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EX-32 - CERT OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350 TO SECTION 906 - MENTOR GRAPHICS CORPment-20150731xexhibit32.htm
EX-31.2 - CERT OF CFO PURSUANT TO SEC RULE 13A-14(A)/15D-14(A) TO SECTION 302 - MENTOR GRAPHICS CORPment-20150731xexhibit312.htm
EX-31.1 - CERT OF CEO PURSUANT TO SEC RULE 13A-14(A)/15D-14(A) TO SECTION 302 - MENTOR GRAPHICS CORPment-20150731xexhibit311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
___________________________________________ 
FORM 10-Q
 
___________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2015
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 No. 1-34795
 ___________________________________________ 
MENTOR GRAPHICS CORPORATION
(Exact name of registrant as specified in its charter)

___________________________________________ 
Oregon
93-0786033
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
 
 
8005 SW Boeckman Road, Wilsonville, Oregon
97070-7777
(Address of principal executive offices)
(Zip Code)
(503) 685-7000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former
fiscal year, if changed since last report)
 
___________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) other than Form 8-K reports, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  




Large Accelerated Filer
x
Accelerated Filer
¨
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Number of shares of common stock, no par value, outstanding as of August 27, 2015: 117,228,814




MENTOR GRAPHICS CORPORATION
Index to Form 10-Q
 
 
 
Page Number
 
 
PART I. FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 

3


PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
Mentor Graphics Corporation
Condensed Consolidated Statements of Income
(Unaudited)
 
 
Three months ended July 31,
 
 Six months ended July 31,
 
2015
 
2014
 
2015
 
2014
In thousands, except per share data
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
System and software
$
162,201

 
$
149,480

 
$
318,132

 
$
297,709

Service and support
118,861

 
110,753

 
235,073

 
214,675

Total revenues
281,062

 
260,233

 
553,205

 
512,384

Cost of revenues:
 
 
 
 
 
 
 
System and software
13,049

 
16,185

 
26,673

 
43,156

Service and support
31,420

 
30,903

 
64,989

 
60,014

Amortization of purchased technology
1,794

 
1,841

 
3,652

 
3,202

Total cost of revenues
46,263

 
48,929

 
95,314

 
106,372

Gross profit
234,799

 
211,304

 
457,891

 
406,012

Operating expenses:
 
 
 
 
 
 
 
Research and development
89,053

 
87,542

 
178,568

 
171,993

Marketing and selling
84,741

 
82,305

 
169,692

 
166,939

General and administration
18,670

 
19,473

 
36,633

 
37,155

Equity in earnings of Frontline
(1,351
)
 
(2,062
)
 
(2,221
)
 
(3,441
)
Amortization of intangible assets
2,234

 
2,026

 
4,453

 
3,776

Special charges
2,186

 
5,108

 
39,163

 
11,034

Total operating expenses
195,533

 
194,392

 
426,288

 
387,456

Operating income
39,266

 
16,912

 
31,603

 
18,556

Other income (expense), net
187

 
(104
)
 
529

 
(362
)
Interest expense
(4,772
)
 
(4,807
)
 
(9,466
)
 
(9,392
)
Income before income tax
34,681

 
12,001

 
22,666

 
8,802

Income tax expense (benefit)
4,071

 
(1,768
)
 
2,559

 
(1,942
)
Net income
30,610

 
13,769

 
20,107

 
10,744

Less: Loss attributable to noncontrolling interest
(602
)
 
(403
)
 
(1,220
)
 
(877
)
Net income attributable to Mentor Graphics shareholders
$
31,212

 
$
14,172

 
$
21,327

 
$
11,621

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.27

 
$
0.13

 
$
0.18

 
$
0.12

Diluted
$
0.26

 
$
0.13

 
$
0.18

 
$
0.11

Weighted average number of shares outstanding:
 
 
 
 
 
 
 
Basic
116,584

 
113,868

 
116,296

 
114,396

Diluted
119,368

 
116,551

 
118,986

 
116,960

Cash dividends declared per common share
$
0.055

 
$
0.050

 
$
0.110

 
$
0.100

See accompanying notes to unaudited condensed consolidated financial statements.


4


Mentor Graphics Corporation
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

 
Three months ended July 31,
 
Six months ended July 31,
 
2015
 
2014
 
2015
 
2014
In thousands
 
 
 
 
 
 
 
Net Income
$
30,610

 
$
13,769

 
$
20,107

 
$
10,744

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
Change in unrealized gain (loss) on derivative instruments
540

 
(232
)
 
380

 
(149
)
Less: Reclassification adjustment for net income (loss) included in net income
120

 
(238
)
 
21

 
(83
)
Net change
420

 
6

 
359

 
(66
)
Change in accumulated translation adjustment
(4,777
)
 
(3,665
)
 
(4,160
)
 
(703
)
Change in pension liability
(2
)
 
(2
)
 
(4
)
 
(4
)
Other comprehensive loss
(4,359
)
 
(3,661
)
 
(3,805
)
 
(773
)
Comprehensive income
26,251

 
10,108

 
16,302

 
9,971

Less amounts attributable to the noncontrolling interest:
 
 
 
 
 
 
 
Net loss
(602
)
 
(403
)
 
(1,220
)
 
(877
)
Change in accumulated translation adjustment
(8
)
 
15

 
42

 
5

Comprehensive loss attributable to the noncontrolling interest
(610
)
 
(388
)
 
(1,178
)
 
(872
)
Comprehensive income attributable to Mentor Graphics shareholders
$
26,861

 
$
10,496

 
$
17,480

 
$
10,843

See accompanying notes to unaudited condensed consolidated financial statements.
 

5


Mentor Graphics Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
As of
July 31,
2015
 
January 31,
2015
In thousands
 
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
295,447

 
$
230,281

Trade accounts receivable, net of allowance for doubtful accounts of $3,611 as of July 31, 2015 and $4,217 as of January 31, 2015
443,797

 
546,622

Other receivables
19,926

 
20,984

Inventory
22,633

 
22,512

Prepaid expenses and other
25,167

 
22,357

Deferred income taxes
24,390

 
23,490

Total current assets
831,360

 
866,246

Property, plant, and equipment, net of accumulated depreciation of $338,587 as of July 31, 2015 and $334,619 as of January 31, 2015
170,898

 
170,737

Term receivables
266,092

 
301,862

Goodwill
602,628

 
599,929

Intangible assets, net of accumulated amortization of $217,811 as of July 31, 2015 and $209,931 as of January 31, 2015
43,436

 
45,577

Other assets
64,516

 
64,671

Total assets
$
1,978,930

 
$
2,049,022

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Short-term borrowings
$
1,844

 
$
7,228

Current portion of notes payable
233,637

 

Accounts payable
10,682

 
12,687

Income taxes payable
223

 
5,994

Accrued payroll and related liabilities
48,738

 
108,553

Accrued and other liabilities
35,678

 
47,728

Deferred revenue
226,098

 
259,340

Total current liabilities
556,900

 
441,530

Notes payable
3,188

 
230,400

Deferred revenue
18,674

 
21,251

Income tax liability
18,860

 
19,279

Deferred income taxes, long-term
35,046

 
31,774

Other long-term liabilities
16,300

 
18,562

Total liabilities
648,968

 
762,796

Commitments and contingencies (Note 6)

 

Convertible notes (Note 5)
19,363

 

Noncontrolling interest with redemption feature
12,020

 
13,372

Stockholders’ equity:
 
 
 
Common stock, no par value, 300,000 shares authorized as of July 31, 2015 and January 31, 2015; 117,190 shares issued and outstanding as of July 31, 2015 and 115,790 shares issued and outstanding as of January 31, 2015
853,455

 
832,612

Retained earnings
460,581

 
451,901

Accumulated other comprehensive loss
(15,734
)
 
(11,887
)
Noncontrolling interest
277

 
228

Total stockholders’ equity
1,298,579


1,272,854

Total liabilities and stockholders’ equity
$
1,978,930

 
$
2,049,022

See accompanying notes to unaudited condensed consolidated financial statements.

6


Mentor Graphics Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Six months ended July 31,
 
2015
 
2014
In thousands
 
 
 
Operating Cash Flows:
 
 
 
Net income
$
20,107

 
$
10,744

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of property, plant, and equipment
17,721

 
17,076

Amortization of intangible assets, debt costs and other
12,439

 
11,173

Stock-based compensation
20,864

 
17,289

Deferred income taxes
2,350

 
1,109

Changes in other long-term liabilities
(1,874
)
 
(191
)
Dividends received from unconsolidated entities, net of equity in income (loss)
740

 
(474
)
Other
(713
)
 
87

Changes in operating assets and liabilities, net of effect of acquired businesses:
 
 
 
Trade accounts receivable, net
101,651

 
46,837

Prepaid expenses and other
(6,302
)
 
(3,045
)
Term receivables, long-term
35,138

 
36,705

Accounts payable and accrued liabilities
(66,823
)
 
(77,068
)
Income taxes receivable and payable
(5,082
)
 
(5,818
)
Deferred revenue
(35,409
)
 
(15,862
)
Net cash provided by operating activities
94,807

 
38,562

Investing Cash Flows:
 
 
 
Proceeds from the sales and maturities of short-term investments

 
4,124

Proceeds from sale of building
2,068

 

Purchases of property, plant, and equipment
(17,036
)
 
(13,315
)
Acquisitions of businesses and other intangible assets, net of cash acquired
(7,200
)
 
(75,900
)
Net cash used in investing activities
(22,168
)
 
(85,091
)
Financing Cash Flows:
 
 
 
Proceeds from issuance of common stock
19,347

 
16,177

Repurchase of common stock

 
(70,053
)
Dividends paid
(12,772
)
 
(11,471
)
Net decrease in short-term borrowing
(6,232
)
 
(5,949
)
Repayments of other borrowings
(6,925
)
 
(1,691
)
Proceeds from the sale of subsidiary shares to non-controlling interest

 
251

Net cash used in financing activities
(6,582
)
 
(72,736
)
Effect of exchange rate changes on cash and cash equivalents
(891
)
 
304

Net change in cash and cash equivalents
65,166

 
(118,961
)
Cash and cash equivalents at the beginning of the period
230,281

 
293,322

Cash and cash equivalents at the end of the period
$
295,447

 
$
174,361

See accompanying notes to unaudited condensed consolidated financial statements.


7


Mentor Graphics Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
All numerical dollar and share references are in thousands, except for per share and conversion rate data.
 
1.    General

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with United States (U.S.) generally accepted accounting principles (GAAP) and reflect all material normal recurring adjustments. However, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). In the opinion of management, the condensed consolidated financial statements include adjustments necessary for a fair presentation of the results of the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015.

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and contingencies as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Any changes in estimates will be reflected in the financial statements in future periods.

The condensed consolidated financial statements include our financial statements and those of our wholly-owned and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

2.    Fair Value Measurement

The following table presents information about financial liabilities measured at fair value on a recurring basis as of July 31, 2015:
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Contingent consideration
$
3,008

 
$

 
$

 
$
3,008


The following table presents information about financial liabilities measured at fair value on a recurring basis as of January 31, 2015:
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Contingent consideration
$
4,563

 
$

 
$

 
$
4,563


The Financial Accounting Standards Board's authoritative guidance for the hierarchy of valuation techniques is based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources. Unobservable inputs reflect our market assumptions. The fair value hierarchy consists of the following three levels:

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 whose significant inputs are observable; and
Level 3—One or more significant inputs to the valuation model are unobservable.

In connection with certain acquisitions, payment of a portion of the purchase price is contingent typically upon the acquired business’ achievement of certain revenue goals. As of July 31, 2015, of the total recorded balance, $1,582 was included in accrued and other liabilities and $1,426 was included in other long-term liabilities on our condensed consolidated balance sheet. As of January 31, 2015, of the total recorded balance, $1,515 was included in accrued and other liabilities and $3,048 was included in other long-term liabilities on our condensed consolidated balance sheet.

We have estimated the fair value of our contingent consideration as the present value of the expected payments over the term of the arrangements. The fair value measurement of our contingent consideration as of July 31, 2015 encompasses the following significant unobservable inputs:

8


Unobservable Inputs
 
Range
Total estimated contingent consideration
 
$546
-
$4,650
Discount rate
 
9.5%
-
16.0%
Timing of cash flows (in years)
 
1
-
3

Changes in the fair value of our contingent consideration are primarily driven by changes in the estimated amount and timing of payments, resulting from changes in the forecasted revenues of the acquired businesses. Significant changes in any of the inputs in isolation could result in a fluctuation in the fair value measurement of contingent consideration. Changes in fair value are recognized in special charges in our condensed consolidated statement of operations in the period in which the change is identified.

The following table summarizes contingent consideration activity: 
Balance as of January 31, 2015
$
4,563

Payments
(1,525
)
Adjustments
(97
)
Interest accretion
67

Balance as of July 31, 2015
$
3,008


The following table summarizes the fair value and carrying value of notes payable:
As of
July 31, 2015
 
January 31, 2015
Fair value of notes payable
$
340,336

 
$
310,173

Carrying value of notes payable
$
236,825

 
$
230,400


We based the fair value of our 4.00% Convertible Subordinated Debentures on the quoted market price at the balance sheet date. Our notes are not actively traded and the quoted market price is derived from observable inputs including our stock price, stock volatility, and interest rate (Level 2). Of the total carrying value of notes payable, $233,637 was classified as current on our condensed consolidated balance sheet as of July 31, 2015 and none was classified as current on our condensed consolidated balance sheet as of January 31, 2015.

The carrying amounts of cash equivalents, trade accounts receivable, net, term receivables, short-term borrowings, accounts payable, and accrued liabilities approximate fair value because of the short-term nature of these instruments or because amounts have been appropriately discounted.

3.    Term Receivables and Trade Accounts Receivable

We have long-term installment receivables that are attributable to multi-year, multi-element term license sales agreements. We include balances under term agreements that are due within one year in trade accounts receivable, net and balances that are due more than one year from the balance sheet date in term receivables, long-term. We discount the total product portion of the agreements to reflect the interest component of the transaction. We amortize the interest component of the transaction, using the effective interest method, to system and software revenues over the period in which payments are made and balances are outstanding. We determine the discount rate at the outset of the arrangement based upon the current credit rating of the customer. We reset the discount rate periodically considering changes in prevailing interest rates but do not adjust previously discounted balances.

Term receivable and trade accounts receivable balances were as follows:
As of
July 31, 2015
 
January 31, 2015
Trade accounts receivable
$
97,839

 
$
208,996

Term receivables, short-term
$
345,958

 
$
337,626

Term receivables, long-term
$
266,092

 
$
301,862


Trade accounts receivable include billed amounts whereas term receivables, short-term are comprised of unbilled amounts. Term receivables, short-term represent the portion of long-term installment agreements that are due within one year. Billings

9


for term agreements typically occur thirty days prior to the contractual due date, in accordance with individual contract installment terms. Term receivables, long-term represent unbilled amounts which are scheduled to be collected beyond one year.

We perform a credit risk assessment of all customers using the Standard & Poor’s (S&P) credit rating as our primary credit-quality indicator. The S&P credit ratings are based on the most recent S&P score available at the time of assessment. For customers that do not have an S&P credit rating, we base our credit risk assessment on results provided in the customers’ most recent financial statements at the time of assessment. We determine whether or not to extend credit to these customers based on the results of our internal credit assessment, thus, mitigating our risk of loss.

The credit risk assessment for our long-term receivables was as follows:
As of
July 31, 2015
 
January 31, 2015
S&P credit rating:
 
 
 
AAA+ through BBB-
$
165,511

 
$
192,430

BB+ and lower
37,782

 
31,939

 
203,293

 
224,369

Internal credit assessment
62,799

 
77,493

Total long-term term receivables
$
266,092

 
$
301,862


We maintain allowances for doubtful accounts on trade accounts receivable and term receivables, long-term for estimated losses resulting from the inability of our customers to make required payments. We regularly evaluate the collectibility of our trade accounts receivable based on a combination of factors. When we become aware of a specific customer’s inability to meet its financial obligations, such as in the case of bankruptcy or deterioration in the customer’s operating results, financial position, or credit rating, we record a specific reserve for bad debt to reduce the related receivable to the amount believed to be collectible. We also record unspecified reserves for bad debt for all other customers based on a variety of factors including length of time the receivables are past due, the financial health of the customers, the current business environment, and historical experience. If these factors change or circumstances related to specific customers change, we adjust the estimates of the recoverability of receivables resulting in either additional selling expense or a reduction in selling expense in the period the determination is made.

We reduced our allowance for doubtful accounts during the six months ended July 31, 2014 by $1,691, to reflect a change in estimate of our unspecified reserves resulting from sustained low write-off experience and strong collections. The adjustment was recorded in marketing and selling expense in our results of operations.

The following shows the change in allowance for doubtful accounts:
Allowance for doubtful accounts
 
Beginning balance
 
Expense adjustment
 
Other deductions(1)
 
Ending balance
Six months ended July 31, 2015
 
$
4,217

 
$
(597
)
 
$
(9
)
 
$
3,611

Six months ended July 31, 2014
 
$
5,469

 
$
(1,951
)
 
$
(224
)
 
$
3,294

(1)Specific account write-offs and foreign exchange.

We enter into agreements to sell qualifying accounts receivable from time to time to certain financing institutions on a non-recourse basis. We received net proceeds from the sale of receivables of $27,562 for the six months ended July 31, 2015 compared to $11,405 for the six months ended July 31, 2014. Amounts collected from customers on accounts receivable previously sold on a non-recourse basis to financial institutions are included in short-term borrowings on the balance sheet. These amounts are remitted to the financial institutions in the month following quarter-end.

4.    Short-Term Borrowings

We have a syndicated, senior, unsecured, revolving credit facility which expires on January 9, 2020.

The revolving credit facility has a maximum borrowing capacity of $125,000. As stated in the revolving credit facility, we have the option to pay interest based on:

10


(i)
London Interbank Offered Rate (LIBOR) with varying maturities commensurate with the borrowing period we select, plus a spread of between 2.00% and 2.50% based on a pricing grid tied to a financial covenant, or
(ii)
A base rate plus a spread of between 1.00% and 1.50%, based on a pricing grid tied to a financial covenant.
As a result of these interest rate options, our interest expense associated with borrowings under this revolving credit facility will vary with market interest rates.
We had no borrowings against the revolving credit facility during the six months ended July 31, 2015 and 2014. Commitment fees are payable on the unused portion of the revolving credit facility at rates between 0.30% and 0.40% based on a pricing grid tied to a financial covenant.

This revolving credit facility contains certain financial and other covenants, including a limit on the aggregate amount we can pay for dividends and repurchases of our stock over the term of the facility of $50,000 plus 70% of our cumulative net income for the periods after January 31, 2011.

We were in compliance with all financial covenants as of July 31, 2015. If we fail to comply with the financial covenants and do not obtain a waiver from our lenders, we would be in default under the revolving credit facility and our lenders could terminate the facility and demand immediate repayment of all outstanding loans under the revolving credit facility.

5.    Notes Payable

Notes payable consist of the following:
As of
July 31, 2015
 
January 31, 2015
4.00% Debentures due 2031
$
233,637

 
$
230,400

Other
3,188

 

Notes Payable
236,825

 
230,400

4.00% Debentures due 2031, current portion
(233,637
)
 

Notes payable, long-term
$
3,188

 
$
230,400


Our 4.00% Convertible Subordinated Debentures (4.00% Debentures) are due in 2031, but we may be required to repay them earlier under the conversion and redemption provisions described below.

4.00% Debentures due 2031

In April 2011, we issued $253,000 of 4.00% Debentures in a private placement pursuant to the SEC Rule 144A under the Securities Act of 1933. Interest on the 4.00% Debentures is payable semi-annually in April and October. The 4.00% Debentures are unsecured obligations.

Each one thousand dollars in principal amount of the 4.00% Debentures is currently convertible, under certain circumstances, into 49.8058 shares of our common stock (equivalent to a conversion price of $20.08 per share). The initial conversion rate for the 4.00% Debentures was 48.6902 shares of our common stock for each one thousand dollars in principal amount (equivalent to a conversion price of $20.54 per share). The conversion rate is adjusted because we declare and pay quarterly cash dividends, beginning in the first quarter of fiscal year 2014.
The 4.00% Debentures are convertible, under certain circumstances, into shares of our common stock at the conversion rate noted above. The circumstances for conversion include:
The market price of our common stock exceeding 120.0% of the conversion price, or $24.09 per share as of July 31, 2015, for at least 20 of the last 30 trading days in the previous fiscal quarter;
A call for redemption of the 4.00% Debentures;
Specified distributions to holders of our common stock;
If a fundamental change, such as a change of control, occurs;
During the two months prior to, but not on, the maturity date; or
The market price of the 4.00% Debentures declining to less than 98% of the value of the common stock into which the 4.00% Debentures are convertible.

11



Upon conversion of any 4.00% Debentures, a holder will receive:
(i)
Cash for the lesser of the principal amount of the 4.00% Debentures that are converted or the value of the converted shares; and
(ii)
Cash or shares of common stock, at our election, for the excess, if any, of the value of the converted shares over the principal amount.

As of July 31, 2015, the if-converted value of the 4.00% Debentures to the note holders exceeded the principal amount by $75,757.

During the fiscal quarter ended July 31, 2015, the market price of our common stock exceeded 120% of the conversion price for at least 20 of the last 30 trading days of the period. Accordingly, the 4.00% Debentures are convertible at the option of the holders through October 31, 2015. Therefore, the carrying value of the 4.00% Debentures is classified as a current liability. Additionally, the excess of the principal amount over the carrying value of the 4.00% Debentures is reclassified from permanent equity to temporary equity in our consolidated balance sheet as of July 31, 2015. The determination of whether or not the 4.00% Debentures are convertible is performed at each balance sheet date and may change from quarter to quarter. If this threshold is not met next quarter, the 4.00% Debentures will be reclassified as a long-term liability and the temporary equity will be reclassified to permanent equity in our consolidated balance sheet.

If a holder elects to convert their 4.00% Debentures through October 31, 2015, we would be required to pay cash for at least the principal amount of converted 4.00% Debentures.

If a holder elects to convert their 4.00% Debentures in connection with a fundamental change in the company that occurs prior to April 5, 2016, in some circumstances the holder will also be entitled to receive a make whole premium upon conversion.

We may redeem some or all of the 4.00% Debentures for cash on or after April 5, 2016 at the following redemption prices, expressed as a percentage of principal plus any accrued and unpaid interest:
Period
Redemption Price
Beginning on April 5, 2016 and ending on March 31, 2017
101.143
%
Beginning on April 1, 2017 and ending on March 31, 2018
100.571
%
On April 1, 2018 and thereafter
100.000
%

The holders, at their option, may redeem the 4.00% Debentures for cash on April 1, 2018April 1, 2021, and April 1, 2026, and in the event of a fundamental change in the company. In each case, our repurchase price will be 100% of the principal amount of the 4.00% Debentures plus any accrued and unpaid interest.

The 4.00% Debentures contain a conversion feature that the debt may be settled in cash upon conversion, therefore we separately account for the implied liability and equity components of the 4.00% Debentures. The principal amount, unamortized debt discount, net carrying amount of the liability component, and carrying amount of the equity component of the 4.00% Debentures are as follows:
As of
July 31, 2015
 
January 31, 2015
Principal amount
$
253,000

 
$
253,000

Unamortized debt discount
(19,363
)
 
(22,600
)
Net carrying amount of the liability component
$
233,637

 
$
230,400

Equity component, net of debt issuance costs
$
42,531

 
$
42,531


The unamortized debt discount amortizes to interest expense using the effective interest method through March 2018.

We recognized the following amounts in interest expense in the condensed consolidated statement of income related to the 4.00% Debentures:

12


 
Three months ended July 31,
 
Six months ended July 31,
 
2015
 
2014
 
2015
 
2014
Interest expense at the contractual interest rate
$
2,530

 
$
2,530

 
$
5,060

 
$
5,060

Amortization of debt discount
$
1,633

 
$
1,521

 
$
3,237

 
$
3,015


The effective interest rate on the 4.00% Debentures was 7.25% for the six months ended July 31, 2015 and 2014.

Other Notes Payable

In February 2015, we issued a subordinated note payable as part of a business combination. The note bears interest at a rate of 4.0% and is due in full on February 25, 2019.

6.    Commitments and Contingencies

Indemnifications

Our license and services agreements generally include a limited indemnification provision for claims from third parties relating to our intellectual property (IP). The indemnification is generally limited to the amount paid by the customer, a multiple of the amount paid by the customer, or a set cap. As of July 31, 2015, we were not aware of any material liabilities arising from these indemnification obligations.

Legal Proceedings

From time to time we are involved in various disputes and litigation matters that arise in the ordinary course of business. These include disputes and lawsuits relating to IP rights, contracts, distributorships, and employee relations matters. Periodically, we review the status of various disputes and litigation matters and assess our potential exposure. When we consider the potential loss from any dispute or legal matter probable and the amount or the range of loss can be estimated, we will accrue a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, we base accruals on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation matters and may revise estimates. We believe that the outcome of current litigation, individually and in the aggregate, will not have a material effect on our results of operations.

In some instances, we are unable to reasonably estimate any potential loss or range of loss. The nature and progression of litigation can make it difficult to predict the impact a particular lawsuit will have. There are many reasons why we cannot make these assessments, including, among others, one or more of the following: a proceeding being in its early stages; damages sought that are unspecific, unsupportable, unexplained or uncertain; discovery not having been started or being incomplete; the complexity of the facts that are in dispute; the difficulty of assessing novel claims; the parties not having engaged in any meaningful settlement discussions; the possibility that other parties may share in any ultimate liability; and/or the often slow pace of litigation.

In December 2012, Synopsys, Inc. (Synopsys) filed a lawsuit claiming patent infringement against us in federal district court in the Northern District of California, alleging that our Veloce® family of products infringed four Synopsys U.S. patents. In January 2015, the court issued a summary judgment order in our favor invalidating all asserted claims of three of the Synopsys patents. In June 2015, the U.S. Patent Trademark Office ruled that claims of the remaining patent asserted against us by Synopsys are unpatentable. This case is no longer on the court’s docket for trial. Synopsys has appealed the decision by the district court.

In May 2013, Synopsys also filed a claim against us in federal district court in Oregon, similarly alleging that our Veloce family of products infringes on two additional Synopsys U.S. patents. These claims have been dismissed.

We believe these lawsuits were filed in response to patent lawsuits we filed in 2010 and 2012 against Emulation and Verification Engineering S.A. and EVE-USA, Inc. (together EVE), which Synopsys acquired in October 2012.

On October 10, 2014, the jury in our patent lawsuit filed in the federal district court for the District of Oregon found that one of our patents - U.S. Patent No. 6,240,376 - was directly and indirectly infringed by EVE and Synopsys. As part of the verdict, the jury awarded us damages of approximately $36,000 as well as certain royalties. As of July 31, 2015, nothing has been included in our financial results for this award. Synopsys has filed an appeal.

13


On March 12, 2015, the Oregon court granted our request for a permanent injunction against future sales of Synopsys emulators containing infringing technology.

In December 2010, we filed a patent lawsuit against EVE in Tokyo district court, which seeks compensatory damages and an injunction against the sale of EVE emulation products. The technical trial for the Japanese litigation was held in October 2014. In May 2015, the court issued a preliminary verdict of non-infringement. We intend to appeal that verdict.

7.    Stockholders' Equity

Dividends

The following table summarizes dividends declared since the beginning of fiscal year 2015:
Declaration Date
 
Record Date
 
Payment Date
 
Per Share Amount
 
Total Amount
Fiscal Year 2016
 
 
 
 
 
 
8/20/2015
 
9/10/2015
 
9/30/2015
 
$
0.055

 
 
5/22/2015
 
6/10/2015
 
6/30/2015
 
$
0.055

 
$
6,389

2/26/2015
 
3/10/2015
 
3/31/2015
 
$
0.055

 
$
6,383

Fiscal Year 2015
 
 
 
 
 
 
11/20/2014
 
12/10/2014
 
1/2/2015
 
$
0.05

 
$
5,743

8/21/2014
 
9/10/2014
 
9/30/2014
 
$
0.05

 
$
5,697

5/22/2014
 
6/10/2014
 
6/30/2014
 
$
0.05

 
$
5,693

2/27/2014
 
3/10/2014
 
3/31/2014
 
$
0.05

 
$
5,778


Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to the quarterly determination of our Board of Directors.

8.    Stock-Based Compensation

Stock Option and Stock Plans

Our 2010 Omnibus Incentive Plan (Incentive Plan) is administered by the Compensation Committee of our Board of Directors and permits accelerated vesting of outstanding options, restricted stock units, restricted stock awards, and other equity incentives upon the occurrence of certain changes in control of our company. Stock options and time-based restricted stock units under the Incentive Plan are generally expected to vest over four years. Stock options have an expiration date of ten years from the date of grant and an exercise price no less than the fair market value of the shares on the date of grant. Performance-based restricted stock units vest after three years depending on attainment of goals for operating income margin.

Employee Stock Purchase Plans

We have an employee stock purchase plan (ESPP) for U.S. employees and an ESPP for certain foreign subsidiary employees. The ESPPs provide for six-month offerings commencing on January 1 and July 1 of each year with purchases on June 30 and December 31 of each year. Each eligible employee may purchase up to six thousand shares of stock on each purchase date (subject to a plan limit on the total fair market value) at prices no less than 85% of the lesser of the fair market value of the shares on the offering date or on the purchase date.

Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense recognized:

14


 
Three months ended July 31,
 
Six months ended July 31,
 
2015
 
2014
 
2015
 
2014
Cost of revenues
$
608

 
$
544

 
$
1,316

 
$
1,079

Operating expenses:
 
 
 
 
 
 
 
Research and development
3,800

 
3,311

 
8,118

 
6,552

Marketing and selling
2,366

 
2,143

 
4,846

 
4,321

General and administration
3,812

 
3,162

 
6,584

 
5,337

Equity plan-related compensation expense
$
10,586

 
$
9,160

 
$
20,864

 
$
17,289


9.    Incentive Stock Rights

On June 24, 2010, our Board of Directors adopted an Incentive Stock Purchase Rights Plan and declared a dividend distribution of one right for each outstanding share of common stock, payable to holders of record on July 6, 2010. The rights would become exercisable if a person or group acquired or commenced a tender offer to acquire a set threshold of our outstanding common stock.  The Plan was subsequently amended in 2011 and 2013 to extend its termination date and make certain other changes.

On June 30, 2015, the Plan expired in accordance with its terms.

10.    Net Income Per Share

We compute basic net income (loss) per share using the weighted average number of common shares outstanding during the period. We compute diluted net income per share using the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of common shares issuable upon vesting of restricted stock units, exercise of stock options and ESPP purchase rights, and conversion of the 4.00% Debentures using the treasury stock method, if dilutive.

The following provides the computation of basic and diluted net income per share:
 
Three months ended July 31,
 
Six months ended July 31,
 
2015
 
2014
 
2015
 
2014
Net income attributable to Mentor Graphics shareholders
$
31,212

 
$
14,172

 
$
21,327

 
$
11,621

Adjustment to redemption value of non-controlling interest with redemption feature
(144
)
 
895

 
125

 
1,562

Adjusted net income attributable to Mentor Graphics shareholders
$
31,068

 
$
15,067

 
$
21,452

 
$
13,183

Weighted average common shares used to calculate basic net income per share
116,584

 
113,868

 
116,296

 
114,396

Employee stock options, restricted stock units and employee stock purchase plan
2,784

 
2,683

 
2,690

 
2,564

Weighted average common and potential common shares used to calculate diluted net income per share
119,368

 
116,551

 
118,986

 
116,960

Net income per share attributable to Mentor Graphics shareholders:
 
 
 
 
 
 
 
Basic net income per share
$
0.27

 
$
0.13

 
$
0.18

 
$
0.12

Diluted net income per share
$
0.26

 
$
0.13

 
$
0.18

 
$
0.11


We excluded from the computation of diluted net income per share no shares of common stock for the three months ended July 31, 2015 and 583 shares of common stock for restricted stock units and ESPP purchase rights for the six months ended July 31, 2015 compared to 20 shares of common stock for stock options for the three months ended July 31, 2014 and 701 shares of common stock for stock options and ESPP purchase rights for the six months ended July 31, 2014. These stock options, restricted stock units, and ESPP purchase rights were determined to be anti-dilutive as a result of applying the treasury stock method.


15


We have decreased the numerator of our basic and diluted earnings per share calculation by $(144) for the three months ended July 31, 2015 for the increase of the noncontrolling interest with redemption feature to its calculated redemption value, recorded directly to retained earnings. We have increased the numerator of our basic and diluted earnings per share calculation by $125 for the six months ended July 31, 2015, $895 for the three months ended July 31, 2014 and $1,562 for the six months ended July 31, 2014 for the decrease of the noncontrolling interest with redemption feature to its calculated redemption value, recorded directly to retained earnings.

The effect of the conversion of the 4.00% Debentures was anti-dilutive and therefore excluded from the computation of diluted net income per share. We assume that the excess of the value of the converted shares over the principal amount of the 4.00% Debentures will be settled in common stock for purposes of calculating the dilutive effect on net income per share. If the 4.00% Debentures had been dilutive we would have included additional income and additional incremental shares as shown in the following table:

 
Three months ended July 31,
 
Six months ended July 31,
 
2015
 
2014
 
2015
 
2014
Additional income
$
2,075

 
$
2,075

 
$
2,075

 
$
2,075

Additional incremental shares
2,825

 
521

 
2,489

 
538


The conversion feature of the 4.00% Debentures, which allows for settlement in cash or a combination of cash and common stock, are further described in Note 5. “Notes Payable.”

11.    Accumulated Other Comprehensive Loss

The following table summarizes the components of accumulated other comprehensive loss, net of tax:
As of
July 31, 2015
 
January 31, 2015
Foreign currency translation adjustment
$
(16,246
)
 
$
(12,044
)
Unrealized gain on derivatives
401

 
42

Pension liability
111

 
115

Total accumulated other comprehensive loss
$
(15,734
)
 
$
(11,887
)

12.    Special Charges

The following is a summary of the components of special charges:
 
Three months ended July 31,
 
Six months ended July 31,
 
2015
 
2014
 
2015
 
2014
Voluntary early retirement program
$

 
$

 
$
25,435

 
$

Employee severance and related costs
840

 
575

 
10,703

 
1,700

Litigation costs
944

 
4,231

 
2,519

 
8,189

Other costs, net
402

 
302

 
506

 
1,145

Total special charges
$
2,186

 
$
5,108

 
$
39,163

 
$
11,034


Special charges generally include expenses incurred related to employee severance, certain litigation costs, acquisitions, excess facility costs, and asset related charges.

We offered the voluntary early retirement program in North America during the three months ended April 30, 2015 and 110 employees elected to participate. The costs presented here are for severance benefits. Approximately 93% of these costs were paid during the six months ended July 31, 2015. We expect to pay the remainder during the fiscal year ending January 31, 2016.

Employee severance and related costs include severance benefits, notice pay, and outplacement services. These rebalance charges generally represent the aggregate of numerous unrelated rebalance plans which impact several employee groups, none

16


of which is individually material to our financial position or results of operations. We determine termination benefit amounts based on employee status, years of service, and local statutory requirements. We record the charge for estimated severance benefits in the quarter that the rebalance plan is approved.

Approximately 61% of the employee severance and related costs for the six months ended July 31, 2015 were paid during the period. We expect to pay the remainder during the fiscal year ending January 31, 2016. Substantially all of the employee severance and related costs for the six months ended July 31, 2014 were paid during the fiscal year ending January 31, 2015. There were no significant modifications to the amount of those charges.

Litigation costs consist of professional service fees for services rendered, related to patent litigation involving us, EVE, and Synopsys regarding emulation technology.

Accrued special charges are included in accrued and other liabilities and other long-term liabilities in the condensed consolidated balance sheets. The following table shows changes in accrued special charges during the six months ended July 31, 2015:
 
Accrued special
charges as of
 
Charges during the six months ended
 
Payments during the six months ended
 
Accrued special
charges as of
 
 
January 31, 2015
 
July 31, 2015
 
July 31, 2015
 
July 31, 2015
(1
)
Voluntary early retirement program
$

 
$
25,435

 
$
(23,730
)
 
$
1,705

 
Employee severance and related costs
370

 
10,703

 
(6,827
)
 
4,246

 
Litigation costs
3,406

 
2,519

 
(5,087
)
 
838

 
Other costs, net
741

 
506

 
(371
)
 
876

 
Total accrued special charges
$
4,517

 
$
39,163

 
$
(36,015
)
 
$
7,665

 

(1) 
Of the $7,665 total accrued special charges as of July 31, 2015, $588 represents the long-term portion, which primarily includes accrued lease termination fees and other facility costs, net of sublease income. The remaining balance of $7,077 represents the short-term portion of accrued special charges.

13.    Related Party Transactions

Certain members of our Board of Directors also serve as executive officers or directors for some of our customers. Management believes the transactions between these customers and us were carried out on an arm’s-length basis. We had amounts receivable from these customers of $16,237 as of July 31, 2015 and $46,661 as of January 31, 2015. The following table shows revenue recognized from these customers:
 
Three months ended July 31,
 
Six months ended July 31,
 
2015
 
2014
 
2015
 
2014
Revenues from customers
$
4,086

 
$
5,105

 
$
7,152

 
$
11,155

Percentage of total revenues
1.5
%
 
2.0
%
 
1.3
%
 
2.2
%

14.    Income Taxes

The provision for income taxes was as follows:
 
Three months ended July 31,
 
Six months ended July 31,
 
2015
 
2014
 
2015
 
2014
Income tax expense (benefit)
$
4,071

 
$
(1,768
)
 
$
2,559

 
$
(1,942
)
Effective tax rate
11.7
%
 
(14.7
)%
 
11.3
%
 
(22.1
)%
Generally, the provision for income taxes is the result of the mix of profits and losses earned in various tax jurisdictions with a broad range of income tax rates, withholding taxes (primarily in certain foreign jurisdictions), changes in tax reserves, and the application of valuation allowances on deferred tax assets. Accounting guidance for interim reporting requires that we evaluate our provision for income tax expense based on our projected results of operations for the full year and record adjustments in each quarter. Such adjustments consider period specific items and a separate determination of tax expense for entities in our consolidated group that are projected to have losses for which no tax benefit will be recognized.


17


Our effective tax rate is 11.3% for the six months ended July 31, 2015, after the inclusion of $(1,618) in net favorable period specific items. For our full year forecast, we have projected a 16.0% effective tax rate. This rate is inclusive of period specific items recognized through July 31, 2015. Our projected rate for the full year differs from tax computed at the U.S. federal statutory rate of 35.0% primarily due to:
The benefit of lower tax rates on earnings of foreign subsidiaries;
Reduction in liabilities for uncertain tax positions; and
Forecasted utilization of net operating loss carryforwards and tax credit carryforwards for which no previous benefit was recognized.
These differences are partially offset by:
Provision of U.S. income tax on non-permanently reinvested foreign subsidiary earnings to permit future repatriation; and
Withholding taxes.
Actual results may differ significantly from our current projections. Further, our effective tax rate could fluctuate considerably on a quarterly basis and could be significantly affected to the extent our actual mix of earnings among individual jurisdictions is different than our expectations.

We determine deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities. In addition, we record deferred tax assets for net operating loss carryforwards and tax credit carryforwards. We calculate the deferred tax assets and liabilities using the enacted tax rates and laws that will be in effect when we expect the differences to reverse. A valuation allowance is recorded when it is more likely than not that all or some portion of the deferred tax asset will not be realized. Since 2004, we have determined that it is uncertain whether our U.S. entity will generate sufficient taxable income to offset reversing timing differences and to fully utilize net operating loss and tax credit carryforwards. Accordingly, we recorded a valuation allowance against those deferred tax assets for which realization does not meet the more likely than not standard. We have established valuation allowances related to certain foreign deferred tax assets based on historical losses as well as future expectations in certain jurisdictions. We will continue to evaluate the realizability of the deferred tax assets on a periodic basis.

As of July 31, 2015, we had a liability of $19,098 for income taxes associated with uncertain income tax positions. Of this liability, $238 was classified as short-term liabilities in income taxes payable in our condensed consolidated balance sheet as we generally anticipate the settlement of such liabilities will require payment of cash within the next twelve months. The remaining $18,860 of income tax associated with uncertain tax positions was classified as long-term liabilities. Certain liabilities may result in the reduction of deferred tax assets rather than settlement in cash. We are not able to reasonably estimate the timing of any cash payments required to settle the long-term liabilities and do not believe that the ultimate settlement of these liabilities will materially affect our liquidity.

15.    Supplemental Cash Flow Information

The following provides information concerning supplemental disclosures of cash flow activities:
 
Six months ended July 31,
 
2015
 
2014
Cash paid, net for:
 
 
 
Interest
$
5,966

 
$
5,865

Income taxes
$
5,693

 
$
6,408


16.    Segment Reporting

Our Chief Operating Decision Makers (CODMs), which consist of the Chief Executive Officer and the President, review our consolidated results within one operating segment. In making operating decisions, our CODMs primarily consider consolidated financial information accompanied by disaggregated revenue information by geographic region.

We eliminate all intercompany revenues in computing revenues by geographic regions. Revenues related to operations in the geographic regions were as follows:

18


 
Three months ended July 31,
 
Six months ended July 31,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
United States
$
115,598

 
$
111,692

 
$
244,789

 
$
236,458

Europe
69,520

 
55,462

 
115,839

 
115,611

Japan
15,524

 
20,973

 
36,941

 
42,254

Pacific Rim
77,458

 
62,963

 
147,587

 
106,676

Other
2,962

 
9,143

 
8,049

 
11,385

Total revenues
$
281,062

 
$
260,233

 
$
553,205

 
$
512,384


For the three months ended July 31, 2015, one customer accounted for 24.0% of our total revenues. For the three months ended July 31, 2014, no customer accounted for 10.0% or more of our total revenues. For the six months ended July 31, 2015, one customer accounted for 14.0% of our total revenues. For the six months ended July 31, 2014, one customer accounted for 11.0% of our total revenues.

19



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated, numerical references are in millions, except for percentages, per share data, and conversion rate data.

Overview

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes included elsewhere in this Form 10-Q. Certain of the statements below contain forward-looking statements. These statements are predictions based upon our current expectations about future trends and events. Actual results could vary materially as a result of certain factors, including but not limited to, those expressed in these statements. In particular, we refer you to the risks discussed in Part II, Item 1A. “Risk Factors” and in our other Securities and Exchange Commission filings, which identify important risks and uncertainties that could cause our actual results to differ materially from those contained in the forward-looking statements.

We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Form 10-Q. All subsequent written or spoken forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Form 10-Q are made only as of the date of this Form 10-Q. We do not intend, and undertake no obligation, to update these forward-looking statements.

The Company

We are a supplier of electronic design automation (EDA) tools — advanced computer software and emulation hardware systems used to automate the design, analysis, and testing of complex electro-mechanical systems, electronic hardware, and embedded systems software in electronic systems and components. We market our products and services worldwide, primarily to large companies in the communications, computer, consumer electronics, semiconductor, networking, military and aerospace, multimedia, and transportation industries. Through the diversification of our customer base among these various customer markets, we attempt to reduce our exposure to fluctuations within each market. We sell and license our products through our direct sales force and a channel of distributors and sales representatives. In addition to our corporate offices in Wilsonville, Oregon, we have sales, support, research and development, and professional service offices worldwide.

We generally focus on products and design platforms where we have or believe we can attain leading market share. Part of this approach includes developing new applications and exploring new markets where EDA companies have not generally participated. We believe this strategy leads to a more diversified product and customer mix and can help reduce the volatility of our business and our risk as a creditor, while increasing our potential for growth.

We derive system and software revenues primarily from the sale of term software license contracts, which are typically three to four years in length. We generally recognize revenue for these arrangements upon product delivery at the beginning of the license term. Larger enterprise-wide customer contracts, which are approximately 50% or more of our system and software revenue, drive the majority of our period-to-period revenue variances. We identify term licenses where collectibility is not probable and recognize revenue on those licenses when cash is received. Ratable license revenues primarily include short-term term licenses as well as other term licenses where we provide the customer with rights to unspecified or unreleased future products. For these reasons, the timing of large contract renewals, customer circumstances, and license terms are the primary drivers of revenue changes from period to period, with revenue changes also being driven by new contracts and additional purchases under existing contracts, to a lesser extent.

The EDA industry is competitive and is characterized by very strong leadership positions in specific segments of the EDA market. These strong leadership positions can be maintained for significant periods of time as the software can be difficult to master and customers are disinclined to make changes once their employees, as well as others in the industry, have developed familiarity with a particular software product. For these reasons, much of our profitability arises from areas in which we are the leader. We expect to continue our strategy of developing high quality tools with number one market share potential, rather than being a broad-line supplier with undifferentiated product offerings. This strategy allows us to focus investment in areas where customer needs are greatest and where we have the opportunity to build significant market share.

Our products and services are dependent to a large degree on new design projects initiated by customers in the integrated circuit (IC) and electronics system industries. These industries can be cyclical and are subject to constant and rapid technological change, rapid product obsolescence, price erosion, evolving standards, short product life cycles, and wide fluctuations in product supply and demand. Furthermore, extended economic downturns can result in reduced funding for development due to

20


downsizing and other business restructurings. These pressures are offset by the need for the development and introduction of next generation products once an economic recovery occurs.

Known Trends and Uncertainties Impacting Future Results of Operations

Our revenue has historically fluctuated quarterly and has generally been the highest in the fourth quarter of our fiscal year due to our customers’ corporate calendar year-end spending trends and the timing of contract renewals.

Ten accounts make up approximately 45% of our receivables, including both short and long-term balances. We have not experienced and do not presently expect to experience collection issues with these customers.

Net of reserves, we have no material receivables greater than 60 days past due, and continue to experience no difficulty in factoring our high quality receivables.

Bad debt expense recorded for the first six months of fiscal 2016 was not material. However, we do have exposures within our receivables portfolio to customers with weak credit ratings. These receivable balances do not represent a material portion of our portfolio but could have a material adverse effect on earnings in any given quarter, should significant additional allowances for doubtful accounts be necessary.

Bookings during the first six months of fiscal 2016 increased by approximately 30% compared to the first six months of fiscal 2015 primarily due to the timing of term license contract renewals. Bookings are the value of executed orders during a period for which revenue has been or will be recognized within six months for software products and within twelve months for emulation hardware systems, professional services, and training. Ten customers accounted for approximately 45% of total bookings for the first six months of fiscal 2016 compared to 35% for the first six months of fiscal 2015. The number of new customers during the first six months of fiscal 2016 decreased approximately 25% from the levels experienced during the first six months of fiscal 2015.

Product Development

During the first six months of fiscal 2016, we continued to execute our strategy of focusing on technical challenges encountered by customers, as well as building upon our well-established product families. We believe that customers, faced with leading-edge design challenges in creating new products, generally choose the best EDA products in each category to build their design environment. Through both internal development and strategic acquisitions, we have focused on areas where we believe we can build a leading market position or extend an existing leading market position.

We believe that the development and commercialization of EDA software tools is generally a three to five year process with limited customer adoption and sales in the first years of tool availability. Once tools are adopted, however, their life spans tend to be long. During the first six months of fiscal 2016, we introduced new products and upgrades to existing products and did not have any significant products reaching the end of their useful economic life.

Critical Accounting Policies

We base our discussion and analysis of our financial condition and results of operations upon our condensed consolidated financial statements which have been prepared in accordance with United States (U.S.) generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate our estimates on an on-going basis. We base our estimates on historical experience, current facts, and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs, and expenses that are not readily apparent from other sources. As future events and their effects cannot be determined with precision, actual results could differ from those estimates.

We believe that the accounting for valuation of accounts receivable, revenue recognition, business combinations, income taxes, goodwill, intangible assets, long-lived assets, special charges, and stock-based compensation are the critical accounting estimates and judgments used in the preparation of our condensed consolidated financial statements. For further discussion of our critical accounting policies, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in Part II of our Annual Report on Form 10-K for the year ended January 31, 2015.


21


RESULTS OF OPERATIONS

Revenues and Gross Profit
 
Three months ended July 31,
 
Six months ended July 31,
 
2015
 
Change
 
2014
 
2015
 
Change
 
2014
System and software revenues
$
162.2

 
8
%
 
$
149.5

 
$
318.1

 
7
%
 
$
297.7

System and software gross profit
$
147.4

 
12
%
 
$
131.5

 
$
287.8

 
15
%
 
$
251.3

Gross profit percent
91
%
 
 
 
88
%
 
90
%
 
 
 
84
%
Service and support revenues
$
118.9

 
7
%
 
$
110.7

 
$
235.1

 
10
%
 
$
214.7

Service and support gross profit
$
87.4

 
10
%
 
$
79.8

 
$
170.1

 
10
%
 
$
154.7

Gross profit percent
74
%
 
 
 
72
%
 
72
%
 
 
 
72
%
Total revenues
$
281.1

 
8
%
 
$
260.2

 
$
553.2

 
8
%
 
$
512.4

Total gross profit
$
234.8

 
11
%
 
$
211.3

 
$
457.9

 
13
%
 
$
406.0

Gross profit percent
84
%
 
 
 
81
%
 
83
%
 
 
 
79
%

System and Software
 
Three months ended July 31,
 
Six months ended July 31,
 
2015
 
Change
 
2014
 
2015
 
Change
 
2014
Upfront license revenues
$
128.8

 
3
%
 
$
124.9

 
$
256.6

 
3
%
 
$
249.7

Ratable license revenues
33.4

 
36
%
 
24.6

 
61.5

 
28
%
 
48.0

Total system and software revenues
$
162.2

 
8
%
 
$
149.5

 
$
318.1

 
7
%
 
$
297.7


We derive system and software revenues from the sale of licenses of software products and emulation hardware systems, including finance fee revenues from our long-term installment receivables resulting from term product sales. Upfront license revenues consist of perpetual licenses and term licenses for which we recognize revenue upon product delivery at the start of a license term. We identify term licenses where collectibility is not probable and recognize revenue on those licenses when cash is received. Ratable license revenues primarily consist of short-term term licenses and finance fees from the accretion of the discount on long-term installment receivables.

Ten customers accounted for approximately 65% of system and software revenues for the three months ended July 31, 2015 and 50% for the six months ended July 31, 2015 compared to approximately 55% for the three months ended July 31, 2014 and 45% for the six months ended July 31, 2014.

System and software revenues increased $12.7 for the three months ended July 31, 2015 compared to the three months ended July 31, 2014, primarily due to an increase in software license revenues of $11.7 driven by timing of contract renewals.

System and software revenues increased $20.4 for the six months ended July 31, 2015 compared to the six months ended July 31, 2014. The effect of acquisitions completed in fiscal years 2016 and 2015 on fiscal 2016 system and software revenues was $6.1. The remaining increase was primarily a result of increased software license revenues driven by timing of contract renewals.

For the three months ended July 31, 2015, one customer accounted for 24% of total revenues. For the three months ended July 31, 2014, no single customer accounted for 10% or more of total revenues. For the six months ended July 31, 2015, one customer accounted for 14% of total revenues. For the six months ended July 31, 2014, one customer accounted for 11% of total revenues.

System and software gross profit percent was higher for the three months ended July 31, 2015 compared to the three months ended July 31, 2014 and for the six months ended July 31, 2015 compared to the six months ended July 31, 2014 primarily due to a more favorable product mix.

Service and Support


22


We derive service and support revenues from software and hardware post-contract maintenance or support services and professional services, which include consulting, training, and other services. Professional services are lower margin offerings which are staffed according to fluctuations in demand. Support services operate under a less variable cost structure.

Service and support revenues increased $8.2 for the three months ended July 31, 2015 compared to the three months ended July 31, 2014. The effect of acquisitions completed in fiscal 2016 and 2015 on service and support revenues for the three months ended July 31, 2015 was $4.6. The remaining increase was primarily due to increased support revenues resulting from an increase in our installed base.

Service and support revenues increased $20.4 for the six months ended July 31, 2015 compared to the six months ended July 31, 2014. The effect of acquisitions completed in fiscal 2016 and 2015 on service and support revenues for the six months ended July 31, 2015 was $9.7. The remaining increase was primarily due to increased support revenues resulting from an increase in our installed base.

Service and support gross profit percent was higher for the three months ended July 31, 2015 compared to the three months ended July 31, 2014 due to increased margins on training and consulting services.

Geographic Revenues Information

Revenue by Geography
 
Three months ended July 31,
 
Six months ended July 31,
 
2015
 
Change
 
2014
 
2015
 
Change
 
2014
North America
$
118.6

 
(2
)%
 
$
120.8

 
$
252.9

 
2
 %
 
$
247.8

Europe
69.5

 
25
 %
 
55.4

 
115.8

 
 %
 
115.6

Japan
15.5

 
(26
)%
 
21.0

 
36.9

 
(13
)%
 
42.3

Pacific Rim
77.5

 
23
 %
 
63.0

 
147.6

 
38
 %
 
106.7

Total revenues
$
281.1

 
8
 %
 
$
260.2

 
$
553.2

 
8
 %
 
$
512.4


The increase in revenues in Europe and Pacific Rim for the three months ended July 31, 2015 compared to the three months ended July 31, 2014 was primarily due to the timing of emulation shipments and the timing of contract renewals. The decrease in revenues in Japan for the three months ended July 31, 2015 compared to the three months ended July 31, 2014 was primarily due to the timing of contract renewals. The increase in revenues in Pacific Rim for the six months ended July 31, 2015 compared to the six months ended July 31, 2014 was primarily due to the timing of contract renewals.

We recognize additional revenues in periods when the U.S. dollar weakens in value against foreign currencies. Conversely, we recognize lower revenues in periods when the U.S. dollar strengthens in value against foreign currencies. For the three months ended July 31, 2015, approximately 25% of European and approximately 75% of Japanese revenues were subject to exchange rate fluctuations as they were booked in local currencies. For the six months ended July 31, 2015, approximately 35% of European and approximately 80% of Japanese revenues were subject to exchange rate fluctuations as they were booked in local currencies.

Foreign currency had an unfavorable impact of $5.4 for the three months ended July 31, 2015 compared to the three months ended July 31, 2014 primarily as a result of the strengthening of the U.S. dollar against the Japanese yen and euro. Foreign currency had an unfavorable impact of $11.0 for the six months ended July 31, 2015 compared to the six months ended July 31, 2014 primarily as a result of the strengthening of the U.S. dollar against the Japanese yen and euro.

For additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see discussion in Part I, “Item 3. Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”

Revenue by Category

We segregate revenues into five categories of similar products and services. Each category includes both product and related support revenues. Revenues for each category as a percent of total revenues are as follows (percentages rounded to the nearest 5%):

23


 
Three months ended July 31,
 
Six months ended July 31,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
IC Design to Silicon
40
%
 
30
%
 
40
%
 
25
%
Scalable Verification
25
%
 
25
%
 
25
%
 
30
%
Integrated Systems Design
20
%
 
25
%
 
20
%
 
25
%
New and Emerging Products
5
%
 
10
%
 
5
%
 
10
%
Services and Other
10
%
 
10
%
 
10
%
 
10
%
Total revenues
100
%
 
100
%
 
100
%
 
100
%

Operating Expenses
 
Three months ended July 31,
 
Six months ended July 31,
 
2015
 
Change
 
2014
 
2015
 
Change
 
2014
Research and development
$
89.1

 
2
 %
 
$
87.5

 
$
178.6

 
4
 %
 
$
172.0

Marketing and selling
84.7

 
3
 %
 
82.3

 
169.7

 
2
 %
 
166.9

General and administration
18.7

 
(4
)%
 
19.5

 
36.6

 
(2
)%
 
37.2

Equity in earnings of Frontline
(1.4
)
 
(30
)%
 
(2.0
)
 
(2.2
)
 
(35
)%
 
(3.4
)
Amortization of intangible assets
2.2

 
10
 %
 
2.0

 
4.4

 
16
 %
 
3.8

Special charges
2.2

 
(57
)%
 
5.1

 
39.2

 
256
 %
 
11.0

Total operating expenses
$
195.5

 
1
 %
 
$
194.4

 
$
426.3

 
10
 %
 
$
387.5


Selected Operating Expenses as a Percentage of Total Revenues
 
Three months ended July 31,
 
Six months ended July 31,
 
2015
 
2014
 
2015
 
2014
Research and development
32
%
 
34
%
 
32
%
 
34
%
Marketing and selling
30
%
 
32
%
 
31
%
 
33
%
General and administration
7
%
 
7
%
 
7
%
 
7
%
Total selected operating expenses
69
%
 
73
%
 
70
%
 
74
%

Research and Development

Research and development expenses increased by $1.6 for the three months ended July 31, 2015 compared to the three months ended July 31, 2014 and $6.6 for the six months ended July 31, 2015 compared to the six months ended July 31, 2014. The components of these changes are summarized as follows:
 
Change
 
Three Months Ended
 
Six Months Ended
Salaries, variable compensation, and benefits expenses
$
(0.8
)
 
$
0.2

Expenses associated with acquired businesses
2.0

 
5.2

Stock compensation
0.5

 
1.6

Other expenses
(0.1
)
 
(0.4
)
Total change in research and development expenses
$
1.6

 
$
6.6


Marketing and Selling

Marketing and selling expenses increased by $2.4 for the three months ended July 31, 2015 compared to the three months ended July 31, 2014 and $2.8 for the six months ended July 31, 2015 compared to the six months ended July 31, 2014. The components of these changes are summarized as follows:

24


 
Change
 
Three Months Ended
 
Six Months Ended
Emulation demonstration inventory amortization
$
1.9

 
$
2.8

Salaries, variable compensation, and benefits expenses
0.3

 
(1.4
)
Expenses associated with acquired businesses
0.4

 
1.4

Smaller reduction in bad debt expense

 
1.1

Other expenses
(0.2
)
 
(1.1
)
Total change in marketing and selling expenses
$
2.4

 
$
2.8


General and Administration

There were no significant changes within general and administration expenses, which decreased by $(0.8) for the three months ended July 31, 2015 compared to the three months ended July 31, 2014 and $(0.6) for the six months ended July 31, 2015 compared to the six months ended July 31, 2014.

We incur a substantial portion of our operating expenses outside the U.S. in various foreign currencies. We recognize additional operating expense in periods when the U.S. dollar weakens in value against foreign currencies and lower operating expenses in periods when the U.S. dollar strengthens in value against foreign currencies. We experienced favorable currency movements in total operating expenses of approximately $10.3 for the three months ended July 31, 2015 compared to the three months ended July 31, 2014, and approximately $20.1 for the six months ended July 31, 2015 compared to the six months ended July 31, 2014, primarily due to movements in the euro, Russian ruble and Japanese yen. The impact of these currency movements is reflected in the changes in operating expenses detailed above.

Special Charges
 
Three months ended July 31,
 
Six months ended July 31,
 
2015
 
Change
 
2014
 
2015
 
Change
 
2014
Voluntary early retirement program
$

 
 %
 
$

 
$
25.4

 
 %
 
$

Employee severance and related costs
0.8

 
33
%
 
0.6

 
10.7

 
529
 %
 
1.7

Litigation costs
1.0

 
(76
%)
 
4.2

 
2.6

 
(68
)%
 
8.2

Other costs, net
0.4

 
33
%
 
0.3

 
0.5

 
(55
)%
 
1.1

Total special charges
$
2.2

 
(57
%)
 
$
5.1

 
$
39.2

 
256
%
 
$
11.0


Special charges generally include expenses incurred related to employee severance, certain litigation costs, acquisitions, excess facility costs, and asset related charges.

We offered the voluntary early retirement program in North America during the three months ended April 30, 2015 and 110 employees elected to participate. The costs presented here are for severance benefits.

Employee severance and related costs include severance benefits, notice pay, and outplacement services. These rebalance charges generally represent the aggregate of numerous unrelated rebalance plans which impact several employee groups, none of which is individually material to our financial position or results of operations. We determine termination benefit amounts based on employee status, years of service, and local statutory requirements. We record the charge for estimated severance benefits in the quarter that the rebalance plan is approved.

Litigation costs consist of professional service fees for services rendered, related to patent litigation involving us, Emulation and Verification Engineering S.A. and EVE-USA, Inc. (together EVE), and Synopsys, Inc. regarding emulation technology.

Provision for Income Taxes

 
Three months ended July 31,
 
Six months ended July 31,
 
2015
 
Change
 
2014
 
2015
 
Change
 
2014
Income tax expense (benefit)
$
4.1

 
(328
)%
 
$
(1.8
)
 
$
2.6

 
(237
)%
 
$
(1.9
)


25


Generally, the provision for income taxes is the result of the mix of profits and losses earned in various tax jurisdictions with a broad range of income tax rates, withholding taxes (primarily in certain foreign jurisdictions), changes in tax reserves, and the application of valuation allowances on deferred tax assets. The provision considers that a significant amount of our earnings are in certain foreign operations, including our Irish subsidiaries. Accounting guidance for interim reporting requires that we evaluate our provision for income tax expense based on our projected results of operations for the full year, and record adjustments in each quarter. Such adjustments consider period specific items and a separate determination of tax expense for entities in our consolidated group that are projected to have losses for which no tax benefit will be recognized.
 
Three months ended July 31,
 
Six months ended July 31,
 
2015
 
2014
 
2015
 
2014
Effective tax rate
12
%
 
(15
)%
 
11
%
 
(22
)%
Net period specific items benefit
$
(1.9
)
 
$
(3.2
)
 
$
(1.6
)
 
$
(3.2
)
Effective tax rate without period specific items
17
%
 
12
 %
 
18
%
 
14
 %

For the six months ended July 31, 2015, we have an 11% effective tax rate with period specific items. This current period effective tax rate differs from our effective tax rate for the six months ended July 31, 2014 due to the lower benefit from period specific items both in dollars and as a percentage of income before income tax, as well as application of the accounting guidance for interim periods with respect to jurisdictions with projected losses before tax for which no tax benefits will be recognized and the variability in the mix of profits and losses earned in various tax jurisdictions with a broad range of income tax rates.

For our full year forecast, we have projected a 16% effective tax rate. This rate is inclusive of period specific items recognized through July 31, 2015. Our projected rate differs from tax computed at the U.S. federal statutory rate of 35% primarily due to:
The benefit of lower tax rates on earnings of foreign subsidiaries;
Reduction in liabilities for uncertain tax positions; and
Forecasted utilization of net operating loss carryforwards and tax credit carryforwards for which no benefit was previously recognized.
These differences are partially offset by:
Provision of U.S. income tax on non-permanently reinvested foreign subsidiary earnings to permit future repatriation to the U.S.; and
Withholding taxes.

We have not provided for taxes which would result from the distribution of earnings by our foreign subsidiaries to the extent they are considered permanently reinvested. Where the earnings of our foreign subsidiaries are not treated as permanently reinvested, we have accrued for taxes on those earnings in our tax provision.

We are subject to income taxes in the U.S. and in numerous foreign jurisdictions. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The statute of limitations for adjustments to our historic tax obligations varies from jurisdiction to jurisdiction. In some cases, it may be extended or be unlimited. Furthermore, net operating loss and tax credit carryforwards may be subject to adjustment after the expiration of the statute of limitations of the year such net operating losses and tax credits originated. Our larger jurisdictions generally provide for a statute of limitations from three to five years. For U.S. federal income tax purposes, the tax years which remain open for examination are fiscal years 2012 and forward, although net operating loss and tax credit carryforwards from all years are subject to examination and adjustment for three years following the year in which they were utilized. We are currently under examination in various jurisdictions. The examinations are in different stages and timing of their resolution is difficult to predict. The statute of limitations remains open for years on or after fiscal 2011 in Ireland.

We have reserves for taxes to address potential exposures involving tax positions that are being challenged or that could be challenged by taxing authorities even though we believe that the positions we have taken are appropriate. We believe our tax reserves are adequate to cover potential liabilities. We review the tax reserves quarterly and adjust the reserves as events occur that affect our potential liability for additional taxes. Many of these events cannot be predicted, such as clarifications of tax law by administrative or judicial means, and it is often difficult to predict the final outcome or timing of resolution of any particular tax matter. To the extent that uncertain tax positions resolve in our favor, it could have a positive impact on our effective tax rate.



26


Our tax position in the U.S. could be impacted by the U.S.Tax Court opinion issued on July 27, 2015 in Altera Corp. v. Commissioner which invalidates part of a Treasury Regulation requiring stock based compensation to be included in any qualified intercompany cost sharing arrangement.  There is uncertainty as to whether the Internal Revenue Service will appeal the U.S. Tax Court decision, the final resolution of this issue, and whether any claim for relief from U.S. Federal tax for past or future years can be sustained. Accordingly, for the six months ended July 31, 2015, no impact has been recorded.  Additionally, we are in the process of determining the impact, if any, the Altera opinion would have on our financial statements in future periods should additional information become available.


Recent Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If the arrangement includes a software license, the customer would account for fees related to the software license element consistent with accounting for the acquisition of other acquired software licenses. If the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. An arrangement would contain a software license element if both: (i) the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty; and (ii) it is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. We will be required to implement this guidance in the first quarter of fiscal year 2017. Early adoption is permitted. The standard permits one of two methods of adoption: (i) fully retrospectively; or (ii) prospectively to arrangements entered into, or materially modified, after the effective date. We are currently assessing the impact of this update on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs. This ASU requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. We will be required to implement this guidance in the first quarter of fiscal year 2017. Early adoption is permitted. This update is not expected to have a material impact on our consolidated financial statements.

In September 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This ASU provides guidance on management's responsibility in evaluating whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern and to provide related disclosures if required. Evaluation is required every reporting period, including interim periods. We will be required to implement this guidance in the fourth quarter of fiscal year 2017. Early adoption is permitted. This update is not expected to have a material impact on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is based on the principle that the amount of revenue recognized should reflect the consideration an entity expects to be entitled to in exchange for the transfer of goods and services to customers. This ASU requires disclosures enabling users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This ASU also requires qualitative and quantitative disclosure about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. On July 9, 2015, the FASB deferred the effective date of the revenue standard by one year. As a result, we will be required to implement this guidance in the first quarter of fiscal year 2019. Early adoption is permitted beginning in the first quarter of fiscal year 2018. The standard permits one of two methods for adoption: (i) retrospectively to each prior reporting period presented, with the ability to utilize certain practical expedients; or (ii) retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application, including additional disclosures. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method, nor have we determined the effect of the standard on our ongoing financial reporting.

In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU states that only disposals of components of an entity representing a strategic shift in operations that have or will have a major impact on operations and financial results will be presented as discontinued operations. This update requires the assets and liabilities of a discontinued operation to be presented separately in the statement of financial position for the current year and all prior periods presented. ASU 2014-08 is to be applied prospectively. We adopted this new guidance beginning February 1, 2015. Adoption of this new guidance did not have a material impact on our financial statements.

27




LIQUIDITY AND CAPITAL RESOURCES

Our primary ongoing cash requirements are for product development, operating activities, capital expenditures, debt service, and acquisition opportunities that may arise. Our primary sources of liquidity are cash generated from operations and borrowings on our revolving credit facility.

We currently have access to sufficient funds for domestic operations and do not anticipate the need to repatriate funds associated with our permanently reinvested foreign earnings for use in U.S. operations. As of July 31, 2015, we have cash totaling $274.1 held by our foreign subsidiaries. A significant portion of our cash held by our foreign subsidiaries is accessible without a significant cash tax cost as the repatriation of foreign earnings will be sheltered from U.S. federal tax by net operating losses and tax credits. To the extent our foreign earnings are not permanently reinvested, we have provided for the tax consequences that would ensue upon their repatriation. In the event funds which are treated as permanently reinvested are repatriated, we will be required to accrue and pay additional taxes to repatriate these funds.

To date, we have experienced no loss or lack of access to our invested cash; however, we can provide no assurances that access to our cash will not be impacted by adverse conditions in the financial markets.

At any point in time, we have significant balances in operating accounts that are with individual third-party financial institutions, which may exceed the Federal Deposit Insurance Corporation insurance limits or other regulatory insurance program limits. We monitor daily the cash balances in our operating accounts and adjust the cash balances as appropriate; however, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets.

We anticipate that the following will be sufficient to meet our working capital needs on a short-term (twelve months or less) and a long-term (more than twelve months) basis:
Current cash balances;
Anticipated cash flows from operating activities, including the effects of selling and financing customer term receivables;
Amounts available under existing revolving credit facilities; and
Other available financing sources, such as the issuance of debt or equity securities.

We have experienced no difficulties to date in raising debt. However, capital markets can be volatile, and we cannot assure that we will be able to raise debt or equity capital on acceptable terms, if at all.

Cash Flow Information
 
Six months ended July 31,

2015
 
2014
Cash provided by operating activities
$
94.8

 
$
38.6

Cash used in investing activities
$
(22.2
)
 
$
(85.1
)
Cash used in financing activities
$
(6.6
)
 
$
(72.7
)

Operating Activities

Cash flows from operating activities consist of our net income adjusted for certain non-cash items and changes in operating assets and liabilities.

Trade Accounts and Term Receivables

Our cash flows from operating activities are significantly influenced by the payment terms on our license agreements and by our sales of qualifying accounts receivable. Our customers’ inability to fulfill payment obligations could adversely affect our cash flow. We monitor our accounts receivable portfolio for customers with low or declining credit ratings and increase our collection efforts when necessary. Trade accounts and term receivables consisted of the following:

28


As of
July 31, 2015
 
January 31, 2015
Trade accounts receivable, net
$
443.8

 
$
546.6

Term receivables, short-term (included in trade accounts receivable on the balance sheet)
$
346.0

 
$
337.6

Term receivables, long-term
$
266.1

 
$
301.9

Average days sales outstanding including the short-term portion of term receivables
142

 
112

Average days sales outstanding in trade accounts receivable, excluding the short-term portion of term receivables
31

 
43


The increase in the average days sales outstanding, including the short-term portion of term receivables, as of July 31, 2015 was primarily due to a decrease in revenue in the second quarter of fiscal 2016 compared to the fourth quarter of fiscal 2015. The decrease in the average days sales outstanding, excluding the short-term portion of term receivables, as of July 31, 2015 was primarily due to a decrease in accounts receivable in the second quarter of fiscal 2016 compared to the fourth quarter of fiscal 2015.

Term receivables are attributable to multi-year term license sales agreements. We include amounts for term agreements that are due within one year in trade accounts receivable, net, on our balance sheet and balances that are due in more than one year in term receivables, long-term. We use term agreements as a standard business practice and have a history of successfully collecting under the original payment terms without making concessions on payments, products, or services. Total term receivables were $612.1 as of July 31, 2015 compared to $639.5 as of January 31, 2015.

We enter into agreements to sell qualifying accounts receivable from time to time to certain financing institutions on a non-recourse basis. We received net proceeds from the sale of receivables of $27.6 for the six months ended July 31, 2015 compared to $11.4 for the six months ended July 31, 2014. We continue to have no difficulty in factoring receivables and continue to evaluate the economics of the sale of accounts receivable. We have not set a target for the sale of accounts receivables for the remainder of fiscal 2016.

Accrued Payroll and Related Liabilities
As of
July 31, 2015
 
January 31, 2015
Accrued payroll and related liabilities
$
48.7

 
$
108.6


The decrease in accrued payroll and related liabilities as of July 31, 2015 compared to January 31, 2015 was primarily due to incentive payments made during fiscal 2016 on fiscal 2015 year-end accruals. We generally experience higher accrued payroll and related liability balances at year-end primarily due to increased commission accruals associated with an increase in revenues in the fourth quarter. Additionally, we generally experience an increase in variable compensation at year-end due to the full year achievement of results.

Investing Activities

Cash used in investing activities for the six months ended July 31, 2015 primarily consisted of cash paid for capital expenditures and acquisitions of businesses.

Expenditures for property, plant, and equipment were $17.0 for the six months ended July 31, 2015 compared to $13.3 for the six months ended July 31, 2014. The expenditures for property, plant, and equipment for the six months ended July 31, 2015 were primarily a result of spending on information technology and infrastructure improvements within facilities. We expect total capital expenditures for property, plant, and equipment for fiscal 2016 to be approximately $55.0. We plan to finance these capital expenditures using cash on hand.

During the six months ended July 31, 2015, we paid $7.2 for acquisitions of businesses, compared to $75.9 during the six months ended July 31, 2014. The fiscal 2015 total represents cash payments of $46.8 ($45.5 net of cash acquired of $1.3) for the acquisition of Berkeley Design Automation, Inc. and $30.4 for acquisitions of other businesses. We plan to finance future business acquisitions through cash and possible common stock issuances. The cash expected to be utilized includes cash on hand, cash generated from operating activities, and borrowings on our revolving credit facility.

Financing Activities


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For the six months ended July 31, 2015, cash used in financing activities consisted primarily of the payment of dividends, repayments of other borrowings and a net decrease in short-term borrowings.

During the six months ended July 31, 2015, we paid two quarterly dividends of $0.055 per share of outstanding common stock for a total of $12.8. On August 20, 2015, we announced a quarterly dividend of $0.055 per share of outstanding common stock, payable on September 30, 2015 to shareholders of record as of the close of business on September 10, 2015. Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to the quarterly determination of our Board of Directors.

We currently have a share repurchase program, approved by our Board of Directors, authorizing the repurchase of up to $200 million of our common stock. During the six months ended July 31, 2015, we did not repurchase any shares compared to repurchases of 3.2 shares of common stock for $70.1 during the six months ended July 31, 2014. As of July 31, 2015, $175.0 remained available for purchase under the program.

The terms of our revolving credit facility limit the combination of the amount of our common stock we can repurchase and the amount of dividends we can pay to $50.0 plus 70% of our cumulative net income for periods after January 31, 2011. An additional $157.4 is available for common stock purchases or dividend payments under this limit as of July 31, 2015.

Repayments of other borrowings during the six months ended July 31, 2015 consisted of deferred payments for consideration related to prior year acquisitions.

Other Factors Affecting Liquidity and Capital Resources

4.00% Convertible Subordinated Debentures due 2031

In April 2011, we issued $253.0 of 4.00% Convertible Subordinated Debentures due 2031 (4.00% Debentures). Interest on the 4.00% Debentures is payable semi-annually in April and October.

Each one thousand dollars in principal amount of the 4.00% Debentures is currently convertible, under certain circumstances, into 49.8058 shares of our common stock (equivalent to a conversion price of $20.08 per share). The events that permit conversion are described in Note 5. “Notes Payable” in Part I, Item 1. “Financial Statements.”

Upon conversion of any 4.00% Debentures, a holder will receive:

(i)
Cash for the lesser of the principal amount of the 4.00% Debentures that are converted or the value of the converted shares; and
(ii)
Cash or shares of common stock, at our election, for the excess, if any, of the value of the converted shares over the principal amount.

If any one of the conversion events occurs, the 4.00% Debentures become convertible and the net balance of the 4.00% Debentures is classified as a current liability in our consolidated balance sheet. The classification of the 4.00% Debentures as current or long-term in the consolidated balance sheet is evaluated at each balance sheet date and may change from quarter to quarter depending on whether any of the conversion conditions are met.

During the fiscal quarter ended July 31, 2015, the market price of our common stock exceeded 120% of the conversion price for at least 20 of the last 30 trading days of the period. Accordingly, the 4.00% Debentures are convertible at the option of the holders through October 31, 2015. Therefore, the carrying value of the 4.00% Debentures is classified as a current liability. Additionally, the excess of the principal amount over the carrying value of the 4.00% Debentures is reclassified from permanent equity to temporary equity in our consolidated balance sheets as of July 31, 2015. If the market price of our common stock does not exceed 120% of the conversion price for at least 20 of the last 30 trading days for the fiscal quarter ended October 31, 2015, the 4.00% Debentures will be reclassified as a long-term liability and the temporary equity will be reclassified to permanent equity in our consolidated balance sheet.

Although the 4.00% Debentures are currently convertible, we do not expect any of the holders to convert because the market value of the 4.00% Debentures has exceeded and likely will continue to exceed the value that would be received upon conversion. If all of the holders of the 4.00% Debentures elect to convert their debentures, we would be required to make cash payments of at least $253.0 prior to the maturity of the 4.00% Debentures.


30


We believe that current cash balances, cash generated from our operating activities in future periods, and access to our revolving credit facility, as well as additional financing arrangements will be sufficient to service any conversion of the 4.00% Debentures; however, future changes in our cash position; cash flows from operating, investing and financing activities; general business levels, and our access to additional financing, may impact our ability to settle the amount payable to the holders of any 4.00% Debentures that are converted.

We may redeem some or all of the 4.00% Debentures for cash on or after April 5, 2016 at the following redemption prices expressed as a percentage of principal, plus any accrued and unpaid interest:
Period
Redemption Price
Beginning on April 5, 2016 and ending on March 31, 2017
101.143
%
Beginning on April 1, 2017 and ending on March 31, 2018
100.571
%
On April 1, 2018 and thereafter
100.000
%

The holders, at their option, may redeem the 4.00% Debentures for cash on April 1, 2018, April 1, 2021, and April 1, 2026, and in the event of a fundamental change in the company. In each case, the repurchase price will be 100% of the principal amount of the 4.00% Debentures plus any accrued and unpaid interest.

For further information on the 4.00% Debentures, see Note 5. “Notes Payable” in Part I, Item 1. “Financial Statements.”

Revolving Credit Facility

We have a syndicated, senior, unsecured, revolving credit facility with a maximum borrowing capacity of $125.0, which expires on January 9, 2020. Our interest rate on the facility is variable. Because the interest rate is variable, our interest expense associated with borrowings under this revolving credit facility will vary with market interest rates. Additionally, commitment fees can vary as they are are payable on the unused portion of the revolving credit facility at rates between 0.30% and 0.40%.

We had no borrowings against the revolving credit facility during the six months ended July 31, 2015 and 2014.

This revolving credit facility contains certain financial and other covenants, including a limit on the aggregate amount we can pay for dividends and repurchases of our stock over the term of the facility.

We were in compliance with all financial covenants as of July 31, 2015. If we fail to comply with the financial covenants and do not obtain a waiver from our lenders, we would be in default under the revolving credit facility and our lenders could terminate the facility and demand immediate repayment of all outstanding loans under the revolving credit facility.

For further information on our revolving credit facility, see Note 4. “Short-Term Borrowings” in Part I, Item 1. “Financial Statements.”

OUTLOOK FOR FISCAL 2016

We expect revenues for the third quarter of fiscal 2016 to be approximately $290 with earnings for the same period of approximately $0.17 per diluted share. For the full fiscal year 2016, we expect revenues of approximately $1,285 with earnings of $1.25 per diluted share.

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Item 3.
Quantitative and Qualitative Disclosures about Market Risk

Unless otherwise indicated, all numerical references in tables are in millions, except interest rates and contract rates.

Interest Rate Risk

We are exposed to interest rate risk primarily through our investment portfolio, short-term borrowings, and notes payable. We do not use derivative financial instruments for speculative or trading purposes.

We place our investments in instruments that meet high quality credit standards, as specified in our investment policy. The policy also limits the amount of credit exposure to any one issuer and type of instrument. We do not expect any material loss with respect to our investment portfolio.

The table below presents the carrying amount and related weighted-average fixed interest rates for our investment portfolio. The carrying amount approximates fair value as of July 31, 2015.
Principal (notional) amounts in United States dollars
Carrying Amount
 
Average Fixed Interest Rate
Cash equivalents - fixed rate
$
144.5

 
0.23%

We have convertible subordinated debentures with a principal balance of $253.0 outstanding with a fixed interest rate of 4.00% classified as current as of July 31, 2015 and classified as long term as of July 31, 2014. Generally, interest rate changes for fixed rate debt affect the fair value of the debt but do not affect future earnings or cash flow.

We have a syndicated, senior, unsecured, revolving credit facility, which expires on January 9, 2020. Borrowings under the revolving credit facility are permitted to a maximum of $125.0. Our interest rate on the facility is variable. Because the interest rate is variable, our interest expense associated with borrowings under this revolving credit facility will vary with market interest rates.

As of July 31, 2015 and 2014, we had no balance outstanding against this revolving credit facility. Interest rate changes for variable interest rate debt generally do not affect the fair market value, but do affect future earnings and cash flow. For further information on our revolving credit facility, see Note 4. “Short-Term Borrowings” in Part I, Item 1. “Financial Statements.”

Foreign Currency Risk

We transact business in various foreign currencies and have established a program to hedge certain foreign currency forecasted transactions and exposures from existing assets and liabilities. Our derivative instruments consist of short-term foreign currency exchange contracts, with a duration period of a year or less. We enter into contracts with counterparties who are major financial institutions and, as such we do not expect material losses as a result of defaults by our counterparties. We do not hold or issue derivative financial instruments for speculative or trading purposes.

We enter into foreign currency forward contracts to protect against currency exchange risk associated with expected future cash flows. Our practice is to hedge a majority of our existing material foreign currency transaction exposures, which generally represent the excess of expected euro denominated expenses over expected euro denominated revenues, and the excess of Japanese yen denominated revenues over expected Japanese yen denominated expenses. We also enter into foreign currency forward contracts to protect against currency exchange risk associated with existing monetary assets and liabilities.

The following table provides volume information about our foreign currency forward program. The information provided is in United States dollar equivalent amounts. The table presents the gross notional amounts, at contract exchange rates, and the weighted average contractual foreign currency exchange rates. These forward contracts mature within the next twelve months.

32


As of
July 31, 2015
 
January 31, 2015
 
Gross
Notional
Amount
 
Weighted
Average
Contract Rate
 
Gross
Notional
Amount
 
Weighted
Average
Contract Rate
Forward Contracts:
 
 
 
 
 
 
 
Euro
$
56.7

 
0.92

 
$
36.5

 
0.87

Japanese yen
35.5

 
123.81

 
21.6

 
117.77

Indian rupee
14.9

 
63.78

 
14.4

 
62.10

Israeli shekel
13.7

 
3.79

 
13.0

 
3.95

British pound
10.8

 
0.64

 
14.7

 
0.66

Taiwan dollar
5.8

 
31.09

 
11.4

 
31.53

Chinese yuan
3.0

 
6.12

 
10.0

 
6.14

Other (1)
22.1

 

 
23.7

 

Total forward contracts
$
162.5

 
 
 
$
145.3

 
 

(1) 
Other includes the Canadian dollar, Korean won, Armenian dollar, Swiss franc, Danish kroner, Norwegian kroner, Russian ruble, Polish zloty, Hungarian forint, Chilean peso, and Singapore dollar.

33



Item 4.
Controls and Procedures

(1) Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (Exchange Act), that are designed to ensure that information required to be disclosed in our Exchange Act reports is accurately recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our 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 report. Based on the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report.

(2) Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.
Legal Proceedings

Legal Proceedings
From time to time we are involved in various disputes and litigation matters that arise in the ordinary course of business. These include disputes and lawsuits relating to intellectual property (IP) rights, contracts, distributorships, and employee relations matters. Periodically, we review the status of various disputes and litigation matters and assess our potential exposure. When we consider the potential loss from any dispute or legal matter probable and the amount or the range of loss can be estimated, we will accrue a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, we base accruals on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation matters and may revise estimates. We believe that the outcome of current litigation, individually and in the aggregate, will not have a material effect on our results of operations.

In some instances, we are unable to reasonably estimate any potential loss or range of loss. The nature and progression of litigation can make it difficult to predict the impact a particular lawsuit will have. There are many reasons why we cannot make these assessments, including, among others, one or more of the following: a proceeding being in its early stages; damages sought that are unspecific, unsupportable, unexplained or uncertain; discovery not having been started or being incomplete; the complexity of the facts that are in dispute; the difficulty of assessing novel claims; the parties not having engaged in any meaningful settlement discussions; the possibility that other parties may share in any ultimate liability; and/or the often slow pace of litigation.

In December 2012, Synopsys, Inc. (Synopsys) filed a lawsuit claiming patent infringement against us in federal district court in the Northern District of California, alleging that our Veloce® family of products infringed four Synopsys United States (U.S.) patents. In January 2015, the court issued a summary judgment order in our favor invalidating all asserted claims of three of the Synopsys patents. In June 2015, the U.S. Patent Trademark Office ruled that claims of the remaining patent asserted against us by Synopsys are unpatentable. This case is no longer on the court’s docket for trial. Synopsys has appealed the decision by the district court.

In May 2013, Synopsys also filed a claim against us in federal district court in Oregon, similarly alleging that our Veloce family of products infringes on two additional Synopsys U.S. patents. These claims have been dismissed.

We believe these lawsuits were filed in response to patent lawsuits we filed in 2010 and 2012 against Emulation and Verification Engineering S.A. and EVE-USA, Inc. (together EVE), which Synopsys acquired in October 2012.

On October 10, 2014, the jury in our patent lawsuit filed in the federal district court for the District of Oregon found that one of our patents - U.S. Patent No. 6,240,376 - was directly and indirectly infringed by EVE and Synopsys. As part of the verdict, the jury awarded us damages of approximately $36 million as well as certain royalties. As of July 31, 2015, nothing has been included in our financial results for this award. Synopsys has filed an appeal.
On March 12, 2015, the Oregon court granted our request for a permanent injunction against future sales of Synopsys emulators containing infringing technology.

In December 2010, we filed a patent lawsuit against EVE in Tokyo district court, which seeks compensatory damages and an injunction against the sale of EVE emulation products. The technical trial for the Japanese litigation was held in October 2014. In May 2015, the court issued a preliminary verdict of non-infringement. We intend to appeal that verdict.

Item 1A.
Risk Factors
The forward-looking statements contained under “Outlook for Fiscal 2016” in Part I, Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and all other statements contained in this report that are not statements of historical fact including without limitation statements containing the words “believes,” “expects,” “projections,” and words of similar meaning, constitute forward-looking statements that involve a number of risks and uncertainties that are difficult to predict. Moreover, from time to time, we may issue other forward-looking statements. Forward-looking statements regarding financial performance in future periods, including the statements under “Outlook for Fiscal 2016”, do not reflect potential impacts of mergers or acquisitions or other significant transactions or events that have not been announced as of the time the statements are made. Actual outcomes and results may differ materially from what is expressed or forecast in forward-looking statements. We disclaim any obligation to update forward-looking statements to reflect future events or revised

35


expectations. Our business faces many risks, and set forth below are some of the factors that could cause actual results to differ materially from the results expressed or implied by our forward-looking statements. Forward-looking statements should be considered in light of these factors.
Weakness in the United States and international economies may harm our business.
Our revenue levels are generally dependent on the level of technology capital spending, which includes worldwide expenditures for electronic design automation (EDA) software, hardware, and consulting services. Periods of economic uncertainty arising out of concerns such as weakness in the European Union relating to debt issues or political instability, slowing growth in China, and the continuing weakness of the Japanese economy together with the consolidation and restructuring of numerous large Japanese electronics companies, can adversely affect our customers. As a result, customers may postpone decisions to license or purchase our products, reduce their spending, or be less able or willing to make payment obligations, any of which could adversely affect our business. In addition, significant customer payment defaults or bankruptcies could materially harm our business.
We are subject to the cyclical nature of the integrated circuit and electronics systems industries.
Purchases of our products and services are highly dependent upon new design projects initiated by customers in the integrated circuit (IC) and electronics systems industries. These industries are highly cyclical and are subject to constant and rapid technological change, rapid product obsolescence, price erosion, evolving standards, short product life cycles, and wide fluctuations in product supply and demand. The increasing complexity of ICs and resulting increase in costs to design and manufacture ICs have in recent years led to fewer design starts, which could cause reduced demand for our products. In addition, the IC and electronics systems industries regularly experience significant downturns, often connected with, or in anticipation of, maturing product cycles within such companies or a decline in general economic conditions. These downturns could cause diminished demand for our products and services.
Our forecasts of our revenues and earnings outlook may be inaccurate.
Our revenues, particularly new hardware and software license revenues, are difficult to forecast. We use a “pipeline” system, a common industry practice, to forecast revenues and trends in our business. Sales personnel monitor the status of potential business and estimate when a customer will make a purchase decision, the dollar amount of the sale, and the products or services to be sold. These estimates are aggregated periodically to generate a sales pipeline. Our pipeline estimates may prove to be unreliable either in a particular quarter or over a longer period of time, in part because the “conversion rate” of the pipeline into contracts can be very difficult to estimate and requires management judgment. A variation in the conversion rate could cause us to plan or budget incorrectly and materially adversely impact our business or our planned results of operations. In particular, a slowdown in customer spending or weak economic conditions generally can reduce the conversion rate in a particular quarter as purchasing decisions are delayed, reduced in amount, or canceled. The conversion rate can also be affected by the tendency of some of our customers to postpone negotiating the terms of a transaction until the end of a fiscal quarter anticipating they will obtain more favorable terms. This may result in failure to agree to terms within the fiscal quarter and cause expected revenue to slip into a subsequent quarter.
Our business could be impacted by fluctuations in quarterly results of operations due to customer seasonal purchasing patterns, the timing of significant orders, and the mix of licenses, products and services purchased by our customers.
We have experienced, and may continue to experience, varied quarterly operating results. Various factors affect our quarterly operating results and some of these are not within our control, including customer demand and the timing of significant orders. We typically experience seasonality in demand for our products due to the purchasing cycles of our customers, with revenues in the fourth quarter generally being the highest. If planned contract renewals are delayed or the average size of renewed contracts is smaller than we anticipate, we could fail to meet our own and investors’ expectations, which could have a material adverse impact on our stock price.
Our revenues are also affected by the mix of transaction types in which we recognize revenues in different ways as required by accounting rules: as payments become due and payable, on a cash basis, ratably over the license term, or at the beginning of the license term. A shift in the license mix toward increased ratable, due and payable, and/or cash-based revenue recognition could result in increased deferral of revenues to future periods and would decrease current revenues, which could result in us not meeting near-term revenue expectations.
The gross margin on our software is greater than that for our emulation hardware systems, software support, and professional services. Therefore, our gross margin may vary as a result of the mix of products and services sold. We also have a significant amount of fixed or relatively fixed costs, such as employee costs and purchased technology amortization, and costs which are committed in advance and can only be adjusted periodically. As a result, a small failure to reach planned revenues would likely

36


have a relatively large negative effect on resulting earnings. If anticipated revenues do not materialize as expected, our gross margin and operating results could be materially adversely impacted.
We face intense price competition in the EDA industry.
Price competition in the EDA industry is intense, which can lead to, among other things, price reductions, longer selling cycles, lower product margins, loss of market share, and additional working capital requirements. If our competitors offer significant discounts on certain products, we may need to lower our prices or offer other favorable terms to compete successfully. Any such changes would likely reduce margins and could materially adversely impact our operating results. Any broad-based changes to our prices and pricing policies could cause new license and service revenues to decline or be delayed as the sales force implements and our customers adjust to the new pricing policies. Some of our competitors may bundle certain software or hardware products with other more desirable products at low prices or no marginal cost for promotional purposes, as a long-term pricing strategy, or to engage in predatory pricing. These practices could significantly reduce demand for our products or limit our pricing.
We currently compete primarily with two large companies: Synopsys, Inc. (Synopsys) and Cadence Design Systems, Inc. (Cadence). We also compete with smaller companies with focused product portfolios and manufacturers of electronic devices and semiconductor equipment that have acquired or internally developed their own EDA products.
Our hardware emulation products are complex, and if we cannot successfully manage this complexity, the results of our emulation business may be adversely affected.
Designing, developing, and introducing new emulation products is a complicated process. The development process for our emulation products requires a high level of innovation. After the development phase, we must be able to forecast customer demand and manufacture next generation products in sufficient volumes to meet this demand and do so in a cost effective manner. Our manufacturing model, in which our emulation products generally are not built until after customer orders have been forecast, may from time to time experience delays in delivering products to customers in a timely manner. These delays could cause our customers to purchase emulation products from our competitors. Customers may also delay purchases of existing products in anticipation of next generation product releases. We must minimize this impact by managing the introduction and transition of new generations of emulation hardware.
We may experience difficulty in manufacturing our emulation hardware.
We currently use one manufacturer to assemble our hardware emulation products and purchase some components from a single supplier. We may be exposed to delays in production and delivery of our emulation products due to delays in receiving components or manufacturing constraints; components rejected that do not meet our standards; components with latent defects; low yields of ICs, subassemblies, or printed circuit boards (PCBs); or other delays in the manufacturing process. For single source parts we purchase for our emulation products, there can be no assurance that if a supplier cannot deliver, a second source can be found on a timely basis. Our reliance on sole suppliers may also result in reduced control over product pricing and quality. Natural disasters such as weather or earthquakes may adversely affect the supply of components, sub-assemblies or shipment of final products.
We may have to replace emulation components under warranty.
Our emulation hardware products are complex and despite pre-shipment testing, some defects may only appear after the products are put into use under operating conditions, including longer-term, continuous use at high capacities. As a result, customers may experience failures requiring us to replace components under warranty, thus increasing our costs and reducing availability of components for other sales.
Foreign currency fluctuations may have an adverse impact on our operating results.
We typically generate more than half of our revenues from customers outside the United States (U.S.) and we generate approximately 35% of our expenses outside the U.S. While most of our international sales are denominated in U.S. dollars, our international operating expenses are typically denominated in foreign currencies. Significant changes in currency exchange rates, particularly in the Japanese yen and the euro, could have an adverse impact on our operating results.
Our international operations involve risks that could increase our expenses, adversely affect our operating results, and require increased time and attention of our management.
Our international operations subject us to risks in addition to those we face in our domestic operations, including longer receivable collection periods; issues relating to complying with complex customs regulations and paying customs duties and value added taxes; changes in a specific country’s or region’s economic or political conditions; trade protection measures; trade

37


sanctions, such as those recently imposed on Russia by the U.S. and the European Union; local labor laws; import or export licensing requirements; anti-corruption, anti-bribery, and other similar laws; loss or modification of exemptions for taxes and tariffs; limitations on repatriation of earnings; and difficulties with licensing and protecting our intellectual property (IP) rights. If we violate laws related to our business, we could be subject to penalties, fines, or other sanctions and could be prohibited or restricted from doing business in one or more countries.
Integrated circuit and printed circuit board technology evolves rapidly.
The complexity of ICs, PCBs, and electrical systems continues to rapidly increase. In response to this increasing complexity, new design tools and methodologies must be invented or acquired quickly to remain competitive. If we fail to quickly respond to new technological developments, our products could become obsolete or uncompetitive, which could materially adversely impact our business.
Errors or defects in our products and services could expose us to liability.
Our customers use our products and services in designing and developing products that involve a high degree of technological complexity and have unique specifications. Due to the complexity of the systems and products with which we work, some of our products can be adequately tested only when put to full use in the marketplace. As a result, our customers or their end users may discover errors or defects in our software, or the products or systems designed with or manufactured using our software that may not operate as expected. Errors or defects could result in:
Loss of current customers and market share, and loss of or delay in revenue;
Failure to attract new customers or achieve market acceptance;
Diversion of development resources to resolve problems resulting from errors or defects;
Disputes with customers relating to such errors or defects, which could result in litigation or other concessions; and
Increased support or service costs.
In addition, we include limited amounts of third-party technology in our products and we rely on those third parties to provide support services to us. Failure of those third parties to provide necessary support services could materially adversely impact our business.
Long sales cycles and delay in customer completion of projects make the timing of our revenues difficult to predict.
We have a long sales cycle. A lengthy customer evaluation and approval process is generally required due to the complexity and expense associated with our products and services. Consequently, we may incur substantial expenses and devote significant management effort and expense to develop potential relationships that do not result in agreements or revenues and may prevent us from pursuing other opportunities. Purchases of our products and services are sometimes discretionary and may be delayed if customers postpone approval or commencement of projects due to budgetary constraints, internal acceptance review procedures, timing of budget cycles, or timing of competitive evaluation processes. Long sales cycles for our hardware products may subject us to risks over which we have limited control, including insufficient, excess, or obsolete inventory, variations in inventory valuation, and fluctuations in quarterly operating results.
Any loss of our leadership position in certain categories of the EDA market could harm our business.
The industry in which we compete is characterized by very strong leadership positions in specific categories of the EDA market. For example, one company may have a large percentage of sales in the physical verification category of the market while another may have a similarly strong position in mixed-signal simulation. These strong leadership positions can be maintained for significant periods of time as the software is difficult to master and customers are disinclined to make changes once their employees, as well as others in the industry, have developed familiarity with a particular software product. For these reasons, much of our profitability arises from niche areas in which we are the leader. Conversely, it is difficult for us to achieve significant profits in niche areas where other companies are the leaders. If for any reason we lose our leadership position in an important niche, our business could be materially adversely impacted.
Conflict minerals regulations may adversely impact our ability to conduct our business.
The Securities and Exchange Commission (SEC) has adopted disclosure rules for companies that use conflict minerals (commonly referred to as tantalum, tin, tungsten, and gold) in their products, with substantial supply chain verification requirements if the materials come from, or could have come from, the Democratic Republic of the Congo or adjoining countries. Implementing these requirements could affect the sourcing, availability and pricing of materials used in our hardware products as well as the companies we use to manufacture our products and their components. As a result, there may only be a

38


limited pool of suppliers who provide conflict-free metals, and we cannot assure you that we will be able to obtain products in sufficient quantities or at competitive prices. The costs of complying with these laws could adversely affect our current or future business.
Pre-announcing products may adversely impact current sales.
We or our competitors sometimes pre-announce or provide "road maps" of the expected availability of new hardware or software products or product features. Such pre-announcements, whether offered by the pre-announcing company or its competitors, can result in customers canceling or deferring orders for currently offered products anticipating that currently offered products may be uncompetitive or lacking in features or performance. In the case of hardware products, slowing sales may cause inventories to increase or become obsolete, resulting in the need to discount or reduce production of current products.
We derive a substantial portion of our revenues from relatively few product groups.
We derive a substantial portion of our revenues from sales of relatively few product groups and related support services. As a result, any factor adversely affecting sales of these products, including the product release cycles, market acceptance, product competition, performance and reliability, reputation, price competition, and economic and market conditions, could harm our operating results.
Accounting rules governing revenue recognition are complex and periodically change.
The accounting rules governing revenue recognition are complex and are revised periodically. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes nearly all existing revenue recognition guidance under U.S. generally accepted accounting principles (GAAP). This rule is based on the principle that the amount of revenue recognized should reflect the consideration an entity expects to receive for goods and services provided to customers. The rule defines a five step process for revenue recognition, making it possible for more judgment and estimation within the revenue recognition process than is required under existing U.S. GAAP. Currently, we will be required to implement this guidance in the first quarter of fiscal year 2019. The standard permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method, nor have we determined the effect of the standard on our ongoing financial reporting. Implementation of this new standard could have a significant effect on our reported financial results.
We may have additional tax liabilities.
Significant judgments and estimates are required in determining the provision for income taxes and other tax liabilities worldwide. Our tax expense may be impacted if our intercompany transactions, which are required to be computed on an arm’s-length basis, are successfully challenged by tax authorities. Further, the application of transfer pricing involves subjectivity, with a variety of application between countries and increasing levels of litigation. Also, our tax expense could be impacted depending on the applicability of withholding taxes on software licenses and related intercompany transactions in certain jurisdictions. In determining the adequacy of income taxes, we assess the likelihood of adverse outcomes that could result if our tax positions were challenged by the Internal Revenue Service (IRS) and other local or foreign tax authorities. The tax authorities in many of the countries where we do business regularly examine our income and other tax returns. The ultimate outcome of these tax audits or other examinations cannot be predicted with certainty. In addition, U.S. income taxes and foreign withholding taxes have not been provided for on undistributed earnings of certain of our non-U.S. subsidiaries to the extent such earnings are considered to be indefinitely reinvested in the operations of those subsidiaries. A change in our decision concerning the amount of foreign earnings not subject to repatriation could increase our effective tax rate.
Forecasting our income tax rate is complex and subject to uncertainty.
The computation of income tax expense (benefit) is complex as it is based on the laws of numerous taxing jurisdictions and requires significant judgment on the application of complicated rules governing accounting for tax provisions under U.S. GAAP. Income tax expense (benefit) for interim quarters is based on a forecast of our global tax rate, including a separate determination for entities, if any, with losses for which no tax benefit is obtained. This forecast contains numerous assumptions and includes forward looking financial projections, such as the expectations of profit and loss by jurisdiction. Various items cannot be accurately forecast and future events may be treated as discrete to the period in which they occur. Our income tax rate can be materially impacted, for example, by the geographical mix of our profits and losses; changes in our business, such as internal restructuring and acquisitions; changes in tax laws and accounting guidance, and other regulatory, legislative or judicial developments; tax audit determinations; changes in our tax positions; changes in our intent and capacity to permanently reinvest foreign earnings; changes to our transfer pricing practices; tax deductions attributed to equity compensation; and

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changes in our valuation allowance for deferred tax assets. For these reasons, our overall global tax rate may be materially different from our forecast.
Certain tax policy efforts by the European Union and the Organisation for Economic Co-operation and Development (OECD), including the discussions under the Base Shifting and Profit Erosion Initiative, could have a material effect on the taxation of international business and in particular, companies with global IP and supply chain structures and companies which publish software.  Further, many of the countries where we are subject to taxes, such as the U.S. and numerous foreign jurisdictions, including France, Ireland, Israel, India, Japan, and the United Kingdom, are independently evaluating their tax policy and we may see significant changes in legislation and regulations concerning taxation. Furthermore, certain of these countries, such as the United Kingdom with its Diverted Profits Tax, have already enacted legislation which would affect international businesses such as ours, and other countries have changed their approach to auditing companies and enforcing their applicable tax laws. Such changes, if brought into tax legislation, regulations and policy, could increase our effective tax rates in many of the countries where we have operations and our overall tax rate could be materially affected, impacting our operating results, cash flows and financial condition.
There are limitations on the effectiveness of controls.
We do not expect that disclosure controls or internal control over financial reporting will prevent all errors and all fraud or that our policies and procedures can prevent all violations of the law by our employees, contractors, or agents. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be 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 our control system will detect all errors and instances of fraud, if any, or prevent our employees, contractors, or agents from breaching or circumventing our policies or violating laws and regulations. Failure of our control systems to prevent error and fraud or violations of the law could materially adversely impact us.
We are subject to changing corporate governance regulations that impact compliance costs and risks of noncompliance.
Rules and regulations set out by various governmental and self-regulatory organizations in the U.S. such as the SEC, NASDAQ, the Financial Industry Regulatory Authority, and the FASB, as well as in other worldwide locations where we operate, are continually evolving in scope and complexity which makes compliance increasingly difficult and uncertain. The increase in costs to develop awareness and comply with such evolving rules and regulations as well as any risk of noncompliance could adversely impact us.
We may not realize revenues as a result of our investments in research and development.
We incur substantial expense to develop new software products. Research and development activities are often performed over long periods of time. These efforts may not result in successful product offerings because of changes in market conditions, competitive product offerings, advancements in technology or our failure to successfully develop products based on that research and development activity. As a result, we could realize little or no revenues related to our investment in research and development.
We may acquire other companies and may not successfully integrate them.
We have acquired numerous businesses and are frequently in discussions with potential acquisition candidates, and we may acquire other businesses in the future. While we generally analyze potential transactions before committing to them, we cannot assure that any completed transaction will result in long-term benefits to us or our shareholders or that we will be able to manage the acquired businesses effectively. In addition, growth through acquisition involves a number of risks. If any of the following events occurs after we acquire another business, it could materially adversely impact us:
Difficulties in combining previously separate businesses into a single unit;
The substantial diversion of management’s attention from ongoing business when integrating the acquired business;
The failure to realize anticipated benefits, such as cost savings and increases in revenues;
The failure to retain key personnel of the acquired business;
Difficulties related to assimilating the products of an acquired business in, for example, distribution, engineering, and customer support areas;
Unanticipated costs;

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Unanticipated liabilities or litigation in connection with or as a result of an acquisition, including claims from terminated employees, customers, or third parties;
Adverse impacts on existing relationships with suppliers and customers; and
Failure to understand and compete effectively in markets in which we have limited experience.
Acquired businesses may not perform as projected, which could result in impairment of acquisition-related intangible assets. Additional challenges include integration of sales channels, training and education of the sales force for new product offerings, integration of product development efforts, integration of systems of internal controls, and integration of information systems. Accordingly, in any acquisition there will be uncertainty as to the achievement and timing of projected synergies, cost savings, and sales levels for acquired products. All of these factors could impair our ability to forecast, meet revenues and earnings targets, and effectively manage our business for long-term growth.
Our competitors may acquire technology or other companies that impact our business.
Our competitors may acquire technology or companies offering competing or complementary product offerings which could adversely impact our ability to compete. A competitor may be able to deliver better or broader product offerings, offer better pricing, or otherwise make it more desirable for our customers to buy more of the tools in their design flow after the acquisition. In addition, our competitors may purchase companies or technology that we had an interest in acquiring, which could limit our expansion into certain market segments. Similarly, our competitors may purchase companies or technology on which we have a dependency resulting from our bundling the acquired software with our products or our use of the acquired software in our research and development environment.
Customers may acquire or merge with other customers or their business.
Like many industries, the semiconductor and electronics industries are subject to mergers, acquisitions, and divestitures and our customers or parts of their business may acquire or be acquired by other customers. Such changes could result in fewer customers in the industries or the loss of some customers to competitors, or reduced customer spending on software and services due to redundancies or stronger customer negotiating power, which could have an adverse effect on our business and future revenues.
Customer payment defaults could adversely affect our timing of revenue recognition.
We use fixed-term license agreements as standard business practices with customers we believe are creditworthy. These multi-year, multi-element term license agreements have payments spread over the license term and are typically about three years in length for semiconductor companies and about four years in length for IC foundries and military and aerospace companies. The complexity of these agreements tends to increase the risk of non-collectibility from customers that can arise for a variety of reasons including ability to pay, product dissatisfaction, and disputes. If we are unable to collect under these agreements, our results of operations could be materially adversely impacted. We have a history of successfully collecting under the original payment terms of fixed-term license agreements without making concessions on payments, products, or services. If we no longer had a history of collecting without providing concessions on the terms of the agreements, then under U.S. GAAP, revenue would be required to be recognized as the payments become due and payable over the license term. This change could have a material adverse impact on our near-term results.
We may not adequately protect our proprietary rights or we may fail to obtain software or other intellectual property licenses.
Our success depends, in large part, upon our proprietary technology. We generally rely on patents, copyrights, trademarks, trade secret laws, licenses, and restrictive agreements to establish and protect our proprietary rights in technology and products. Despite precautions we take to protect our IP, we cannot assure that third parties will not try to challenge, invalidate, or circumvent these protections. The companies in the EDA industry, as well as entities and persons outside the industry, continue to obtain patents at a rapid rate. We cannot predict if any of these patents will cover any of our products. In addition, many of these entities have substantially larger patent portfolios than we have. As a result, we may on occasion be forced to engage in costly patent litigation to protect our rights or defend our customers’ rights. We may also need to settle these claims on terms that are unfavorable; such settlements could result in the payment of significant damages or royalties, or force us to stop selling or redesign one or more products. We cannot assure that the rights granted under our patents will provide us with any competitive advantage, that patents will be issued on any of our pending applications, or that future patents will be sufficiently broad to protect our technology. In addition, recent U.S. court decisions have substantially weakened the enforceability of patents for software-related inventions, which make up a large portion of our patent portfolio. Furthermore, the laws of foreign countries may not protect our proprietary rights in those countries to the same extent as U.S. law protects these rights in the

41


U.S. In addition, despite the actions we take to limit piracy, other parties regularly illegally copy and use our products, which results in lost revenue.
Some of our products include software or other IP licensed from third parties, and we may have to seek new licenses or renew existing licenses for software and other IP in the future. Failure to obtain software or other IP licenses or rights from third parties on favorable terms could materially adversely impact us.
Intellectual property infringement actions may harm our business.
Patent holders are making increasing efforts to monetize their patent portfolios. IP infringement claims against us directly, or where we contractually must defend our customers, could result in costly litigation and consume significant time of employees and management. In addition, IP litigation could harm our business, either due to damage awards, payment of legal fees, an obligation to refund license fees to a customer or forgo receipt of future customer payments, the need to license technology on what might be unfavorable business terms, injunctions that could stop or delay future shipments, or the need to redesign our technology. For example, we are currently engaged in patent infringement litigation in Japan, California, and Oregon involving Emulation and Verification Engineering S.A., EVE-USA, Inc., and Synopsys, Inc. Further information regarding these lawsuits is contained in Part II, Item 1. "Legal Proceedings".
Our use of open source software could negatively impact our ability to sell our products and may subject us to unanticipated obligations.
The products, services or technologies we acquire, license, provide or develop may incorporate or use open source software. We monitor and restrict our use of open source software in an effort to avoid unintended consequences, such as reciprocal license grants, patent retaliation clauses, and the requirement to license our products at no cost. Nevertheless, we may be subject to unanticipated obligations regarding our products which incorporate open source software.
Our failure to attract and retain key employees may harm us.
We depend on the efforts and abilities of our senior management, our research and development staff, and a number of other key management, sales, support, technical, and services personnel. Competition for experienced, high-quality personnel is intense, and we cannot assure that we can continue to recruit and retain such personnel. Our failure to hire and retain such personnel could impair our ability to develop new products and manage our business effectively.
We have global sales and research and development offices in parts of the world that are not as politically stable as the United States.
We have global sales and research and development offices, some of which are in parts of the world that are not as politically stable as the U.S. In particular, approximately 14% of our workforce, and a larger percentage of our engineers, are located in our offices in Israel, Egypt, Pakistan, Armenia, and Russia which may be subject to disruption or closure from time to time. As a result, we may face a greater risk of business interruption as a result of potential unrest, terrorist acts, or military conflicts than businesses located domestically. This could have a material and adverse effect on product delivery and our research and development operations.
Our business is subject to the risk of natural disasters.
We have sales and research and development offices worldwide which may be adversely affected by weather, earthquakes, or other natural disasters. If a natural disaster occurs at or near any of our offices, our operations may be interrupted, which could adversely impact our business and results of operations. In addition, if a natural disaster impacts a significant number of our customers, our business and results of operations could be adversely impacted.
If our information technology security measures are breached, our information systems may be perceived as being insecure, which could harm our business and reputation.
Our products and services involve the storage and transmission of proprietary information owned by us and our customers. We have sales and research and development offices throughout the world. Our operations are dependent upon the connectivity of our operations worldwide. Despite our security measures, our information technology and infrastructure may be vulnerable to breach by cyber-attacks, errors or malicious actions by employees or contractors, or other disruptions that could result in unauthorized disclosure of sensitive information and could significantly interfere with our business operations. Breaches of our security measures could expose us to a risk of loss or misuse of this information, adverse publicity, violations of privacy laws, and litigation. Because techniques used to obtain unauthorized access or to sabotage information systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. In addition, with the use of "cloud" services in our business, despite our attempts to validate the

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security of such services, proprietary information may be misappropriated by third parties. If there is an actual or perceived breach of our security, or the security of one of our vendors, the market perception of the effectiveness of our security measures could be harmed and we could suffer damage to our reputation or our business, or lose existing customers and lose our ability to obtain new customers.
Our revolving credit facility has financial and non-financial covenants, and default of any covenant could materially adversely impact us.
Our bank revolving credit facility imposes operating restrictions on us in the form of financial and non-financial covenants. Financial covenants include adjusted quick ratio, tangible net worth, leverage ratio, senior leverage ratio, and minimum cash and accounts receivable ratio. If we were to fail to comply with the financial covenants and did not obtain a waiver from our lenders, we would be in default under the revolving credit facility and our lenders could terminate the facility and demand immediate repayment of all outstanding loans under the revolving credit facility. The declaration of an event of default could have a material adverse effect on our financial condition. We could also find it difficult to obtain other bank lines or credit facilities on comparable terms.
We have a substantial level of indebtedness.
As of July 31, 2015, we had $258.0 million of outstanding indebtedness, which includes principal of $253.0 million of 4.00% Convertible Subordinated Debentures due 2031 (4.00% Debentures), $3.2 million in other notes payable, and $1.8 million in short-term borrowings. This level of indebtedness among other things could:
Make it difficult for us to satisfy payment obligations on our debt;
Make it difficult for us to incur additional indebtedness or obtain any necessary financing in the future for working capital, capital expenditures, debt service, acquisitions, or general corporate purposes;
Limit our flexibility in planning for or reacting to changes in our business;
Reduce funds available for use in our operations;
Make us more vulnerable in the event of a downturn in our business; and
Place us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have greater access to capital resources.
We may also be unable to borrow funds as a result of an inability of financial institutions to lend due to restrictive lending policies and/or institutional liquidity concerns.
Our 4.00% Debentures are convertible under certain circumstances at a conversion price as of July 31, 2015 of $20.08 per share (as adjusted for the effect of cash dividends and other applicable items). These circumstances include the market price of our common stock exceeding 120% of the conversion price, or $24.09 per share as of July 31, 2015, for at least 20 of the last 30 trading days of the previous fiscal quarter. Our 4.00% Debentures are convertible as of July 31, 2015. If any of the holders elect to convert their debentures, we are required to pay cash for at least the principal amount of any converted debentures and cash or shares for the excess of the value of the converted shares over the principal amount. If holders of a significant amount of our 4.00% Debentures elect to convert, we could have difficulty paying the amount due upon conversion, which would have a material adverse impact on our liquidity and financial condition. However, the market value of the 4.00% Debentures has exceeded and likely will continue to exceed the value that would be received on conversion, so, we believe it is unlikely at this time that a significant amount of our 4.00% Debentures will be converted.
If we experience a decline in revenues, we could have difficulty paying amounts due on our indebtedness. Any default under our indebtedness could have a material adverse impact on our business, operating results, and financial condition.
Our stock price could become more volatile, and your investment could lose value.
All of the factors discussed in this “Risk Factors” section could affect our stock price. The timing of announcements in the public market regarding new products, product enhancements, or technological advances by our competitors or us, and any announcements by us or by our competitors of acquisitions, major transactions, or management changes could also affect our stock price. Our stock price is subject to speculation in the press and the analyst community, changes in recommendations or earnings estimates by financial analysts, changes in investors’ or analysts’ valuation measures for our stock, our credit ratings, and market trends unrelated to our performance. A significant drop in our stock price could also expose us to the risk of securities class actions lawsuits, which could result in substantial costs and divert management’s attention and resources, which could adversely affect our business.
Our business could be negatively affected as a result of actions of activist shareholders.

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Responding to actions by activist shareholders can be costly and time-consuming, disrupting our operations, and diverting the attention of management and our employees. The perceived uncertainties as to our future direction may result in the loss of potential business opportunities, and may make it more difficult to attract and retain qualified personnel and business partners.
Ability to pay dividends.
We currently declare and pay quarterly cash dividends on our common stock. Any future payment of cash dividends will depend upon our financial condition, earnings, available cash, cash flow, and other factors our board of directors deems relevant. Our revolving credit facility contains certain financial and other covenants, including a limit on the aggregate amount we can pay for dividends and repurchases of our stock over the term of the facility of $50 million plus 70% of our cumulative net income for the periods after January 31, 2011. We were in compliance with all financial covenants as of July 31, 2015. In addition, our board may decrease or discontinue payment of dividends at any time, which could cause the market price of our stock to decline.

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Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth information regarding repurchases of our common stock by us during the three months ended July 31, 2015:
 
Period
Total number
of shares
purchased
 
Average price
paid per share
 
Total number of
shares purchased as
part of publicly
announced
programs
 
Maximum dollar value
of shares that may
yet be purchased
under the programs
May 1 - May 31, 2015

 
$

 

 
$
175,000,019

June 1 - June 30, 2015

 
$

 

 
$
175,000,019

July 1 - July 31, 2015

 
$

 

 
$
175,000,019

 

 
$

 

 
 

On June 12, 2014, we announced a share repurchase program approved by our Board of Directors, authorizing the repurchase of up to $200 million of our common stock over a three-year period.




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Item 6.
Exhibits
 
31.1
 
Certification of Chief Executive Officer of Registrant Pursuant to SEC Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
 
Certification of Chief Financial Officer of Registrant Pursuant to SEC Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
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Certifications of Chief Executive Officer and Chief Financial Officer of Registrant Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS
 
XBRL Instance Document
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document


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SIGNATURES
Pursuant to the requirements 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.
 
 
 
 
 
 
Dated: August 31, 2015
 
MENTOR GRAPHICS CORPORATION
(Registrant)
 
 
 
 
 
 
/S/ GREGORY K. HINCKLEY
 
 
 
Gregory K. Hinckley
 
 
 
President, Chief Financial Officer

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