASU No. 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” on February 1, 2019. The amendment allows entities the option to reclassify tax effects stranded in accumulated other comprehensive income as a result of the U.S. Tax Cuts and Jobs Act (the "Tax Act") to retained earnings. Upon adoption, the amount reclassified from other comprehensive loss to stockholders' deficit was not material.
Autodesk adopted ASU No. 2019-12 regarding ASC Topic 740, "Simplifying the Accounting for Income Taxes", which simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740 on January 31, 2020. The ASU also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The adoption did not have a material impact on the consolidated financial statements.
Leases
FASB issued ASU No. 2016-02, "Leases (ASC Topic 842)", to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. The new standard requires entities to reflect the net present value of all future fixed lease payments for both operating and finance leases on the balance sheet. It also requires entities to disclose fixed and variable lease payments separately and by lease type (operating vs. finance leases). In addition, FASB issued ASU No. 2018-10, ASU No. 2018-11and ASU No. 2018-20 to help provide accommodations and interpretive clarifications on various issues raised by stakeholders. ASU No. 2018-10 clarifies ambiguous or potentially conflicting guidance in ASU No. 2016-02. ASU No. 2018-11 provides an additional transition option to apply ASU No. 2016-02 upon adoption of the new standard.
Adoption and policy elections
Autodesk adopted ASU No. 2016-02 as of February 1, 2019, using the modified retrospective method permitted under ASU No. 2018-11 for all existing leases which does not include retrospectively adjusting prior periods presented in the financial statements. Under ASU No. 2016-02, as the lessee, Autodesk recognized a right-of-use ("ROU") asset and offsetting lease liability for leases that existed on adoption. The asset and liability were measured at present value of all future fixed lease payments, discounted using the Company’s incremental borrowing rate. Autodesk has elected to opt for the practical expedients: to not reassess whether any existing contracts are leases or contain a lease; to not reassess the lease classification of existing leases; and to not reassess initial direct costs for existing leases. Autodesk has elected to combine lease and non-lease components for new leases post adoption for all lease assets.
Autodesk determines if an arrangement is a lease at inception. Operating leases are included in “Operating lease right-of-use assets”, “Operating lease liabilities”, and “Long-term operating lease liabilities” in the Consolidated Balance Sheets.
Operating lease ROU assets represent Autodesk’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Autodesk uses its incremental borrowing rate, if the Company's leases do not provide an implicit rate, adjusted for local country-specific borrowing rates as applicable, based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU assets also include any lease payments made and are reduced by any lease incentives. Options to extend or terminate the lease are considered in determining the lease term when it is reasonably certain that the option will be exercised. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Autodesk has lease agreements with lease and non-lease components. Autodesk accounts for the lease and non-lease components as a single lease component.
Quantitative effect of ASC Topic 842 adoption
Under the modified retrospective method, Autodesk recorded $(0.7) million to the opening balance of "Accumulated deficit" as of February 1, 2019. The comparative information has not been adjusted and continues to be reported as under previous accounting guidance. The adoption of ASC Topic 842 did not have a material impact to the Company’s consolidated statement of operations or net cash provided by operating activities as of February 1, 2019.
2020 Form 10-K 76
The following table shows line items that were materially impacted by the adoption of ASC Topic 842 on February 1, 2019 on Autodesk’s Consolidated Balance Sheet:
As reported January 31, 2019 | Impact from the adoption (1) | As adjusted | |||||||||
ASSETS | |||||||||||
Prepaid expenses and other current assets | $ | 192.1 | $ | (5.9 | ) | $ | 186.2 | ||||
Total current assets | 1,620.0 | (5.9 | ) | 1,614.1 | |||||||
Operating lease right-of-use assets | — | 283.4 | 283.4 | ||||||||
Total assets | 4,729.2 | 277.5 | 5,006.7 | ||||||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | |||||||||||
Current liabilities: | |||||||||||
Other accrued liabilities | 142.3 | (4.9 | ) | 137.4 | |||||||
Operating lease liabilities | — | 54.1 | 54.1 | ||||||||
Long-term operating lease liabilities | — | 245.9 | 245.9 | ||||||||
Other liabilities | 121.8 | (16.9 | ) | 104.9 | |||||||
Accumulated deficit | $ | (2,147.4 | ) | $ | (0.7 | ) | $ | (2,148.1 | ) | ||
____________________
(1) | Adoption of ASC Topic 842 did not have any other material impacts on Autodesk's consolidated financial statements. |
See Note 9, "Leases" for disclosures under ASC Topic 842.
Recently Issued Accounting Standards But Not Yet Adopted
In March 2020, FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting", which provides optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. Autodesk is still currently evaluating the impact to the financial statements, the transition, and disclosure requirements of the standard.
In June 2016, FASB issued ASU No. 2016-13 regarding ASC Topic 326, "Financial Instruments - Credit Losses", which modifies the measurement of expected credit losses of certain financial instruments. Autodesk plans to adopt ASU No. 2016-13 as of the effective date which represents Autodesk’s fiscal year beginning February 1, 2020. The adoption of the ASU will not have a material impact on its consolidated financial statements.
2. Revenue Recognition
Revenue Disaggregation
Autodesk recognizes revenue from the sale of (1) product subscriptions, cloud service offerings, and EBAs, (2) renewal fees for existing maintenance plan agreements that were initially purchased with a perpetual software license, and (3) consulting, training and other goods and services. The three categories are presented as line items on Autodesk's Consolidated Statements of Operations.
2020 Form 10-K 77
Information regarding the components of Autodesk's net revenue from contracts with customers by geographic location, product family, and sales channel is as follows:
Fiscal Year ended January 31, | |||||||||||
2020 | 2019 | 2018 | |||||||||
Net revenue by product family: | |||||||||||
Architecture, Engineering and Construction | $ | 1,377.1 | $ | 1,021.6 | $ | 787.5 | |||||
Manufacturing | 726.1 | 616.2 | 528.8 | ||||||||
AutoCAD and AutoCAD LT | 948.2 | 731.8 | 561.4 | ||||||||
Media and Entertainment | 199.2 | 182.0 | 152.1 | ||||||||
Other | 23.7 | 18.2 | 26.8 | ||||||||
Total net revenue | $ | 3,274.3 | $ | 2,569.8 | $ | 2,056.6 | |||||
Net revenue by geographic area: | |||||||||||
Americas | |||||||||||
U.S. | $ | 1,108.9 | $ | 874.6 | $ | 740.4 | |||||
Other Americas | 226.9 | 175.3 | 130.7 | ||||||||
Total Americas | 1,335.8 | 1,049.9 | 871.1 | ||||||||
Europe, Middle East and Africa | 1,303.5 | 1,034.3 | 815.4 | ||||||||
Asia Pacific | 635.0 | 485.6 | 370.1 | ||||||||
Total net revenue | $ | 3,274.3 | $ | 2,569.8 | $ | 2,056.6 | |||||
Net revenue by sales channel: | |||||||||||
Indirect | $ | 2,282.2 | $ | 1,830.8 | $ | 1,443.8 | |||||
Direct | 992.1 | 739.0 | 612.8 | ||||||||
Total net revenue | $ | 3,274.3 | $ | 2,569.8 | $ | 2,056.6 | |||||
Payments for product subscriptions, industry collections, cloud subscriptions, and maintenance subscriptions are typically due up front with payment terms of 30 to 45 days. Payments on EBAs are typically due in annual installments over the contract term, with payment terms of 30 to 60 days. Autodesk does not have any material variable consideration, such as obligations for returns, refunds, warranties or amounts payable to customers for which significant estimation or judgment is required as of the reporting date.
Remaining performance obligations consist of total billed and unbilled deferred revenue. As of January 31, 2020, Autodesk had remaining performance obligations of $3.6 billion, which represents the total contract price allocated to remaining performance obligations, which are generally recognized over the next three years. We expect to recognize $2.4 billion or 67% of our remaining performance obligations as revenue during the next 12 months. We expect to recognize the remaining $1.2 billion or 33% of our remaining performance obligations as revenue thereafter.
The amount of remaining performance obligations may be impacted by the specific timing, duration and size of customer subscription and support agreements, varying billing cycles of such agreements, the specific timing of customer renewals, and foreign currency fluctuations.
Contract Balances
We receive payments from customers based on a billing schedule as established in our contracts. Contract assets relate to performance completed in advance of scheduled billings. Contract assets were not material as of January 31, 2020. Deferred revenue relates to billings in advance of performance under the contract. The primary changes in our contract assets and deferred revenues are due to our performance under the contracts and billings.
2020 Form 10-K 78
Revenue recognized during the fiscal year ended January 31, 2020 and 2019, that was included in the deferred revenue balances at January 31, 2019 and 2018, was $1.8 billion and $1.5 billion, respectively. The satisfaction of performance obligations typically lags behind payments received under revenue contracts from customers.
Revenue from contracts with customers adopted in Fiscal 2019
Effective in the first quarter of fiscal 2019, Autodesk adopted ASU No. 2014-09, “Revenue from Contracts with Customers" regarding Accounting Standards Codification (ASC Topic 606)” and the subsequent and related ASU No. 2015-14, ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12, and ASU No. 2016-20.
Under ASC Topic 606, the Company has concluded that the desktop software and related substantial cloud functionality that are included in the majority of its product subscription offerings and enterprise arrangements are not distinct in the context of the contract as they are considered highly interrelated and represent a single combined performance obligation that should be recognized over time. Therefore, the adoption of ASC Topic 606 has not resulted in a material change in the timing and amount of the recognition of revenue for the majority of the Company's product subscription offerings and enterprise arrangements.
One impact of the new standard relates to product subscriptions that do not incorporate substantial cloud functionality. A limited number of Autodesk's product subscriptions do not incorporate substantial cloud functionality, and therefore are not considered highly interrelated. Under ASU No. 2014-09, these limited number of product subscriptions are recognized as separate and distinct license and service performance obligations. Under ASU No. 2009-13, "Revenue Recognition" regarding Accounting Standards Codification (ASC Topic 605), licenses sold with undelivered elements without vendor-specific objective evidence ("VSOE") are recognized ratably over the term of the undelivered elements. Under ASC Topic 606, Autodesk is no longer required to establish VSOE to recognize software license revenue separately from the other elements and recognizes software licenses once the customer obtains control of the license, which is generally upon delivery of the license. Therefore, revenue allocated to the licenses in these offerings under ASC Topic 606 is recognized at a point in time instead of over the contract term.
Autodesk adopted ASC Topic 606 using the modified retrospective method, with a cumulative decrease of $89.0 million to the opening balance of "Accumulated deficit" at February 1, 2018. Autodesk applied the standard only to contracts that are not completed as of the date of initial application. The comparative information has not been adjusted and continues to be reported under ASC Topic 605. The details of the quantitative impact of the adoption on the fiscal year ended January 31, 2019, are shown below.
Costs to acquire a contract from a customer
With the adoption of ASC Topic 606, Autodesk also adopted ASC Topic 340-40, "Other Assets and Deferred Costs—Contracts with Customers." Prior to the adoption of ASC Topic 340-40, Autodesk previously recognized compensation paid to sales employees and certain resellers related to obtaining customer contracts in marketing and sales expense in the Consolidated Statements of Operations when incurred. Under ASC Topic 340-40, Autodesk capitalizes this sales compensation as contract costs when they are incremental, directly incurred to obtain a contract with a customer and expected to be recoverable. The contract costs are amortized based on the transfer of goods or services to which the contract costs relate.
Under the modified retrospective method, Autodesk booked a cumulative decrease of $90.4 million to the opening balance of "Accumulated deficit" at February 1, 2018. The comparative information has not been adjusted and continues to be reported as incurred. The details of the quantitative impact of the adoption on the fiscal year ended January 31, 2019, are shown below. See Note 7, "Deferred Compensation" for disclosures under the new standard.
2020 Form 10-K 79
Quantitative effect of ASC Topics 606 and 340-40 adoption
Under the modified retrospective adoption, Autodesk calculated the impact of the adoption during fiscal 2019, as the first year of adoption. The following table shows select line items that were materially impacted by the adoption of ASC Topics 606 and 340-40 on Autodesk’s Consolidated Statements of Operations for the fiscal year ended January 31, 2019:
For the Fiscal Year ended January 31, 2019 | ||||||||||||
As reported | Impact from the adoption of ASC 606 and 340-40 | As adjusted | ||||||||||
Net revenue (1) | ||||||||||||
Subscription | $ | 1,802.3 | $ | (16.6 | ) | $ | 1,785.7 | |||||
Maintenance | 635.1 | 5.7 | 640.8 | |||||||||
Other | 132.4 | (11.3 | ) | 121.1 | ||||||||
Cost of revenue (1) | ||||||||||||
Cost of subscription and maintenance revenue | 216.0 | (0.1 | ) | 215.9 | ||||||||
Cost of other revenue | 54.4 | 1.1 | 55.5 | |||||||||
Operating expenses (1): | ||||||||||||
Marketing and sales | 1,183.9 | (17.9 | ) | 1,166.0 | ||||||||
Provision for income taxes | (38.1 | ) | (4.8 | ) | (42.9 | ) | ||||||
Net loss (2) | $ | (80.8 | ) | $ | (10.1 | ) | $ | (90.9 | ) | |||
Basic net loss per share | $ | (0.37 | ) | $ | (0.05 | ) | $ | (0.42 | ) | |||
Diluted net loss per share | $ | (0.37 | ) | $ | (0.05 | ) | $ | (0.42 | ) | |||
____________________
(1) | While not shown here, gross margin, loss from operations, and loss before income taxes have consequently been affected as a result of the net effect of the adjustments noted above. |
(2) | The impact on the Consolidated Statements of Comprehensive Loss is limited to the net effects of the impacts noted above on the Consolidated Statements of Operations, specifically on the line item "Net loss." |
2020 Form 10-K 80
The following table shows select line items that were materially impacted by the adoption of ASC Topics 606 and 340-40 on Autodesk’s Consolidated Balance Sheet as of January 31, 2019:
As reported | Impact from the adoption of ASC 606 and 340-40 | As adjusted | |||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Accounts receivable, net | $ | 474.3 | $ | 73.4 | $ | 547.7 | |||||
Prepaid expenses and other current assets (1) | 192.1 | (79.4 | ) | 112.7 | |||||||
Deferred income taxes, net | 65.3 | 7.0 | 72.3 | ||||||||
Other assets (1) | 337.8 | (17.9 | ) | 319.9 | |||||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | |||||||||||
Current liabilities: | |||||||||||
Deferred revenue | 1,763.3 | 140.6 | 1,903.9 | ||||||||
Other accrued liabilities | 142.3 | 1.7 | 144.0 | ||||||||
Long-term deferred revenue | 328.1 | 37.2 | 365.3 | ||||||||
Long-term income taxes payable | 21.5 | (0.2 | ) | 21.3 | |||||||
Long-term deferred income taxes | 79.8 | (6.7 | ) | 73.1 | |||||||
Stockholders’ deficit: | |||||||||||
Accumulated deficit (2) | $ | (2,147.4 | ) | $ | (189.5 | ) | $ | (2,336.9 | ) | ||
____________________
(1) | Short term and long term "contract assets" under ASC Topic 606 are included within "Prepaid expenses and other current assets" and "Other assets", respectively, on the Consolidated Balance Sheet. |
(2) | Included in the "Accumulated deficit" adjustment is $179.4 million for the cumulative effect adjustment of adopting ASC Topic 606 and 340-40 on the opening balance as of February 1, 2018. |
Adoption of the standard had no impact to net cash provided by or (used in) operating, financing, or investing activities on the Company’s Consolidated Statements of Cash Flows.
2020 Form 10-K 81
3. 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 January 31, 2020 and 2019.
January 31, 2020 | |||||||||||||||||||||||||||||
(in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
Cash equivalents (1): | |||||||||||||||||||||||||||||
Agency discount notes | $ | 6.0 | $ | — | $ | — | $ | 6.0 | $ | — | $ | 6.0 | $ | — | |||||||||||||||
Commercial paper | 36.8 | — | — | 36.8 | — | 36.8 | — | ||||||||||||||||||||||
Money market funds | 1,135.5 | — | — | 1,135.5 | 1,135.5 | — | — | ||||||||||||||||||||||
Other (2) | 2.3 | — | — | 2.3 | 1.3 | 1.0 | — | ||||||||||||||||||||||
Marketable securities: | |||||||||||||||||||||||||||||
Short-term trading securities | |||||||||||||||||||||||||||||
Mutual funds | 59.9 | 9.2 | (0.1 | ) | 69.0 | 69.0 | — | — | |||||||||||||||||||||
Derivative contract assets (3) | 1.1 | 9.7 | (1.3 | ) | 9.5 | — | 8.9 | 0.6 | |||||||||||||||||||||
Derivative contract liabilities (4) | — | — | (4.7 | ) | (4.7 | ) | — | (4.7 | ) | — | |||||||||||||||||||
Total | $ | 1,241.6 | $ | 18.9 | $ | (6.1 | ) | $ | 1,254.4 | $ | 1,205.8 | $ | 48.0 | $ | 0.6 | ||||||||||||||
____________________
(1) | Included in “Cash and cash equivalents” in the accompanying Consolidated Balance Sheets. |
(2) | Consists of custody cash deposits and certificates of deposit. |
(3) | Included in “Prepaid expenses and other current assets,” or “Other assets,” in the accompanying Consolidated Balance Sheets. |
(4) | Included in “Other accrued liabilities” in the accompanying Consolidated Balance Sheets. |
January 31, 2019 | |||||||||||||||||||||||||||||
(in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
Cash equivalents (1): | |||||||||||||||||||||||||||||
Certificates of deposit | $ | 1.0 | $ | — | $ | — | $ | 1.0 | $ | — | $ | 1.0 | $ | — | |||||||||||||||
Commercial paper | 87.9 | — | — | 87.9 | — | 87.9 | — | ||||||||||||||||||||||
Corporate debt securities | 5.0 | — | — | 5.0 | — | 5.0 | — | ||||||||||||||||||||||
Custody cash deposit | 0.8 | — | — | 0.8 | 0.8 | — | — | ||||||||||||||||||||||
Money market funds | 281.4 | — | — | 281.4 | 281.4 | — | — | ||||||||||||||||||||||
Marketable securities: | |||||||||||||||||||||||||||||
Short-term available-for-sale | |||||||||||||||||||||||||||||
Other (2) | 6.2 | 1.1 | — | 7.3 | 2.7 | 4.6 | — | ||||||||||||||||||||||
Short-term trading securities | |||||||||||||||||||||||||||||
Mutual funds | 56.6 | 3.7 | — | 60.3 | 60.3 | — | — | ||||||||||||||||||||||
Convertible debt securities (3) | 4.6 | 1.9 | (2.1 | ) | 4.4 | — | — | 4.4 | |||||||||||||||||||||
Derivative contract assets (4) | 1.7 | 8.6 | (1.8 | ) | 8.5 | — | 7.7 | 0.8 | |||||||||||||||||||||
Derivative contract liabilities (5) | — | — | (7.4 | ) | (7.4 | ) | — | (7.4 | ) | — | |||||||||||||||||||
Total | $ | 445.2 | $ | 15.3 | $ | (11.3 | ) | $ | 449.2 | $ | 345.2 | $ | 98.8 | $ | 5.2 | ||||||||||||||
____________________
(1) | Included in “Cash and cash equivalents” in the accompanying Consolidated Balance Sheets. |
(2) | Consists of corporate bonds, commercial paper, and common stock. |
(3) | Considered "available for sale" securities and included in "Other assets" in the accompanying Consolidated Balance Sheets. |
(4) | Included in “Prepaid expenses and other current assets”, "Other assets", or “Other accrued liabilities” in the accompanying Consolidated Balance Sheets. |
(5) | Included in “Other accrued liabilities” in the accompanying Consolidated Balance Sheets. |
2020 Form 10-K 82
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.
A reconciliation of the change in Autodesk’s Level 3 items for the fiscal year ended January 31, 2020 was as follows:
Fair Value Measurements Using Significant Unobservable Inputs | ||||||||||||
(Level 3) | ||||||||||||
(in millions) | Derivative Contracts | Convertible Debt Securities | Total | |||||||||
Balances, January 31, 2019 | $ | 0.8 | $ | 4.4 | $ | 5.2 | ||||||
Impairments | — | (1.0 | ) | (1.0 | ) | |||||||
Settlements | — | (3.5 | ) | (3.5 | ) | |||||||
(Losses) gains included in earnings (1) | (0.2 | ) | 0.2 | — | ||||||||
Losses included in OCI | — | (0.1 | ) | (0.1 | ) | |||||||
Balances, January 31, 2020 | $ | 0.6 | $ | — | $ | 0.6 | ||||||
____________________
(1) | Included in “Interest and other expense, net” in the accompanying Consolidated Statements of Operations. |
As of January 31, 2020 and 2019, Autodesk had no material unrealized losses, individually and in the aggregate, for securities that are in a continuous unrealized loss position for greater than twelve months.
There was no gain or loss for the sale or redemption of securities during fiscal 2020. The sales or redemptions of securities in fiscal 2019 and fiscal 2018 resulted in a loss of $1.3 million, and $0.3 million, respectively. The losses were recorded in "Interest and other expense, net" on the Company's Consolidated Statements of Operations.
Proceeds from the sale and maturity of marketable securities for fiscal 2020, fiscal 2019 and fiscal 2018 were $27.4 million, $531.0 million and $1.08 billion, respectively.
Non-marketable equity securities
As of January 31, 2020 and 2019, Autodesk had $122.5 million and $111.6 million in direct investments in privately held companies. These non-marketable equity security investments do not have readily determined fair values and Autodesk uses the measurement alternative to account for the adjustment to these investments in a given quarter. During the fiscal years ended January 31, 2020 and 2019, Autodesk recorded an upward adjustment on certain of its privately held investments, reflected as a gain in "Interest and other expense, net" on the Company's Consolidated Statement of Operations of $3.2 million and $6.2 million, respectively. As of January 31, 2020, Autodesk has recorded $9.4 million in cumulative upward adjustments on certain of its privately held investments.
If Autodesk determines that an impairment has occurred, Autodesk writes down the investment to its fair value. During fiscal 2020, fiscal 2019 and fiscal 2018, Autodesk recorded $4.2 million, $4.8 million and $15.5 million, respectively, in impairments and negative adjustments on its privately held investments, reflected as a loss in "Interest and other expense, net" on the Company's Consolidated Statements of Operations. As of January 31, 2020, Autodesk has recorded $9.0 million in cumulative impairments and negative adjustments on its privately held investments. Autodesk does not consider the remaining investments to be impaired at January 31, 2020.
Foreign currency contracts designated as cash flow hedges
Autodesk uses foreign currency contracts to reduce the exchange rate impact on a portion of the net revenue or operating expense of certain anticipated transactions. These currency collars and forward contracts are designated and documented as cash flow hedges. The notional amounts of these contracts are presented net settled and were $981.3 million at January 31, 2020, and $803.5 million at January 31, 2019. Outstanding contracts are recognized as either assets or liabilities on the balance sheet at fair value. The majority of the net gain of $8.4 million remaining in “Accumulated other comprehensive loss” as of January 31, 2020, is expected to be recognized into earnings within the next twenty-four months.
2020 Form 10-K 83
The location and amount of gain or loss recognized in income on cash flow hedges together with the total amount of income or expense presented in the Company's Consolidated Statements of Operations where the effects of the hedge are recorded were as follows for the fiscal year ended January 31, 2020:
Fiscal Year Ended January 31, 2020 | ||||||||||||||||||||||||
Net Revenue | Cost of revenue | Operating expenses | ||||||||||||||||||||||
(in millions) | Subscription Revenue | Maintenance Revenue | Cost of subscription and maintenance revenue | Marketing and sales | Research and development | General and administrative | ||||||||||||||||||
Total amounts of income and expense line items presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded | $ | 2,751.9 | $ | 386.6 | $ | 223.9 | $ | 1,310.3 | $ | 851.1 | $ | 405.6 | ||||||||||||
Gain (loss) on cash flow hedging relationships | ||||||||||||||||||||||||
Foreign exchange contracts | ||||||||||||||||||||||||
Amount of gain (loss) reclassified from accumulated other comprehensive income into income | $ | 11.7 | $ | 5.9 | $ | (0.9 | ) | $ | (4.3 | ) | $ | (0.7 | ) | $ | (2.1 | ) | ||||||||
Derivatives not designated as hedging instruments
Autodesk uses foreign currency contracts that are not designated as hedging instruments to reduce the exchange rate risk associated primarily with foreign currency denominated receivables, payables, and cash. The notional amounts of these foreign currency contracts are presented net settled and were $736.2 million at January 31, 2020, and $579.8 million at January 31, 2019.
Fair Value of Derivative Instruments:
The fair value of derivative instruments in Autodesk’s Consolidated Balance Sheets were as follows as of January 31, 2020, and January 31, 2019:
Balance Sheet Location | Fair Value at | ||||||||
(in millions) | January 31, 2020 | January 31, 2019 | |||||||
Derivative Assets | |||||||||
Foreign currency contracts designated as cash flow hedges | Prepaid expenses and other current assets | $ | 1.0 | $ | 4.3 | ||||
Derivatives not designated as hedging instruments | Prepaid expenses and other current assets and Other assets | 8.4 | 4.2 | ||||||
Total derivative assets | $ | 9.4 | $ | 8.5 | |||||
Derivative Liabilities | |||||||||
Foreign currency contracts designated as cash flow hedges | Other accrued liabilities | $ | 2.8 | $ | 3.3 | ||||
Derivatives not designated as hedging instruments | Other accrued liabilities | 1.9 | 4.1 | ||||||
Total derivative liabilities | $ | 4.7 | $ | 7.4 | |||||
2020 Form 10-K 84
The effects of derivatives designated as hedging instruments on Autodesk’s Consolidated Statements of Operations were as follows for the fiscal years ended January 31, 2020, 2019, and 2018, respectively (amounts presented include any income tax effects):
Foreign Currency Contracts | |||||||||||
Fiscal Year Ended January 31, | |||||||||||
(in millions) | 2020 | 2019 | 2018 | ||||||||
Amount of gain (loss) recognized in accumulated other comprehensive loss on derivatives (effective portion) | $ | 3.0 | $ | 19.6 | $ | (21.3 | ) | ||||
Amount and location of gain (loss) reclassified from accumulated other comprehensive loss into income (loss) (effective portion) | |||||||||||
Net revenue | $ | 17.6 | $ | (8.5 | ) | $ | 8.0 | ||||
Cost of revenue | (0.9 | ) | — | — | |||||||
Operating expenses | (7.1 | ) | (3.6 | ) | 1.9 | ||||||
Total | $ | 9.6 | $ | (12.1 | ) | $ | 9.9 | ||||
The effects of derivatives not designated as hedging instruments on Autodesk’s Consolidated Statements of Operations were as follows for the fiscal years ended January 31, 2020, 2019, and 2018, respectively (amounts presented include any income tax effects):
Fiscal Year Ended January 31, | |||||||||||
(in millions) | 2020 | 2019 | 2018 | ||||||||
Amount and location of gain (loss) recognized on derivatives in net income (loss) | |||||||||||
Interest and other expense, net | $ | 6.0 | $ | 6.6 | $ | (19.1 | ) | ||||
2020 Form 10-K 85
4. Employee and Director Stock Plans
Stock Plans
As of January 31, 2020, Autodesk maintained four 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 (as amended, the “2012 Employee Plan”), which is available only to employees, the Autodesk 2012 Outside Directors’ Stock Plan (“2012 Directors' Plan”), which is available only to non-employee directors, the PlanGrid 2012 Equity Incentive Plan ("PlanGrid 2012 Plan"), which is available to employees who held outstanding unvested options and restricted stock units that were assumed as part of our acquisition of PlanGrid, Inc. and the BuildingConnected, Inc. 2013 Stock Plan ("BuildingConnected 2013 Plan"), which is available to employees who held outstanding unvested options that were assumed as part of our acquisition of BuildingConnected, Inc. Additionally, there is one terminated plan with options outstanding.
The 2012 Employee Plan was approved by Autodesk's stockholders and became effective on January 6, 2012. Since the 2012 Stock Plan was adopted by stockholders in January 2012, Autodesk has received stockholder approval to increase the number of shares subject to the plan by 36.1 million shares. The 2012 Employee Plan replaced the 2008 Employee Stock Plan, as amended ("2008 Plan"), and no further equity awards may be granted under the 2008 Plan. The 2012 Employee Plan reserves up to 57.3 million shares which includes 51.3 million shares reserved under 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 January 31, 2020, 50.6 million shares subject to options or restricted stock awards have been granted under the 2012 Employee Plan. Options and restricted stock that were granted under the 2012 Employee 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 January 31, 2020, 13.8 million shares were available for future issuance under the 2012 Employee Plan.
The 2012 Directors' Plan was approved by Autodesk's stockholders and became effective on January 6, 2012. The 2012 Directors' Plan replaced the 2010 Outside Directors' Stock Plan, as amended ("2010 Plan"). 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 January 31, 2020, 0.9 million shares subject to restricted stock unit awards have been granted under the 2012 Directors' Plan. Restricted stock units that were granted under the 2012 Outside Directors' Plan vest over one to three years from the date of grant. On March 12, 2015, the Board reduced the number of shares reserved for issuance under the 2012 Directors' Plan by 0.9 million shares, so that 1.7 million shares are now reserved for issuance under the 2012 Directors' Plan. The 2012 Directors' Plan will expire on June 30, 2022. At January 31, 2020, 0.8 million shares were available for future issuance under the 2012 Director's Plan.
Pursuant to the PlanGrid acquisition on December 19, 2018, the Company assumed the unvested options and restricted stock units under the PlanGrid 2012 Plan. No further equity awards will be granted under the PlanGrid 2012 Plan. As of January 31, 2020, 0.3 million shares subject to options remain outstanding under the PlanGrid 2012 Plan. Options that were granted under the PlanGrid 2012 Plan vest over a four-year period and expire 10 years from the date of grant. The PlanGrid 2012 Plan will expire on June 18, 2022.
Pursuant to the BuildingConnected acquisition on January 23, 2019, the Company assumed the unvested options under the BuildingConnected 2013 Plan. No further equity awards will be granted under the BuildingConnected 2013 Plan. As of January 31, 2020, 0.1 million shares subject to options remain outstanding under the BuildingConnected 2013 Plan. Options that were granted under the BuildingConnected 2013 Plan vest over a four-year period and expire 10 years from the date of grant. The BuildingConnected 2013 Plan will expire on May 6, 2023.
The following sections summarize activity under Autodesk’s stock plans.
2020 Form 10-K 86
Stock Options:
A summary of stock option activity for the fiscal year ended January 31, 2020 is as follows:
Number of Shares (in millions) | Weighted average exercise price per share | Weighted average remaining contractual term (in years) | Aggregate Intrinsic Value (1) (in millions) | |||||||||
Options outstanding at January 31, 2019 | 0.8 | $ | 23.95 | |||||||||
Granted | — | — | ||||||||||
Exercised | (0.3 | ) | 23.43 | |||||||||
Canceled/Forfeited | (0.1 | ) | 21.27 | |||||||||
Options outstanding at January 31, 2020 | 0.4 | $ | 24.80 | 6.6 | $ | 73.8 | ||||||
Options vested and exercisable at January 31, 2020 | 0.2 | $ | 31.73 | 3.9 | $ | 25.3 | ||||||
Shares available for grant at January 31, 2020 | 14.6 | |||||||||||
_______________
(1) | Represents the total pre-tax intrinsic value, based on Autodesk’s closing stock price of $196.85 per share as of January 31, 2020. |
As of January 31, 2020, compensation cost of $30.4 million related to non-vested stock options is expected to be recognized over a weighted average period of 2.0 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 fiscal years ended January 31, 2020, 2019, and 2018:
Fiscal year ended January 31, | |||||||||||
2020 | 2019 | 2018 | |||||||||
Pre-tax intrinsic value of options exercised (1) | $ | 44.1 | $ | 9.7 | $ | 22.8 | |||||
Weighted average grant date fair value per share of stock options assumed from acquisition | $ | — | $ | 110.40 | $ | — | |||||
——————
(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. |
Restricted Stock Units:
A summary of restricted stock activity for the fiscal year ended January 31, 2020, is as follows:
Unreleased Restricted Stock Units (in thousands) | Weighted average grant date fair value per share | |||||
Unvested restricted stock at January 31, 2019 | 4,287.4 | $ | 120.07 | |||
Granted | 3,136.1 | 156.24 | ||||
Vested | (2,276.5 | ) | 112.50 | |||
Canceled/Forfeited | (422.5 | ) | 133.82 | |||
Performance Adjustment (1) | 7.8 | 142.17 | ||||
Unvested restricted stock at January 31, 2020 | 4,732.3 | $ | 147.24 | |||
_______________
(1) | Based on Autodesk's financial results and relative total stockholder return for the fiscal 2019 performance period. The performance stock units were attained at rates ranging from 105.2% to 122.5% of the target award. |
For the restricted stock granted during fiscal years ended January 31, 2020, 2019, and 2018, the weighted average grant date fair values were $156.24, $144.37, and $106.55, respectively. The fair value of the shares vested during fiscal years ended January 31, 2020, 2019, and 2018 were $361.0 million, $425.4 million, and $399.7 million, respectively.
During the fiscal year ended January 31, 2020, Autodesk granted 2.6 million restricted stock units. 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
2020 Form 10-K 87
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.
Additionally, during the fiscal year ended January 31, 2020, Autodesk granted 0.3 million restricted stock units for which the ultimate number of shares earned is based on the Autodesk closing stock price on each vesting date. As these awards will be settled in a fixed dollar amount of shares, the awards are accounted for as a liability-classified award and are expensed using the straight-line method over the vesting period. During the fiscal year ended January 31, 2020, Autodesk settled liability-classified awards of $23.5 million.
Autodesk recorded stock-based compensation expense related to restricted stock units of $274.5 million, $189.3 million, and $202.1 million during fiscal years ended January 31, 2020, 2019, and 2018, respectively. As of January 31, 2020, total compensation cost not yet recognized of $474.6 million related to non-vested awards is expected to be recognized over a weighted average period of 1.9 years. At January 31, 2020, the number of restricted stock units granted but unvested was 4.1 million.
During the fiscal year ended January 31, 2020, Autodesk granted 0.3 million performance stock units for which the ultimate number of shares earned is determined based on the achievement of performance criteria at the end of the stated service and performance period. The performance criteria for the performance stock units are based on Annualized Recurring Revenue ("ARR") and free cash flow goals adopted by the Compensation and Human Resources Committee, as well as total stockholder return compared against companies in the S&P North American Technology Software Index with a market capitalization over $2.0 billion ("Relative TSR"). These performance stock units vest over a three-year period and have the following vesting schedule:
• | Up to one third of the performance stock units may vest following year one, depending upon the achievement of the performance criteria for fiscal 2020 as well as 1-year Relative TSR (covering year one). |
• | Up to one third of the performance stock units may vest following year two, depending upon the achievement of the performance criteria for year two as well as 2-year Relative TSR (covering years one and two). |
• | Up to one third of the performance stock units may vest following year three, depending upon the achievement of the performance criteria for year three as well as 3-year Relative TSR (covering years one, two and three). |
Performance stock units are not considered outstanding stock at the time of grant, as the holders of these units are not entitled to any of the rights of a stockholder, including voting rights. Autodesk has determined the grant-date fair value for these awards using the stock price on the date of grant or if the awards are subject to a market condition, a Monte Carlo simulation model. The fair value of the performance stock units is expensed using the accelerated attribution over the vesting period.
Autodesk recorded stock-based compensation expense related to performance stock units of $27.1 million, $28.6 million, and $33.7 million during fiscal years ended January 31, 2020, 2019, and 2018 respectively. As of January 31, 2020, total compensation cost not yet recognized of $6.7 million related to unvested performance stock units, is expected to be recognized over a weighted average period of 0.7 years. At January 31, 2020, the number of performance stock units granted but unvested was 0.6 million.
1998 Employee Qualified Stock Purchase Plan (“ESPP”)
Under Autodesk’s ESPP, which was approved by stockholders in 1998, eligible employees may purchase shares of Autodesk’s common stock at their discretion using up to 15% of their eligible compensation, subject to certain limitations, at 85% of the lower of Autodesk's closing price (fair market value) on the offering date or the exercise date. The offering period for ESPP awards consists of four, six-month exercise periods within a 24-month offering period.
At January 31, 2020, a total of 7.3 million shares were available for future issuance. Under the ESPP, the Company issues shares on the first trading day following March 31 and September 30 of each fiscal year. The ESPP does not have an expiration date.
2020 Form 10-K 88
A summary of the ESPP activity for the fiscal years ended January 31, 2020, 2019, and 2018 is as follows:
Fiscal year ended January 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Issued shares | 0.9 | 1.0 | 2.0 | |||||||||
Average price of issued shares | $ | 102.20 | $ | 90.25 | $ | 39.03 | ||||||
Weighted average grant date fair value of awards granted under the ESPP | $ | 47.78 | $ | 42.75 | $ | 32.41 | ||||||
Autodesk recorded $33.3 million, $27.2 million, and $25.7 million of compensation expense associated with the ESPP in fiscal 2020, 2019, and 2018, respectively.
Equity Compensation Plan Information
The following table summarizes the number of outstanding options and awards granted to employees and directors, as well as the number of securities remaining available for future issuance under these plans as of January 31, 2020:
(a) | (b) | (c) | ||||||||
Plan category | Number of securities to be issued upon exercise or vesting of outstanding options and awards (in millions) | Weighted-average exercise price of outstanding options | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (in millions) | |||||||
Equity compensation plans approved by security holders | 5.2 | $ | 24.80 | 21.9 | (1) | |||||
Total | 5.2 | $ | 24.80 | 21.9 | ||||||
____________________
(1) | Included in this amount are 7.3 million securities available for future issuance under Autodesk’s ESPP. |
5. Income Taxes
The provision for income taxes consists of the following:
Fiscal year ended January 31, | |||||||||||
2020 | 2019 | 2018 | |||||||||
Federal: | |||||||||||
Current | $ | (2.3 | ) | $ | (13.3 | ) | $ | (0.8 | ) | ||
Deferred | 7.6 | (6.7 | ) | (19.3 | ) | ||||||
State: | |||||||||||
Current | (0.4 | ) | (1.8 | ) | (0.3 | ) | |||||
Deferred | 2.1 | 0.1 | 2.2 | ||||||||
Foreign: | |||||||||||
Current | 69.6 | 65.3 | 50.9 | ||||||||
Deferred | 3.7 | (5.5 | ) | (23.1 | ) | ||||||
$ | 80.3 | $ | 38.1 | $ | 9.6 | ||||||
Foreign pretax (loss) income was $475.5 million in fiscal 2020, $181.4 million in fiscal 2019, and $(76.2) million in fiscal 2018.
2020 Form 10-K 89
The differences between the U.S. statutory rate and the aggregate income tax provision are as follows:
Fiscal year ended January 31, | |||||||||||
2020 | 2019 | 2018 | |||||||||
Income tax provision (benefit) at U.S. Federal statutory rate | $ | 61.9 | $ | (9.0 | ) | $ | (188.4 | ) | |||
State income tax benefit, net of the U.S. Federal benefit | (5.3 | ) | (11.4 | ) | (21.9 | ) | |||||
Foreign income taxed at rates different from the U.S. statutory rate including GILTI | (41.2 | ) | 117.8 | (53.3 | ) | ||||||
Valuation allowance adjustment | 65.3 | 18.8 | (82.5 | ) | |||||||
Transition tax and revisions due to subsequent regulations | 9.6 | (16.0 | ) | 408.4 | |||||||
Tax effect of non-deductible stock-based compensation | 24.9 | 7.6 | 20.7 | ||||||||
Stock compensation windfall / shortfall | (22.4 | ) | (39.4 | ) | (67.7 | ) | |||||
Research and development tax credit benefit | (19.8 | ) | (23.5 | ) | (11.3 | ) | |||||
Closure of income tax audits and changes in uncertain tax positions | (2.0 | ) | (12.7 | ) | 1.2 | ||||||
Tax effect of officer compensation in excess of $1.0 million | 3.4 | 5.0 | 2.2 | ||||||||
Non-deductible expenses | 5.4 | 1.5 | 2.1 | ||||||||
Other | 0.5 | (0.6 | ) | 0.1 | |||||||
$ | 80.3 | $ | 38.1 | $ | 9.6 | ||||||
Significant components of Autodesk’s deferred tax assets and liabilities are as follows:
January 31, | |||||||
2020 | 2019 | ||||||
Stock-based compensation | $ | 32.8 | $ | 25.9 | |||
Research and development tax credit carryforwards | 263.4 | 238.7 | |||||
Foreign tax credit carryforwards | 253.9 | 198.6 | |||||
Accrued compensation and benefits | 3.4 | 6.5 | |||||
Other accruals not currently deductible for tax | 28.4 | 19.0 | |||||
Purchased technology and capitalized software | 37.7 | 32.6 | |||||
Fixed assets | 11.6 | 15.0 | |||||
Lease liability | 106.4 | — | |||||
Tax loss carryforwards | 241.2 | 237.2 | |||||
Deferred revenue | 29.2 | 49.0 | |||||
Other | 28.0 | 28.4 | |||||
Total deferred tax assets | 1,036.0 | 850.9 | |||||
Less: valuation allowance | (883.4 | ) | (797.8 | ) | |||
Net deferred tax assets | 152.6 | 53.1 | |||||
Indefinite lived intangibles | (76.5 | ) | (67.6 | ) | |||
Right-of-use assets | (101.3 | ) | — | ||||
Unremitted earnings of foreign subsidiaries | (0.9 | ) | — | ||||
Total deferred tax liabilities | (178.7 | ) | (67.6 | ) | |||
Net deferred tax assets (liabilities) | $ | (26.1 | ) | $ | (14.5 | ) | |
Autodesk’s fiscal 2020 tax expense is primarily driven by tax expense in foreign locations, withholding taxes on payments made to the U.S. or to Singapore from foreign sources, and tax amortization on indefinite-lived intangibles offset by a tax benefit resulting from valuation allowance release in Singapore.
Autodesk regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, Autodesk considers both positive and negative evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, Autodesk considered cumulative losses arising from the Company's business model transition as a significant piece of negative evidence. Consequently, Autodesk determined
2020 Form 10-K 90
that a valuation allowance was required on the accumulated U.S., Canada and Netherlands tax attributes as of January 31, 2020. In the current year, the U.S. created incremental deferred tax assets, primarily operating losses, foreign tax and R&D credits, Canada generated R&D credits and the Netherlands generated non-deductible interest expense. These U.S., Canada and Netherlands deferred tax attributes have been offset by a full valuation allowance. The valuation allowance increased by $85.6 million in fiscal 2020 primarily due to the generation of deferred tax attributes inclusive of the valuation allowance release of$42.0 million benefit in Singapore. The valuation allowance increased by $163.6 million, and decreased by $113.8 million in fiscal 2019 and 2018, respectively, primarily related to U.S. and Singapore tax attributes generated in fiscal year 2019 and the Tax Act reduction in rate in fiscal 2018.
Given the increase in our global earnings in the current year and the expectation of continued increase in global earnings, the Company anticipates a significant increase in U.S. taxable income beginning fiscal 2021. Moreover, if we are subject to GILTI in fiscal 2021, the inclusion of foreign earnings in our U.S. tax basis will be positive evidence in our evaluation of our need for a valuation allowance on our U.S. deferred tax assets. As Autodesk continually strives to optimize the overall business model, tax planning strategies may become feasible and prudent allowing the Company to realize many of the deferred tax assets that are offset by a valuation allowance; therefore, Autodesk will continue to evaluate the ability to utilize the deferred tax assets each quarter, both in the U.S. and in foreign jurisdictions, based on all available evidence, both positive and negative.
Realization of foreign net deferred tax assets of $56.4 million is dependent upon the Company's ability to generate future taxable income in appropriate tax jurisdictions to obtain benefit from the reversal of temporary differences, net operating loss carryforwards and tax credits. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are reduced and Autodesk then determine that it is not more likely than not to realize such deferred tax assets.
The Tax Act provided broad and significant changes to the U.S. corporate income tax regime. In light of our fiscal year-end, the Tax Act reduced the statutory federal corporate rate from 35% to 34% for fiscal 2018 and to 21% for fiscal 2019 and forward. The Tax Act also, among many other provisions, imposed a one-time mandatory tax on accumulated earnings of foreign subsidiaries (commonly referred to as the "transition tax") to which we were subject in our fiscal year 2018, subjects the deemed intangible income of our foreign subsidiaries to current U.S. taxation (commonly referred to as "GILTI"), provides for a full dividends received deduction upon repatriation of untaxed earnings of our foreign subsidiaries, imposes a minimum taxation (without most tax credits) on modified taxable income, which is generally taxable income without deductions for payments to related foreign companies (commonly referred to as “BEAT”), modifies the accelerated depreciation deduction rules, and made updates to the deductibility of certain expenses. We completed our determination of the accounting implications of the Tax Act on our tax accruals in our fiscal year January 31, 2019; any subsequent adjustments would be solely related to issuance of regulations related to provision of Tax Act or tax audits in U.S. or foreign jurisdictions..
We recorded a tax benefit of the Tax Act in our financial statements as of January 31, 2018 of approximately $32.3 million mainly driven by the corporate rate re-measurement (from 35% to 21%) of the indefinite-lived intangible deferred tax liability.
As of January 31, 2018, we estimated taxable income associated with offshore earnings of $831.5 million, and as of January 31, 2019, we adjusted the taxable income to $819.6 million for transition tax. We had an incremental adjustment to our transition tax in our fiscal year 2020 of $45.5 million, as a result of additional Treasury Regulations published this year. Transition tax related to adjustments in the offshore earnings or correlated foreign tax credits resulted in no impact to the effective tax rate as it is primarily offset by net operating losses that are subject to a full valuation allowance. As a result of transition tax, we recorded a deferred tax asset of approximately $43.2 million for foreign tax credits, which are also subject to a full valuation allowance.
We have not had a GILTI inclusion in fiscal 2019 and fiscal 2020 resulting in no impact to the effective tax rates.
We anticipate that the U.S. Department of Treasury and other standard-setting bodies will continue to interpret or issue guidance on how provisions of the Tax Act will be applied or otherwise administered. As future guidance is issued, we may make adjustments to amounts that we have previously recorded that may materially impact our financial statements in the period in which the adjustments are made.
As of January 31, 2020, Autodesk had $742.8 million of cumulative U.S. federal tax loss carryforwards and $1,486.2 million of cumulative U.S. state tax loss carryforwards, which may be available to reduce future income tax liabilities in federal and state jurisdictions. The pre-fiscal 2019 U.S. federal tax loss carryforward will expire beginning fiscal 2021 through fiscal 2037. U.S. federal losses generated beginning in fiscal 2019 do not expire and are carried forward indefinitely. The U.S. state tax loss carryforward will expire beginning fiscal 2021 through fiscal 2039.
2020 Form 10-K 91
In addition to U.S. federal and state tax loss carryforwards, Ireland, Netherlands, and Singapore jurisdictions incurred federal tax losses totaling $277.7 million, which may be available to reduce future income tax liabilities. As discussed above, with the exception of our Irish and Singaporean losses, of $37.9million and $195.6 million, respectively, these cumulative assets have full valuation allowance against them on our balance sheet as the Company has determined it is more likely than not that these losses will not be utilized.
As of January 31, 2020, Autodesk had $186.3 million of cumulative U.S. federal research tax credit carryforwards, $98.0 million of cumulative California state research tax credit carryforwards, and $58.4 million of cumulative Canadian federal tax credit carryforwards, which may be available to reduce future income tax liabilities in the respective jurisdictions. The federal tax credit carryforwards will expire beginning fiscal 2021 through fiscal 2040, the state credit carryforwards may reduce future California income tax liabilities indefinitely, and the Canadian tax credit carryforwards will expire beginning fiscal 2028 through fiscal 2040. Autodesk also has $267.1 million of cumulative U.S. federal foreign tax credit carryforwards, which may be available to reduce future U.S. tax liabilities. These foreign tax credits will expire beginning fiscal 2021 through fiscal 2030. As discussed above, these cumulative assets have full valuation allowance against them on our balance sheet as the Company has determined it is more likely than not that these losses will not be utilized.
Utilization of net operating losses and tax credits may be subject to an annual limitation due to ownership change limitations provided in the Internal Revenue Code and similar state provisions. This annual limitation may result in the expiration of net operating losses and credits before utilization. There were no permanent losses of U.S. federal and state tax attributes as a result of any ownership changes occurring through the balance sheet date.
As of January 31, 2020, the Company had $220.6 million of gross unrecognized tax benefits, of which $203.7 million would reduce our valuation allowance, if recognized. The remaining $16.9 million would impact the effective tax rate.
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.
A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows:
Fiscal Year Ended January 31, | |||||||||||
2020 | 2019 | 2018 | |||||||||
Gross unrecognized tax benefits at the beginning of the fiscal year | $ | 209.0 | $ | 337.6 | $ | 261.4 | |||||
Increases for tax positions of prior years | 2.8 | 7.9 | 22.8 | ||||||||
Decreases for tax positions of prior years | (0.4 | ) | (146.3 | ) | (22.5 | ) | |||||
Increases for tax positions related to the current year | 11.1 | 10.3 | 78.4 | ||||||||
Decreases relating to settlements with taxing authorities | — | — | (0.8 | ) | |||||||
Reductions as a result of lapse of the statute of limitations | (1.9 | ) | (0.5 | ) | (1.7 | ) | |||||
Gross unrecognized tax benefits at the end of the fiscal year | $ | 220.6 | $ | 209.0 | $ | 337.6 | |||||
It is the Company's continuing practice to recognize interest and/or penalties related to income tax matters in income tax expense. Autodesk had $2.3 million, $3.1 million, and $2.8 million, net of tax benefit, accrued for interest and penalties related to unrecognized tax benefits as of January 31, 2020, 2019, and 2018, respectively. There was $(0.8) million, $0.3 million, and $0.3 million of net expense for interest and penalties related to tax matters recorded through the consolidated statements of operations for the years ended January 31, 2020, 2019, and 2018, respectively.
Autodesk's U.S. and state income tax returns for fiscal year 2001 through fiscal year 2020 remain open to examination due to either net operating loss or credit carryforward. The Internal Revenue Service has examined the Company's U.S. consolidated federal income tax returns for fiscal years 2014 and 2015. This audit was finalized on January 31, 2019, and impacts from the finalization of the audit were recorded in the fiscal 2019 financial statements.
Autodesk files tax returns in multiple foreign taxing jurisdictions with open tax years ranging from fiscal year 2006 to 2020.
As a result of certain business and employment actions and capital investments undertaken by Autodesk, income earned in certain Europe and Asia Pacific countries was subject to reduced tax rates through fiscal 2019. Historically, the Company
2020 Form 10-K 92
incurred $11.4 million net benefit ($0.05 basic net income per share) in fiscal 2019 from the tax status of these business arrangements, and $0.0 million ($0.00 basic net income per share) in fiscal 2018.
6. Acquisitions
The results of operations for the following acquisitions are included in the accompanying Consolidated Statements of Operations since their respective acquisition dates. Pro forma results of operations have been presented for acquisitions that were material to Autodesk's Consolidated Financial Statements.
Fiscal 2020 Acquisitions
During the fiscal year ended January 31, 2020, Autodesk did not complete any business combinations or technology acquisitions.
Fiscal 2019 Acquisitions
BuildingConnected, Inc.
On January 23, 2019, Autodesk acquired BuildingConnected, Inc. ("BuildingConnected"). BuildingConnected is a leading provider of construction bid-management software.
The acquisition-date fair value of the consideration transferred totaled $253.2 million, which consisted of $248.1 million of cash, and $5.1 million attributable to the fair value of equity awards related to pre-combination services. Under the terms of the merger agreement, Autodesk replaced BuilidingConnected's unvested options with 116,279 Autodesk options.
PlanGrid, Inc.
On December 19, 2018, Autodesk acquired PlanGrid, Inc. ("PlanGrid"). PlanGrid is a leading provider of construction productivity software and this acquisition.
The acquisition-date fair value of the consideration transferred totaled $777.6 million, which consisted of $772.4 million of cash and $5.2 million attributed to the fair value of assumed PlanGrid equity awards for pre-combination services. Under the terms of the merger agreement, Autodesk replaced PlanGrid's unvested options and restricted stock awards with 602,051 Autodesk options and 41,069 Autodesk RSUs. Autodesk entered into a term loan agreement in the aggregate principal amount of $500.0 million to fund a portion of the purchase. See Note 8, "Borrowing Arrangements" for more information.
Assemble Systems, Inc.
On July 3, 2018, Autodesk acquired Assemble Systems, Inc. ("Assemble Systems"). Assemble Systems is a provider of software solutions that enable construction professionals to influence, query and connect BIM data to key workflows across bid management, estimating, scheduling, site management and finance.
The acquisition-date fair value of the consideration transferred totaled $93.6 million, which consisted of $38.2 million of cash, $44.8 million of Autodesk common stock (340,769 shares) and ascribed a value of $10.6 million to Autodesk's existing equity interest in Assemble Systems.
Prior to the acquisition date, Autodesk accounted for its approximate 14% equity interest in Assemble Systems as a cost-method investment. The acquisition-date fair value of Autodesk's existing equity interest was $10.6 million and was included in the measurement of the consideration transferred. Autodesk recognized a gain of $4.6 million as a result of remeasuring its prior equity interest in Assemble Systems held before the business combination using a control premium to calculate a discount for lack of control. The gain is included in “Interest and other expense, net” in the Consolidated Statements of Operations.
2020 Form 10-K 93
Purchase Price Allocation
For the Assemble Systems, PlanGrid, and BuildingConnected acquisitions that were accounted for as business combinations, 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. The goodwill recorded was primarily attributable to synergies expected to arise after the acquisition. There is no amount of goodwill that is deductible for U.S. income tax purposes.
The following table summarizes the fair value of the assets acquired and liabilities assumed by major class for the business combinations that were completed during the fiscal year ended January 31, 2019:
Assemble Systems (1) | PlanGrid (2) | BuildingConnected (3) | Total | ||||||||||||
Developed technologies | $ | 4.4 | $ | 78.0 | $ | 12.5 | $ | 94.9 | |||||||
Customer relationships and other non-current intangible assets | 12.0 | 98.0 | 26.9 | 136.9 | |||||||||||
Trade name | 2.8 | 20.0 | 6.8 | 29.6 | |||||||||||
Goodwill | 71.8 | 589.5 | 206.7 | 868.0 | |||||||||||
Deferred revenue (current and non-current) | (1.7 | ) | (25.5 | ) | (2.8 | ) | (30.0 | ) | |||||||
Net tangible assets | 4.3 | 17.6 | 3.1 | 25.0 | |||||||||||
Total | $ | 93.6 | $ | 777.6 | $ | 253.2 | $ | 1,124.4 | |||||||
_______________
(1) | During fiscal 2020, Autodesk recorded a measurement period adjustment related to the valuation of the deferred tax liability associated with the Assemble Systems acquisition. This adjustment reduced goodwill and increased net tangible assets by $0.2 million. |
(2) | During fiscal 2020, Autodesk recorded measurement period adjustments to the preliminary determination of estimated fair value of assets and liabilities assumed associated with the PlanGrid acquisition in the amount of $0.8 million. These adjustments increased goodwill and reduced net tangible assets. |
(3) | During fiscal 2020, Autodesk recorded measurement period adjustments to the preliminary determination of estimated fair value of assets and liabilities assumed associated with the BuildingConnected in the amount of $0.4 million. These adjustments increased goodwill and reduced net tangible assets. |
For the three business combinations in fiscal 2019, the determination of estimated fair values of certain assets and liabilities was derived from estimated fair value assessments and assumptions by Autodesk. For PlanGrid and BuildingConnected, Autodesk's estimates and assumptions were subject to change within the measurement period (up to one year from the acquisition date). For the three business combinations in fiscal 2019, the tax impact of the acquisition was also subject to change within the measurement period.
Unaudited Pro Forma Results of Acquirees
Autodesk has included the financial results of each of the acquirees in the consolidated financial statements from the respective dates of acquisition; the revenues and the results of each of the acquirees, except for PlanGrid, have not been material both individually or in the aggregate to Autodesk's fiscal 2019 and 2018 results.
The following unaudited pro forma financial information summarizes the combined results of operations for Autodesk and PlanGrid, as though the companies were combined as of the beginning of Autodesk's fiscal year 2018. The unaudited pro forma financial information was as follows (in millions):
Fiscal Year ended January 31, | |||||||
2019 | 2018 | ||||||
Total revenues | $ | 2,632.6 | $ | 2,099.2 | |||
Pretax loss | (157.5 | ) | (724.9 | ) | |||
Net loss | (200.1 | ) | (734.5 | ) | |||
The pro forma financial information for all periods presented includes the business combination accounting effects from the acquisition of PlanGrid including amortization expense from acquired intangible assets, compensation expense, and the
2020 Form 10-K 94
interest expense and debt issuance costs related to the term loan agreement. The historical financial information has been adjusted to give effect to pro forma events that are directly attributable to the business combinations and factually supportable. The pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the Company’s fiscal 2018.
The pro forma financial information for fiscal 2019 and 2018 combines the historical results of the Company, the adjusted historical results of PlanGrid for fiscal 2019 and 2018 considering the date the Company acquired PlanGrid and the effects of the pro forma adjustments described above.
7. Deferred Compensation
At January 31, 2020, Autodesk had marketable securities totaling $69.0 million, all of which related to investments in debt and equity securities that are held in a rabbi trust under non-qualified deferred compensation plans. Of the $69.0 million related to the deferred compensation liability at January 31, 2020, $5.3 million was classified as current and $63.7 million was classified as non-current liabilities. Of the $60.3 million related to the deferred compensation liability at January 31, 2019, $5.0 million was classified as current and $55.3 million was classified as non-current liabilities. The securities are recorded in the Consolidated Balance Sheets under the current portion of "Marketable securities". The current and non-current portions of the liability are recorded in the Consolidated Balance Sheets under “Accrued compensation” and “Long-Term Other liabilities”, respectively.
Costs to obtain a contract with a customer
Sales commissions earned by our internal sales personnel and our reseller partners are considered incremental and recoverable costs of obtaining a contract with a customer. The ending balance of assets recognized from costs to obtain a contract with a customer was $98.8 million and $93.0 million as of January 31, 2020, and January 31, 2019, respectively. Amortization expense related to assets recognized from costs to obtain a contract with a customer was $101.6 million and $108.8 million during fiscal years ended January 31, 2020, and January 31, 2019, respectively. Autodesk did not recognize any contract cost impairment losses during the fiscal years ended January 31, 2020 and January 31, 2019.
8. Borrowing Arrangements
In January 2020, Autodesk issued $500.0 million aggregate principal amount of 2.85% notes due January 15, 2030 (“2020 Notes”). Net of a discount of $1.1 million and issuance costs of $4.8 million, Autodesk received net proceeds of $494.1 million from issuance of the 2020 Notes. Both the discount and issuance costs are being amortized to interest expense over the term of the 2020 Notes using the effective interest method. On March 4, 2020, proceeds of the 2020 Notes were used for the repayment of $450.0 million of debt due June 15, 2020, subject to a make-whole premium. See Note 17, "Subsequent Events," for further discussion on the repayment. The remainder will be used for general corporate purposes.
In December 2018, Autodesk entered into a credit agreement by and among Autodesk, the lenders from time to time party thereto and Citibank, N.A., as agent, which provides for an unsecured revolving loan facility in the aggregate principal amount of $650.0 million with an option, subject to customary conditions, to request an increase in the amount of the credit facility by up to an additional $350.0 million, and is available for working capital or other business needs. The credit agreement replaced and terminated Autodesk’s prior $400.0 million revolving credit facility. The credit agreement contains customary covenants that could, among other things, restrict the imposition of liens on Autodesk's assets, and restrict Autodesk's ability to incur additional indebtedness or make dispositions of assets if Autodesk fails to maintain compliance with the financial covenants. The credit agreement financial covenants consist of (1) a minimum interest coverage ratio of 2.50:1.0 starting with the fiscal quarter ending January 31, 2019 and increasing to 3.00:1.0 starting with the fiscal quarter ending April 30, 2019, and (2) a maximum leverage ratio of 3.50:1.0 starting with the fiscal quarter ending July 31, 2019, and dropping to 3.00:1.0 in the fiscal quarter ending January 31, 2020. At January 31, 2020, Autodesk was in compliance with the credit agreement covenants. Revolving loans under the credit agreement bear interest, at Autodesk's option, at either (i) a floating rate per annum equal to the base rate plus a margin of between 0.000% and 0.500%, depending on Autodesk’s Public Debt Rating (as defined in the credit agreement) or (ii) a per annum rate equal to the rate at which dollar deposits are offered in the London interbank market, plus a margin of between 0.900% and 1.500%, depending on Autodesk’s Public Debt Rating. The maturity date on the credit agreement is December 2023. At January 31, 2020, Autodesk had no outstanding borrowings under the credit agreement.
In December 2018, Autodesk also entered into a Term Loan Agreement by and among Autodesk, the lenders from time to time party thereto and Citibank, N.A., as agent, which provides for a delayed draw term loan facility in the aggregate principal amount of $500.0 million and was borrowed in full to consummate the PlanGrid, Inc. acquisition in Note 6, "Acquisitions". The term loan bears interest, at Autodesk's option, at either (i) a floating rate per annum equal to the base rate plus a margin between
2020 Form 10-K 95
0.000% and 0.625%, depending on Autodesk's Public Debt Rating or (ii) a per annum rate equal to the rate at which dollar deposits are offered in the London interbank market, plus a margin of between 0.875% and 1.625%, depending on Autodesk's Public Debt Rating. Based on Autodesk's current credit ratings the term loan bears interest at a per annum rate equal to the rate at which dollar deposits are offered in the London interbank market, plus a margin of 1.125% per annum. Interest under the term loan was 2.689% upon final payment. As of January 31, 2020, the term loan was repaid in full.
In June 2017, Autodesk issued $500.0 million aggregate principal amount of 3.5% notes due June 15, 2027 (collectively, the “2017 Notes”). Net of a discount of $3.1 million and issuance costs of $4.9 million, Autodesk received net proceeds of $492.0 million from issuance of the 2017 Notes. Both the discount and issuance costs are being amortized to interest expense over the term of the 2017 Notes using the effective interest method. The proceeds of the 2017 Notes have been used for the repayment of $400.0 million of debt due December 15, 2017 and the remainder is available for general corporate purposes.
In June 2015, Autodesk issued $450.0 million aggregate principal amount of 3.125% notes due June 15, 2020 ("$450.0 million 2015 Notes") and $300.0 million aggregate principal amount of 4.375% notes due June 15, 2025 ("$300.0 million 2015 Notes") (collectively, the “2015 Notes”). Net of a discount of $0.6 million and $1.1 million, and issuance costs of $3.8 million and $2.5 million, Autodesk received net proceeds of $445.6 million and $296.4 million from issuance of the $450.0 million 2015 Notes and $300.0 million 2015 Notes, respectively. Both the discount and issuance costs are being amortized to interest expense over the respective terms of the 2015 Notes using the effective interest method. The proceeds of the 2015 Notes are available for general corporate purposes. On March 4, 2020, the proceeds of the 2020 Notes were used for the repayment of the $450.0 million 2015 Notes. See Note 17, "Subsequent Events," for further discussion on the repayment. As of January 31, 2020, the $450.0 million 2015 Notes are recorded in the Consolidated Balance Sheets under "Current portion of long-term notes payable, net", and the weighted average interest rate was 4.375%.
In December 2012, Autodesk issued $350.0 million aggregate principal amount of 3.6% notes due December 15, 2022 ("2012 Notes"). Autodesk received net proceeds of $346.7 million from issuance of the 2012 Notes, net of a discount of $0.5 million and issuance costs of $2.8 million. Both the discount and issuance costs are being amortized to interest expense over the respective terms of the 2012 Notes using the effective interest method. The proceeds of the 2012 Notes are available for general corporate purposes.
The 2020 Notes, 2017 Notes, 2015 Notes and the 2012 Notes may all be redeemed 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 all the Notes, at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. All Notes contain restrictive covenants that limit Autodesk's ability to create certain liens, to enter into certain sale and leaseback transactions and to consolidate or merge with, or convey, transfer or lease all or substantially all of its assets, subject to important qualifications and exceptions.
Based on the quoted market prices, the approximate fair value of the notes as of January 31, 2020 were as follows:
Aggregate Principal Amount | Fair value | ||||||
2012 Notes | $ | 350.0 | $ | 364.0 | |||
$450 2015 Notes | 450.0 | 451.5 | |||||
$300 2015 Notes | 300.0 | 331.9 | |||||
2017 Notes | 500.0 | 535.0 | |||||
2020 Notes | 500.0 | 513.3 | |||||
2020 Form 10-K 96
The expected future principal payments for all borrowings as of January 31, 2020 are as follows:
Fiscal year ending | |||
2021 | $ | 450.0 | |
2022 | — | ||
2023 | 350.0 | ||
2024 | — | ||
2025 | — | ||
Thereafter | 1,300.0 | ||
Total principal outstanding | $ | 2,100.0 | |
9. Leases
Autodesk has operating leases for real estate, vehicles and certain equipment. Leases have remaining lease terms of less than 1 year to 70 years, some of which include options to extend the lease with renewal terms from 1 year to 10 years and some of which include options to terminate the leases from less than 1 year to 10 years. Options to extend the lease are included in the lease liability if they are reasonably certain of being exercised. Options to terminate are considered in determining the lease liability if they are reasonably certain of being exercised. Payments under our lease arrangements are primarily fixed, however, certain lease agreements contain variable payments, which are expensed as incurred and not included in the operating lease assets and liabilities. These amounts include payments affected by the Consumer Price Index, payments for common area maintenance that are subject to annual reconciliation, and payments for maintenance and utilities. The Company’s leases do not contain residual value guarantees or material restrictive covenants. Short-term leases are recognized in the consolidated statement of operations on a straight-line basis over the lease term. Short-term lease expense was not material for the periods presented.
The components of lease cost were as follows:
Fiscal Year Ended January 31, 2020 | ||||||||||||||||||
Cost of subscription and maintenance revenue | Cost of other revenue | Marketing and sales | Research and development | General and administrative | Total | |||||||||||||
Operating lease cost | $ | 6.6 | $ | 2.2 | $ | 38.0 | $ | 27.3 | $ | 12.7 | $ | 86.8 | ||||||
Variable lease cost | 0.9 | 0.3 | 5.4 | 3.8 | 1.8 | 12.2 | ||||||||||||
Supplemental operating cash flow information related to leases is as follows:
Fiscal Year Ended January 31, 2020 | |||
Cash paid for operating leases included in operating cash flows (1) | $ | 93.5 | |
Non-cash operating lease liabilities arising from obtaining operating right-of-use assets | 231.7 | ||
_______________
(1) Includes $12.2 million in variable lease payments not included in "Operating lease liabilities" and "Long-term operating lease liabilities" on the Consolidated Balance Sheet.
The weighted average remaining lease term for operating leases is 7.5 years at January 31, 2020. The weighted average discount rate was 3.41% at January 31, 2020.
2020 Form 10-K 97
Maturities of operating lease liabilities were as follows:
Fiscal year ending | |||
2021 | $ | 60.4 | |
2022 | 90.9 | ||
2023 | 84.4 | ||
2024 | 71.3 | ||
2025 | 52.3 | ||
Thereafter | 167.6 | ||
526.9 | |||
Less imputed interest | (67.1 | ) | |
Present value of operating lease liabilities | $ | 459.8 | |
As of January 31, 2020, Autodesk has additional operating lease minimum lease payments of $22.7 million for executed leases that have not yet commenced, primarily for office locations.
Rent expense related to operating leases recognized on a straight-line basis over the lease period under previous accounting guidance, was as follows:
Fiscal Year Ended January 31, | |||||||
2019 | 2018 | ||||||
Rent expense | $ | 60.7 | $ | 55.9 | |||
10. Commitments and Contingencies
Purchase commitments
In the normal course of business, Autodesk enters into various purchase commitments for goods or services. Total non-cancellable purchase commitments as of January 31, 2020, were approximately $402.0 million for periods through fiscal 2028. These purchase commitments primarily result from contracts entered into for the acquisition of cloud services, IT infrastructure, marketing, and software development services, as well as commitments related to our investment agreements with limited liability partnership funds.
Autodesk has certain royalty commitments associated with the sale and licensing of certain products. Royalty expense is generally based on a fixed rate over a specified period, dollar amount per unit sold or a percentage of the underlying revenue. Royalty expense, which was recorded under cost of subscription and maintenance revenue and cost of other revenue on Autodesk’s Consolidated Statements of Operations, was $14.3 million in fiscal 2020, $6.4 million in fiscal 2019, and $15.3 million in fiscal 2018.
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
2020 Form 10-K 98
potential amount of future payments Autodesk could be required to make under these indemnification agreements is unlimited; however, Autodesk has directors’ and officers’ liability insurance coverage that is intended to reduce its financial exposure and may enable Autodesk to recover a portion of any future amounts paid. Autodesk believes the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.
Legal Proceedings
Autodesk is involved in a variety of claims, suits, inquiries, investigations, and proceedings in the normal course of business including claims of alleged infringement of intellectual property rights, commercial, employment, tax, prosecution of unauthorized use, business practices, and other matters. Autodesk routinely reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any matter is considered probable and the amount can be reasonably estimated, Autodesk records a liability for the estimated loss. Because of inherent uncertainties related to these legal matters, Autodesk bases its loss accruals on the best information available at the time. As additional information becomes available, Autodesk reassesses its potential liability and may revise its estimates. In the Company's opinion, resolution of pending matters is not expected to have a material adverse impact on its consolidated results of operations, cash flows, or its financial position. Given the unpredictable nature of legal proceedings, there is a reasonable possibility that an unfavorable resolution of one or more such proceedings could in the future materially affect the Company's results of operations, cash flows, or financial position in a particular period, however, based on the information known by the Company as of the date of this filing and the rules and regulations applicable to the preparation of the Company's financial statements, any such amount is either immaterial or it is not possible to provide an estimated amount of any such potential loss.
11. 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. Autodesk repurchased and retired approximately 2.7 million shares in fiscal 2020 at an average repurchase price of $168.63 per share, 2.2 million shares in fiscal 2019 at an average repurchase price of $130.15 per share, and 6.9 million shares in fiscal 2018 at an average repurchase price of $100.45.
At January 31, 2020, 14.7 million shares remained available for repurchase under the repurchase program approved by the Board of Directors. The share repurchase program does not have an expiration date and the pace and timing of repurchases will depend on factors such as cash generation from operations, available surplus, the volume of employee stock plan activity, cash requirements for acquisitions, economic and market conditions, stock price and legal and regulatory requirements.
12. Interest and Other Expense, net
Interest and other expense, net, consists of the following:
Fiscal Year Ended January 31, | |||||||||||
2020 | 2019 | 2018 | |||||||||
Interest and investment expense, net | $ | (54.0 | ) | $ | (52.1 | ) | $ | (34.5 | ) | ||
Gain (loss) on foreign currency | 3.9 | 5.1 | (3.3 | ) | |||||||
(Loss) gain on strategic investments | (3.3 | ) | 12.5 | (16.4 | ) | ||||||
Other income | 5.2 | 16.8 | 6.0 | ||||||||
Interest and other expense, net | $ | (48.2 | ) | $ | (17.7 | ) | $ | (48.2 | ) | ||
2020 Form 10-K 99
13. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, net of taxes, consisted of the following:
Net Unrealized (Losses) Gains on Derivative Instruments | Net Unrealized Gains (Losses) on Available for Sale Securities | Defined Benefit Pension Components | Foreign Currency Translation Adjustments | Total | |||||||||||||||
Balances, January 31, 2018 | $ | (16.6 | ) | $ | 1.3 | $ | (29.3 | ) | $ | (79.2 | ) | $ | (123.8 | ) | |||||
Other comprehensive income (loss) before reclassifications | 20.6 | 0.7 | 14.7 | (58.3 | ) | (22.3 | ) | ||||||||||||
Pre-tax gains reclassified from accumulated other comprehensive income | 12.1 | 1.3 | 0.3 | — | 13.7 | ||||||||||||||
Tax effects | (1.1 | ) | — | (2.0 | ) | 0.5 | (2.6 | ) | |||||||||||
Net current period other comprehensive income (loss) | 31.6 | 2.0 | 13.0 | (57.8 | ) | (11.2 | ) | ||||||||||||
Balances, January 31, 2019 | 15.0 | 3.3 | (16.3 | ) | (137.0 | ) | (135.0 | ) | |||||||||||
Other comprehensive income (loss) before reclassifications | 4.1 | 1.8 | — | (13.7 | ) | (7.8 | ) | ||||||||||||
Pre-tax losses reclassified from accumulated other comprehensive income | (9.6 | ) | — | (8.1 | ) | — | (17.7 | ) | |||||||||||
Tax effects | (1.1 | ) | (0.4 | ) | 1.6 | 0.1 | 0.2 | ||||||||||||
Net current period other comprehensive (loss) income | (6.6 | ) | 1.4 | (6.5 | ) | (13.6 | ) | (25.3 | ) | ||||||||||
Balances, January 31, 2020 | $ | 8.4 | $ | 4.7 | $ | (22.8 | ) | $ | (150.6 | ) | $ | (160.3 | ) | ||||||
Reclassifications related to gains and losses on available-for-sale debt securities are included in "Interest and other expense, net". Refer to Note 3, "Financial Instruments" for the amount and location of reclassifications related to derivative instruments. Reclassifications of the defined benefit pension components of net periodic benefit cost are included in "Interest and other expense, net".
14. Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding for the period, excluding stock options and restricted stock units. Diluted net income (loss) per share is based upon the weighted average number of shares of common stock outstanding for the period and potentially dilutive common shares, including the effect of stock options and restricted stock units under the treasury stock method. The following table sets forth the computation of the numerators and denominators used in the basic and diluted net income (loss) per share amounts:
Fiscal Year Ended January 31, | |||||||||||
2020 | 2019 | 2018 | |||||||||
Numerator: | |||||||||||
Net income (loss) | $ | 214.5 | $ | (80.8 | ) | $ | (566.9 | ) | |||
Denominator: | |||||||||||
Denominator for basic net income (loss) per share—weighted average shares | 219.7 | 218.9 | 219.5 | ||||||||
Effect of dilutive securities (1) | 2.8 | — | — | ||||||||
Denominator for dilutive net income (loss) per share | 222.5 | 218.9 | 219.5 | ||||||||
Basic net income (loss) per share | $ | 0.98 | $ | (0.37 | ) | $ | (2.58 | ) | |||
Diluted net income (loss) per share | $ | 0.96 | $ | (0.37 | ) | $ | (2.58 | ) | |||
____________________
(1) | The effect of dilutive securities of 3.1 million and 4.5 million shares for the fiscal years ended January 31, 2019 and 2018, respectively, have been excluded from the calculation of diluted net loss per share as those shares would have been anti-dilutive due to the net loss incurred during those fiscal years. |
The computation of diluted net income (loss) per share does not include shares that are anti-dilutive under the treasury stock method because their exercise prices are higher than the average market value of Autodesk’s stock during the fiscal year. There were no potentially anti-dilutive shares excluded from the computation of diluted net income per share for the fiscal year
2020 Form 10-K 100
ended January 31, 2020. The effect of 0.5 million and 0.5 million potentially anti-dilutive shares were excluded from the computation of net loss per share for the fiscal years ended January 31, 2019 and 2018, respectively.
15. Retirement Benefit Plans
Pretax Savings Plan
Autodesk has a 401(k) plan that covers nearly all U.S. employees. Eligible employees may contribute up to 75% of their pretax salary, subject to limitations mandated by the Internal Revenue Service. Autodesk makes voluntary cash contributions and matches a portion of employee contributions in cash. Autodesk’s contributions were $21.4 million in fiscal 2020, $17.1 million in fiscal 2019, and $17.3 million in fiscal 2018. Autodesk does not allow participants to invest in Autodesk common stock through the 401(k) plan.
Defined Benefit Pension Plans
Autodesk provides certain defined benefit pension plans to employees located in countries outside of the U.S., primarily the United Kingdom, Switzerland, and Japan. The Company deposits funds for specific plans, consistent with the requirements of local law, with insurance companies or third-party trustees, or into government-managed accounts, and accrues for the unfunded portion of the obligation, where material.
The projected benefit obligation was $103.5 million and $91.6 million as of January 31, 2020, and January 31, 2019, respectively. The accumulated benefit obligation was $97.3 million and $85.1 million as of January 31, 2020, and January 31, 2019. The related fair value of plan assets was $96.2 million and $80.8 million as of January 31, 2020, and January 31, 2019, respectively. Our defined pension plan assets are measured at fair value and consist primarily of insurance contracts categorized as level 2 in the fair value hierarchy and an investment fund valued using net asset value. The insurance contracts represent the immediate cash surrender value of assets managed by qualified insurance companies. The assets held in the investment fund are invested in a diversified growth fund actively managed by a third-party.
Autodesk recognized $11.6 million and $10.8 million in other long-term liabilities within the consolidated balance sheets as of January 31, 2020, and January 31, 2019, respectively. Our total net periodic pension plan cost (benefit) was $3.7 million, $(3.1) million and $6.7 million for fiscal years 2020, 2019, and 2018, respectively.
Our expected funding for the plans during fiscal 2021 is approximately $4.9 million.
Estimated Future Benefit Payments
Estimated benefit payments over the next 10 fiscal years are as follows:
(in millions) | Pension Benefits | ||
2021 | $ | 2.3 | |
2022 | 2.1 | ||
2023 | 2.1 | ||
2024 | 2.1 | ||
2025 | 2.9 | ||
2026-2030 | 12.4 | ||
Total | $ | 23.9 | |
Defined Contribution Plans
Autodesk also provides defined contribution plans in certain foreign countries where required by statute. Autodesk’s funding policy for foreign defined contribution plans is consistent with the local requirements in each country. Autodesk’s contributions to these plans were $28.7 million in fiscal 2020, $29.6 million in fiscal 2019, and $27.2 million in fiscal 2018.
Cash Balance Plans
Autodesk provides a cash balance plan that insures the risks of disability, death, and longevity, in which the vested pension capital is reinvested and provides a 100% capital and interest guarantee. The weighted-average guaranteed interest
2020 Form 10-K 101
crediting rate for cash balance plans was 1%, 1%, and 1% for mandatory retirement savings and 0.1%, 0.3%, and 0.3% for supplementary retirement savings for fiscal 2020, 2019 and 2018, respectively.
Other Plans
In addition, Autodesk offers a non-qualified deferred compensation plan to certain key employees whereby they may defer a portion (or all) of their annual compensation until retirement or a different date specified by the employee in accordance with terms of the plan. See Note 7, “Deferred Compensation”, for further discussion.
16. Selected Quarterly Financial Information (Unaudited)
Summarized quarterly financial information for fiscal years 2020 and 2019 is as follows:
2020 | 1st quarter | 2nd quarter | 3rd quarter | 4th quarter | Fiscal year | ||||||||||||||
Net revenue | $ | 735.5 | $ | 796.8 | $ | 842.7 | $ | 899.3 | $ | 3,274.3 | |||||||||
Gross profit | 652.8 | 717.3 | 763.2 | 816.1 | 2,949.4 | ||||||||||||||
Income from operations | 24.8 | 73.8 | 110.6 | 133.8 | 343.0 | ||||||||||||||
(Provision) benefit for income taxes | (32.8 | ) | (26.3 | ) | (29.7 | ) | 8.5 | (80.3 | ) | ||||||||||
Net (loss) income | (24.2 | ) | 40.2 | 66.7 | 131.8 | 214.5 | |||||||||||||
Basic net (loss) income per share (2) | $ | (0.11 | ) | $ | 0.18 | $ | 0.30 | $ | 0.60 | $ | 0.98 | ||||||||
Diluted net (loss) income per share (2) | $ | (0.11 | ) | $ | 0.18 | $ | 0.30 | $ | 0.59 | $ | 0.96 | ||||||||
(Loss) Income from operations includes the following items: | |||||||||||||||||||
Stock-based compensation expense | $ | 75.2 | $ | 88.2 | $ | 94.0 | $ | 105.0 | $ | 362.4 | |||||||||
Amortization of acquisition related intangibles | 19.0 | 18.3 | 18.1 | 18.0 | 73.4 | ||||||||||||||
Acquisition related costs | 12.7 | 6.0 | 2.5 | 2.1 | 23.3 | ||||||||||||||
Restructuring and other exit costs, net | $ | 0.2 | $ | 0.2 | $ | 0.1 | $ | — | $ | 0.5 | |||||||||
2019 | 1st quarter | 2nd quarter | 3rd quarter | 4th quarter | Fiscal year | ||||||||||||||
Net revenue (1) | $ | 559.9 | $ | 611.7 | $ | 660.9 | $ | 737.3 | $ | 2,569.8 | |||||||||
Gross profit (1) | 493.1 | 541.9 | 588.6 | 660.3 | 2,283.9 | ||||||||||||||
(Loss) Income from operations (1) | (55.3 | ) | (24.7 | ) | 14.7 | 40.3 | (25.0 | ) | |||||||||||
(Provision) benefit for income taxes | (18.6 | ) | (16.0 | ) | (35.2 | ) | 31.7 | (38.1 | ) | ||||||||||
Net (loss) income (1) | (82.4 | ) | (39.4 | ) | (23.7 | ) | 64.7 | (80.8 | ) | ||||||||||
Basic net (loss) income per share (1) (2) | $ | (0.38 | ) | $ | (0.18 | ) | $ | (0.11 | ) | $ | 0.30 | $ | (0.37 | ) | |||||
Diluted net (loss) income per share (1) (2) | $ | (0.38 | ) | $ | (0.18 | ) | $ | (0.11 | ) | $ | 0.29 | $ | (0.37 | ) | |||||
(Loss) Income from operations includes the following items: | |||||||||||||||||||
Stock-based compensation expense | $ | 54.4 | $ | 56.9 | $ | 64.2 | $ | 74.0 | $ | 249.5 | |||||||||
Amortization of acquisition related intangibles | 7.4 | 7.2 | 7.8 | 11.1 | 33.5 | ||||||||||||||
CEO transition costs | — | (0.1 | ) | — | — | (0.1 | ) | ||||||||||||
Acquisition related costs | — | 2.5 | 1.8 | 11.9 | 16.2 | ||||||||||||||
Restructuring and other exit costs, net | $ | 22.5 | $ | 13.8 | $ | 3.7 | $ | 1.9 | $ | 41.9 | |||||||||
____________________
(1) | Reflects the impact of the adoption of new accounting standards in fiscal year 2019 related to ASC Topic 606 and ASC Topic 340. |
(2) | Net (loss) income per share were computed independently for each of the periods presented; therefore the sum of the net (loss) income per share amount for the quarters may not equal the total for the fiscal year. |
2020 Form 10-K 102
17. Subsequent Events
On March 4, 2020, Autodesk redeemed in full $450.0 million in aggregate principal amount of its outstanding 3.125% senior notes due June 15, 2020. The redemption was completed pursuant to the optional redemption provisions. To redeem the 2015 Notes, Autodesk paid a redemption price of approximately $452.1 million, plus accrued and unpaid interest to, but not including, the date of the redemption. The Company did not incur any additional early termination penalties in connection with such redemption.
2020 Form 10-K 103
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Autodesk, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Autodesk, Inc. (the Company) as of January 31, 2020, and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ (deficit) equity, and cash flows for each of the three years in the period ended January 31, 2020, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 31, 2020, and 2019, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 19, 2020 expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for recognizing revenue from contracts with customers and recognizing costs related to obtaining a customer contract in the year ended January 31, 2019 due to the adoption of ASU No. 2014‑09, Revenue from Contracts with Customers.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
2020 Form 10-K 104
Revenue Recognition | |
Description of the Matter | As discussed in Note 1 to the consolidated financial statements, revenue is recognized when the Company's offerings are delivered to customers, in an amount that reflects the consideration expected in exchange for products and services. Determining whether the Company’s products and services are considered distinct performance obligations that should be accounted for separately or as one combined performance obligation may require significant judgment. For the Company’s product subscriptions and enterprise business agreement ("EBA") subscriptions in which the desktop software and related cloud functionalities are highly interrelated, the combined performance obligation is recognized ratably over the contract term as the subscription is delivered. Judgment is required to determine the level of integration and interdependency between individual components of desktop software applications and cloud functionalities. This determination influences whether the desktop software is considered distinct and accounted for separately as a license performance obligation recognized at the time of delivery, or not distinct and accounted for together with the cloud functionalities as a single subscription performance obligation recognized over time. Auditing the Company’s revenue recognition accounting policy required a significant level of auditor judgment to assess whether the products and services included in the Company’s product subscriptions and EBA subscriptions should be accounted for as distinct performance obligations or as one combined performance obligation. |
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the Company's identification and evaluation of performance obligations. For example, we tested management’s assessment of performance obligations included in new product and service offerings. Our audit procedures also included, among others, evaluating the interdependency and level of integration between the software and cloud functionality. We also assessed key assumptions related to the software and cloud functionality with the Company’s product specialists and further reviewed information externally available on the Company’s product offerings. We have also evaluated the Company’s revenue disclosures in relation to these matters. |
Uncertain tax positions | |
Description of the Matter | As discussed in Note 1 and Note 5 to the consolidated financial statements, the Company makes estimates in determining the accruals for uncertain tax positions. As of January 31, 2020, the Company had gross unrecognized tax benefits of $220.6 million for uncertain tax positions. Auditing management's estimate of the amount of tax benefit related to the Company's uncertain tax positions that qualified for recognition involved especially challenging auditor judgment because management's estimate required significant judgment in evaluating the technical merits of the positions, including interpretations of applicable tax laws and regulations. |
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company’s accounting process for uncertain tax positions. For example, we tested controls over management’s identification of uncertain tax positions and its application of the recognition and measurement principles, including management’s review of the inputs and calculations of unrecognized income tax benefits. Our audit procedures included, among others, involvement of our tax professionals to assess the technical merits of the Company’s tax positions. These procedures included assessing the Company’s correspondence with the relevant tax authorities and evaluating income tax opinions or other third-party advice obtained by the Company. We also evaluated the appropriateness of the Company’s accounting for its tax positions taking into consideration relevant international and local income tax laws. We analyzed the Company’s assumptions and data used to determine the amount of tax benefit to recognize and tested the accuracy of the calculations. For certain tax positions related to intercompany transactions, we assessed the assumptions and pricing method used in setting arm’s length prices and the documentation to support the pricing. We also evaluated the adequacy of the Company’s financial statement disclosures related to these tax matters. |
/s/ ERNST & YOUNG LLP
We have served as the Company's auditor since 1983.
San Francisco, California
March 19, 2020
2020 Form 10-K 105
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Autodesk, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Autodesk, Inc.’s internal control over financial reporting as of January 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Autodesk, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of January 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the accompanying consolidated balance sheets of the Company as of January 31, 2020, and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ (deficit) equity, and cash flows for each of the three years in the period ended January 31, 2020, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) and our report dated March 19, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ ERNST & YOUNG LLP
San Francisco, California
March 19, 2020
2020 Form 10-K 106
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. | CONTROLS AND PROCEDURES |
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain "disclosure controls and procedures," as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in our Exchange Act reports is (i) recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission ("SEC"), and (ii) accumulated and communicated to Autodesk management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of January 31, 2020.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of January 31, 2020. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in the 2013 Internal Control—Integrated Framework. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Autodesk have been detected.
Our management has concluded that, as of January 31, 2020, our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on our internal control over financial reporting, which is included in Item 8 herein.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the three months ended January 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. | OTHER INFORMATION |
None.
2020 Form 10-K 107
PART III
Certain information required by Part III is omitted from this Annual Report because we intend to file a definitive proxy statement pursuant to Regulation 14A for our Annual Meeting of Stockholders not later than 120 days after the end of the fiscal year covered by this Annual Report (the “Proxy Statement”) and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement that specifically address the items set forth herein are incorporated by reference.
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this Item is incorporated herein by reference to the sections entitled “Proposal One—Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Corporate Governance” in our Proxy Statement.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The following sets forth certain information as of March 19, 2020, regarding our executive officers.
Name | Age | Position | |
Andrew Anagnost | 55 | President and Chief Executive Officer | |
R. Scott Herren | 58 | SVP and Chief Financial Officer | |
Steve M. Blum | 55 | SVP, Worldwide Field Operations | |
Pascal W. Di Fronzo | 55 | SVP, Corporate Affairs, Chief Legal Officer & Secretary | |
Carmel Galvin | 51 | SVP, People and Places and Chief Human Resources Officer | |
Andrew Anagnost joined Autodesk in September 1997 and has served as President and Chief Executive Officer since June 2017. Dr. Anagnost served as Co-CEO from February 2017 to June 2017, Chief Marketing Officer from December 2016 to June 2017 and as the Company’s Senior Vice President, Business Strategy & Marketing, from March 2012 to June 2017. From December 2009 to March 2012, Dr. Anagnost was Vice President, Product Suites and Web Services of the Company. Prior to this position, Dr. Anagnost served as Vice President of CAD/CAE products for the manufacturing division of the Company from March 2007 to December 2009. Previously, Dr. Anagnost held other senior management positions at the Company. Prior to joining the Company, Dr. Anagnost held various engineering, sales, marketing and product management positions at Lockheed Aeronautical Systems Company and EXA Corporation. He also served as an NRC post-doctoral fellow at NASA Ames Research Center.
R. Scott Herren joined Autodesk in November 2014 and serves as Senior Vice President and Chief Financial Officer. Prior to joining Autodesk, Mr. Herren was the Senior Vice President of Finance for Citrix Systems, Inc. from September 2011 to October 2014 where he led the company’s finance, accounting, tax, treasury, investor relations, real estate, and facilities teams. From March 2000 to September 2011, Mr. Herren held a variety of leadership positions at Citrix including Vice President and Managing Director for EMEA and Vice President and General Manager of the Virtualization Systems Group. Prior to Citrix, Mr. Herren served at FedEx Corporation as Vice President, Financial Planning. Prior to FedEx, he spent 13 years at International Business Machines Corporation in senior financial positions.
Steven M. Blum joined Autodesk in January 2003 and has served as Senior Vice President, Worldwide Field Operations since September 2017. Mr. Blum served as Senior Vice President, Worldwide Sales and Services from February 2011 to September 2017. From January 2003 to February 2011, he served as Senior Vice President of Americas Sales. Prior to this position, Blum was Executive Vice President of Sales and Account Management for Parago, Inc. Blum also held positions at Mentor Graphics, most recently serving as Vice President of America's sales. Before joining Mentor Graphics, he held engineering and sales positions at NCR Corporation and Advanced Micro Devices.
Pascal W. Di Fronzo joined Autodesk in June 1998 and has served as Senior Vice President, Corporate Affairs, Chief Legal Officer & Secretary since December 2016. Mr. Di Fronzo served as Senior Vice President, General Counsel and Secretary from March 2007 to December 2016. From March 2006 to March 2007, Mr. Di Fronzo served as Vice President, General Counsel and Secretary, and served as Vice President, Assistant General Counsel and Assistant Secretary from March 2005 through March 2006. Previously, Mr. Di Fronzo served in other business and legal capacities in our Legal Department.
2020 Form 10-K 108
Prior to joining Autodesk, he advised high technology and emerging growth companies on business and intellectual property transactions and litigation while in private practice.
Carmel Galvin joined Autodesk in March 2018 and serves as Senior Vice President, People and Places and Chief Human Resources Officer (“CHRO”). Prior to joining Autodesk, from April 2016 to February 2018, Ms. Galvin was the Senior Vice President, CHRO for Glassdoor, Inc. where she led all people functions of the company, including human resources planning, learning and development, talent acquisition, employee relations and engagement. From October 2014 to April 2016, Ms. Galvin served as Senior Vice President and CHRO at Advent Software, Inc., where she oversaw the company’s global people strategies and programs. Prior to Advent, she served as Vice President of Talent & Culture Development for Deloitte’s new-venture accelerator, advising a growing portfolio of innovative companies on how to scale and adjust their culture and talent programs. Prior to Deloitte, Ms. Galvin gained 20 years of human resources experience at global companies including Moody’s KMV, Barra Inc., Visa International and IBM (Ireland) Ltd.
There is no family relationship among any of our directors or executive officers.
ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this Item is incorporated herein by reference to the sections entitled "Corporate Governance" and “Executive Compensation” in our Proxy Statement.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item is incorporated herein by reference to the sections entitled “Security Ownership of Certain Beneficial Owners and Management” and “Executive Compensation—Equity Compensation Plan Information” in our Proxy Statement.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item is incorporated herein by reference to the sections entitled “Certain Relationships and Related Party Transactions” and “Corporate Governance—Independence of the Board of Directors” in our Proxy Statement.
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by this Item is incorporated herein by reference to the sections entitled “Proposal Two—Ratification of the Appointment of Independent Registered Public Accounting Firm” in our Proxy Statement.
2020 Form 10-K 109
PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) The following documents are filed as part of this Report:
1. | Financial Statements: The information concerning Autodesk’s financial statements, and the Report of Ernst & Young LLP, Independent Registered Public Accounting Firm required by this Item is incorporated by reference herein to the section of this Report in Item 8, entitled “Financial Statements and Supplementary Data.” |
2. | Financial Statement Schedule: The following financial statement schedule of Autodesk, Inc., for the fiscal years ended January 31, 2020, 2019, and 2018, is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Autodesk, Inc.: |
Schedule II Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.
3. | Exhibits: See Item 15(b) below. We have filed, or incorporated into this Report by reference, the exhibits listed on the accompanying Index to Exhibits immediately prior to the signature page of this Form 10-K. |
(b) Exhibits:
We have filed, or incorporated into this Report by reference, the exhibits listed on the accompanying Index to Exhibits immediately prior to the signature page of this Form 10-K.
(c) Financial Statement Schedules: See Item 15(a), above.
ITEM 15(A)(2) | FINANCIAL STATEMENT SCHEDULE II |
Description | Balance at Beginning of Fiscal Year | Additions Charged to Costs and Expenses or Revenues | Deductions and Write-Offs | Balance at End of Fiscal Year | |||||||||
(in millions) | |||||||||||||
Fiscal Year Ended January 31, 2020 | |||||||||||||
Partner Program reserves (1) | $ | 51.7 | 453.7 | 445.0 | $ | 60.4 | |||||||
Restructuring and other facility exit costs | $ | 2.1 | 0.3 | 2.4 | $ | — | |||||||
Fiscal Year Ended January 31, 2019 | |||||||||||||
Partner Program reserves (1) | $ | 36.5 | 294.7 | 279.5 | $ | 51.7 | |||||||
Restructuring and other facility exit costs | $ | 57.2 | 41.9 | 97.0 | $ | 2.1 | |||||||
Fiscal Year Ended January 31, 2018 | |||||||||||||
Partner Program reserves (1) | $ | 28.1 | 224.3 | 215.9 | $ | 36.5 | |||||||
Restructuring and other facility exit costs | $ | 8.4 | 94.1 | 45.3 | $ | 57.2 | |||||||
____________________
(1) | The partner program reserves balance impacts "Accounts receivable, net" and "Accounts payable" on the accompanying Consolidated Balance Sheets. |
ITEM 16 | FORM 10-K SUMMARY |
None.
2020 Form 10-K 110
Index to Exhibits
Exhibit No. | Description | |
3.1 | ||
3.2 | ||
4.1 | ||
4.2 | ||
4.3 | ||
4.4 | ||
4.5 | ||
4.6 | ||
10.1* | ||
10.2* | ||
10.3* | ||
10.4* | ||
10.5* | ||
10.6* | ||
10.7* | ||
10.8* | ||
2020 Form 10-K 111
Exhibit No. | Description | |
10.9* | ||
10.10* | ||
10.11* | ||
10.12* | ||
10.13* | ||
10.14* | ||
10.15* | ||
10.16* | ||
10.17* | ||
10.18* | ||
10.19* | ||
10.20* | ||
10.21* | ||
10.22* | ||
10.23 | ||
10.24 | ||
10.25 | ||
10.26 | ||
2020 Form 10-K 112
Exhibit No. | Description | |
21.1 | ||
23.1 | ||
24.1 | ||
31.1 | ||
31.2 | ||
32.1† | ||
101.INS †† | XBRL Instance Document | |
101.SCH †† | XBRL Taxonomy Extension Schema | |
101.CAL †† | XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF †† | XBRL Taxonomy Extension Definition Linkbase | |
101.LAB †† | XBRL Taxonomy Extension Label Linkbase | |
101.PRE †† | XBRL Taxonomy Extension Presentation Linkbase | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
____________________
* | Denotes a management contract or compensatory plan or arrangement. |
† | The certifications attached as Exhibit 32.1 that accompany this Annual Report on Form 10-K are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Autodesk, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-K, irrespective of any general incorporation language contained in such filing. |
†† | The financial information contained in these XBRL documents is unaudited. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
AUTODESK, INC. | |||
By: | /s/ ANDREW ANAGNOST | ||
Andrew Anagnost | |||
President and Chief Executive Officer | |||
Dated: | March 19, 2020 | ||
2020 Form 10-K 113
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Andrew Anagnost and R. Scott Herren each as his or her attorney-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities as of March 19, 2020.
Signature | Title | |
/s/ ANDREW ANAGNOST | President and Chief Executive Officer, Director (Principal Executive Officer) | |
Andrew Anagnost | ||
/s/ R. SCOTT HERREN | Senior Vice President and Chief Financial Officer (Principal Financial Officer) | |
R. Scott Herren | ||
/s/ STEPHEN W. HOPE | Vice President and Chief Accounting Officer (Principal Accounting Officer) | |
Stephen W. Hope | ||
/s/ STACY J. SMITH | Director (Non-executive Chairman of the Board) | |
Stacy J. Smith | ||
/s/ KAREN BLASING | Director | |
Karen Blasing | ||
/s/ REID FRENCH | Director | |
Reid French | ||
/s/ AYANNA HOWARD | Director | |
Ayanna Howard | ||
/s/ MARY T. MCDOWELL | Director | |
Mary T. McDowell | ||
/s/ BLAKE J. IRVING | Director | |
Blake J. Irving | ||
/s/ STEPHEN D. MILLIGAN | Director | |
Stephen D. Milligan | ||
/s/ LORRIE M. NORRINGTON | Director | |
Lorrie M. Norrington | ||
/s/ ELIZABETH RAFAEL | Director | |
Elizabeth Rafael | ||
2020 Form 10-K 114