10-Q 1 adsk-4302014x10q.htm 10-Q ADSK-4.30.2014-10Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission File Number: 0-14338
 
 
AUTODESK, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
94-2819853
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
Identification No.)
 
 
 
111 McInnis Parkway,
San Rafael, California
 
94903
(Address of principal executive offices)
 
(Zip Code)
(415) 507-5000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of May 29, 2014, registrant had outstanding approximately 227,866,880 shares of common stock.
 




AUTODESK, INC. FORM 10-Q
TABLE OF CONTENTS

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





PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS

AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)
 
 
Three Months Ended April 30,
 
2014
 
2013
Net revenue:
 
 
 
License and other
$
316.2

 
$
323.5

Subscription
276.3

 
246.9

Total net revenue
592.5

 
570.4

Cost of revenue:
 
 
 
Cost of license and other revenue
49.3

 
44.4

Cost of subscription revenue
29.4

 
23.1

Total cost of revenue
78.7

 
67.5

Gross profit
513.8

 
502.9

Operating expenses:
 
 
 
Marketing and sales
225.4

 
208.8

Research and development
170.5

 
150.8

General and administrative
73.4

 
61.5

Restructuring charges, net
2.3

 
0.4

Total operating expenses
471.6

 
421.5

Income from operations
42.2

 
81.4

Interest and other (expense) income, net
(6.6
)
 
(8.8
)
Income before income taxes
35.6

 
72.6

Provision for income taxes
(7.3
)
 
(17.0
)
Net income
$
28.3

 
$
55.6

Basic net income per share
$
0.12

 
$
0.25

Diluted net income per share
$
0.12

 
$
0.24

Weighted average shares used in computing basic net income per share
227.0

 
223.8

Weighted average shares used in computing diluted net income per share
231.6

 
229.3


See accompanying Notes to Condensed Consolidated Financial Statements.



3



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

 
Three Months Ended April 30,
 
2014
 
2013
Net income
$
28.3

 
$
55.6

Other comprehensive income, net of reclassifications:
 
 
 
Net (loss) gain on derivative instruments (net of tax effect of ($0.7) and $0.2)
(3.3
)
 
9.9

Change in net unrealized (loss) gain on available-for-sale securities (net of tax effect of ($0.4) and $0.2)
(0.6
)
 
0.2

Net change in cumulative foreign currency translation gain (loss) (net of tax effect of ($1.4) and $1.4)
10.1

 
(6.4
)
Total other comprehensive gain
6.2

 
3.7

Total comprehensive income
$
34.5

 
$
59.3


See accompanying Notes to Condensed Consolidated Financial Statements.

4





AUTODESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
 
 
April 30, 2014
 
January 31, 2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:



Cash and cash equivalents
$
1,609.6


$
1,853.0

Marketable securities
510.1


414.1

Accounts receivable, net
323.3


423.7

Deferred income taxes
54.5


56.8

Prepaid expenses and other current assets
92.8


87.4

Total current assets
2,590.3


2,835.0

Marketable securities
268.2


277.3

Computer equipment, software, furniture and leasehold improvements, net
142.1


130.3

Purchased technologies, net
89.4


63.1

Goodwill
1,263.0


1,009.9

Deferred income taxes, net
93.6


131.1

Other assets
202.0


148.3

Total assets
$
4,648.6


$
4,595.0

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:



Accounts payable
$
90.3


$
84.5

Accrued compensation
156.6


181.2

Accrued income taxes
36.4


24.3

Deferred revenue
749.7


696.2

Other accrued liabilities
85.7


85.3

Total current liabilities
1,118.7


1,071.5

Deferred revenue
213.8


204.4

Long term income taxes payable
170.5


211.8

Long term notes payable, net of discount
746.6

 
746.4

Other liabilities
110.3


99.4

Stockholders’ equity:



Preferred stock



Common stock and additional paid-in capital
1,683.1


1,637.3

Accumulated other comprehensive income (loss)
5.6


(0.6
)
Retained earnings
600.0


624.8

Total stockholders’ equity
2,288.7


2,261.5

Total liabilities and stockholders' equity
$
4,648.6


$
4,595.0


See accompanying Notes to Condensed Consolidated Financial Statements.


5



AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
 
Three Months Ended April 30,
 
2014
 
2013
Operating activities:



Net income
$
28.3


$
55.6

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



Depreciation, amortization and accretion
36.1


33.1

Stock-based compensation expense
33.6


33.5

Excess tax benefits from stock-based compensation


(9.0
)
Restructuring charges, net
2.3


0.4

Other operating activities
8.3


6.7

Changes in operating assets and liabilities, net of business combinations
110.1


103.8

Net cash provided by operating activities
218.7


224.1

Investing activities:



Purchases of marketable securities
(306.4
)

(264.6
)
Sales of marketable securities
59.2


128.1

Maturities of marketable securities
163.1


68.9

Capital expenditures
(14.5
)

(25.8
)
Acquisitions, net of cash acquired
(322.3
)

(34.7
)
Other investing activities
(0.8
)

(3.6
)
Net cash (used in) investing activities
(421.7
)

(131.7
)
Financing activities:



Proceeds from issuance of common stock, net of issuance costs
62.2


70.0

Repurchase and retirement of common shares
(102.5
)

(129.2
)
Excess tax benefits from stock-based compensation


9.0

Net cash (used in) financing activities
(40.3
)

(50.2
)
Effect of exchange rate changes on cash and cash equivalents
(0.1
)

1.4

Net (decrease) increase in cash and cash equivalents
(243.4
)

43.6

Cash and cash equivalents at beginning of fiscal year
1,853.0


1,612.2

Cash and cash equivalents at end of period
$
1,609.6


$
1,655.8


See accompanying Notes to Condensed Consolidated Financial Statements.


6



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

The accompanying unaudited Condensed Consolidated Financial Statements of Autodesk, Inc. (“Autodesk” or the “Company”) as of April 30, 2014, and for the three months ended April 30, 2014 and 2013, have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information along with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles (“GAAP”) for annual financial statements. In management’s opinion, Autodesk made all adjustments (consisting of normal, recurring and non-recurring adjustments) during the quarter that were considered necessary for the fair presentation of the financial position and operating results of the Company. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. In addition, the results of operations for the three months ended April 30, 2014 are not necessarily indicative of the results for the entire fiscal year ending January 31, 2015, or for any other period. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes, together with management’s discussion and analysis of financial position and results of operations contained in Autodesk’s Annual Report on Form 10-K for the fiscal year ended January 31, 2014, filed on March 10, 2014.

2. Recently Issued Accounting Standards

With the exception of those discussed below, there have been no recent changes in accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) or adopted by the Company during the three months ended April 30, 2014, that are of significance, or potential significance, to the Company.

Accounting Standards Adopted in the Three Months Ended April 30, 2014

Effective February 1, 2014, Autodesk prospectively adopted FASB's Accounting Standards Update (“ASU”) 2013-11 regarding ASC Topic 740 “Income Tax.” This ASU clarifies the guidance on the presentation of an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The adoption of this ASU impacted the presentation of tax assets and liabilities on the statement of financial position, but did not impact its results of operations or cash flows.

Recently Issued Accounting Standards

On May 28, 2014, the FASB issued ASU 2014-09 regarding ASC Topic 606 “ Revenue from Contracts with Customers.” This ASU provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU will be effective for Autodesk’s fiscal year beginning February 1, 2017. Early adoption is not permitted. Autodesk is currently evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

3. Concentration of Credit Risk
    
Autodesk places its cash, cash equivalents and marketable securities in highly liquid instruments with, and in the custody of, diversified financial institutions globally with high credit ratings and limits the amounts invested with any one institution, type of security and issuer. Autodesk’s primary commercial banking relationship is with Citigroup Inc. and its global affiliates. Citibank, N.A., an affiliate of Citigroup, is one of the lead lenders and an agent in the syndicate of Autodesk’s $400.0 million line of credit facility. It is Autodesk’s policy to limit the amounts invested with any one institution by type of security and issuer.

Total sales to the distributor Tech Data Corporation, and its global affiliates (“Tech Data”), accounted for 26% and 25% of Autodesk’s total net revenue for the three months ended April 30, 2014 and 2013, respectively. The majority of the net revenue from sales to Tech Data relates to Autodesk’s Platform Solutions and Emerging Business (“PSEB”) segment and is for sales made outside of the United States. In addition, Tech Data accounted for 26% and 24% of trade accounts receivable at April 30, 2014 and January 31, 2014, respectively.


7



4. Financial Instruments

The following tables summarize the Company's financial instruments' amortized cost, gross unrealized gains, gross unrealized losses, and fair value by significant investment category as of April 30, 2014 and January 31, 2014:
 
 
 
 
April 30, 2014
 
 
 
Amortized Cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Cash equivalents (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit and time deposits
$
314.1

 
$

 
$

 
$
314.1

 
$
23.7

 
$
290.4

 
$

 
Commercial paper
203.4

 

 

 
203.4

 

 
203.4

 

 
Money market funds
256.0

 

 

 
256.0

 

 
256.0

 

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper and corporate debt securities
383.3

 

 

 
383.3

 
133.0

 
250.3

 

 
 
Certificate of deposit and time deposits
33.6

 

 

 
33.6

 

 
33.6

 

 
 
Agency bond
18.7

 

 

 
18.7

 
18.7

 

 

 
 
U.S. government agency securities
7.5

 

 

 
7.5

 
7.5

 

 

 
 
Municipal securities
13.5

 

 

 
13.5

 
13.5

 

 

 
 
Other (2)
11.5

 

 

 
11.5

 
11.5

 

 

 
Short-term trading securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
37.3

 
4.7

 

 
42.0

 
42.0

 

 

 
Long-term available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
183.4

 
0.6

 

 
184.0

 
184.0

 

 

 
 
Agency bond
41.3

 
0.1

 

 
41.4

 
41.4

 

 

 
 
U.S. government agency securities
9.1

 
0.1

 

 
9.2

 
9.2

 

 

 
 
Municipal securities
33.4

 
0.2

 

 
33.6

 
33.6

 

 

Convertible debt securities (3)
21.4

 
4.8

 
(6.0
)
 
20.2

 

 

 
20.2

Derivative contracts (4)
7.9

 
5.6

 
(6.5
)
 
7.0

 

 
2.2

 
4.8

 
 
Total
$
1,575.4

 
$
16.1

 
$
(12.5
)
 
$
1,579.0

 
$
518.1

 
$
1,035.9

 
$
25.0

____________________ 
(1)
Included in “Cash and cash equivalents” in the accompanying Condensed Consolidated Balance Sheets.
(2)
Consists of agency discount notes, U.S. treasury bills, and other short-term securities.
(3)
Considered “available for sale” and included in “Other assets” in the accompanying Condensed Consolidated Balance Sheets.
(4)
Included in “Prepaid expenses and other current assets,” “Other assets,” or “Other accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets.

8



 
 
 
 
January 31, 2014
 
 
 
Amortized Cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Cash equivalents (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit and time deposits
$
280.7

 
$

 
$

 
$
280.7

 
$
30.4

 
$
250.3

 
$

 
Commercial paper
280.5

 

 

 
280.5

 

 
280.5

 

 
Municipal securities
2.0

 

 

 
2.0

 
2.0

 

 

 
Money market funds
262.8

 

 

 
262.8

 

 
262.8

 

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper and corporate debt securities
261.0

 

 

 
261.0

 
95.4

 
165.6

 

 
 
Time deposits
37.1

 

 

 
37.1

 

 
37.1

 

 
 
Agency bond
42.7

 

 

 
42.7

 
42.7

 

 

 
 
U.S. government agency securities
11.3

 

 

 
11.3

 
11.3

 

 

 
 
Municipal securities
11.7

 

 

 
11.7

 
11.7

 

 

 
 
Other (2)
11.4

 

 

 
11.4

 
11.4

 

 

 
Short-term trading securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
35.6

 
3.3

 

 
38.9

 
38.9

 

 

 
Long-term available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
179.7

 
0.7

 
(0.1
)
 
180.3

 
180.3

 

 

 
 
Agency bond
43.3

 
0.1

 

 
43.4

 
43.4

 

 

 
 
U.S. government agency securities
9.8

 

 

 
9.8

 
9.8

 

 

 
 
Municipal securities
43.5

 
0.3

 

 
43.8

 
43.8

 

 

Convertible debt securities (3)
21.4

 
3.2

 
(4.4
)
 
20.2

 

 

 
20.2

Derivative contracts (4)
10.8

 
14.8

 
(6.0
)
 
19.6

 

 
10.5

 
9.1

 
 
Total
$
1,545.3

 
$
22.4

 
$
(10.5
)
 
$
1,557.2

 
$
521.1

 
$
1,006.8

 
$
29.3

____________________ 
(1)
Included in “Cash and cash equivalents” in the accompanying Condensed Consolidated Balance Sheets.
(2)
Consists of agency discount notes, U.S. treasury bills, and other short-term securities.
(3)
Considered “available for sale” and included in “Other assets” in the accompanying Condensed Consolidated Balance Sheets.
(4)
Included in “Prepaid expenses and other current assets,” “Other assets,” or “Other accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets.
    
Autodesk classifies its marketable securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Marketable securities with remaining maturities of less than 12 months are classified as short-term and marketable securities with remaining maturities greater than 12 months are classified as long-term. Autodesk may sell certain of its marketable securities prior to their stated maturities for strategic purposes or in anticipation of credit deterioration.

Autodesk applies fair value accounting for certain financial assets and liabilities, which consist of cash equivalents, marketable securities and other financial instruments, on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and (Level 3) unobservable inputs for which there is little or no market data, which require Autodesk to develop its own assumptions. When determining fair value, Autodesk uses observable market data and relies on unobservable inputs only when observable market data is not available. There have been no transfers between fair value measurement levels during the three months ended April 30, 2014.


9



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

A reconciliation of the change in Autodesk’s Level 3 items for the three months ended April 30, 2014 was as follows:

 
Fair Value Measurements Using
Significant Unobservable Inputs
 
(Level 3)
 
 
Derivative Contracts
 
Convertible Debt Securities
 
Total
Balance at January 31, 2014
 
$
9.1

 
$
20.2

 
$
29.3

Purchases
 

 

 

Settlements
 
(0.8
)
 

 
(0.8
)
Net realized (losses)
 
(2.0
)
 

 
(2.0
)
Net unrealized (losses)
 
(1.5
)
 

 
(1.5
)
Balance at April 30, 2014
 
$
4.8

 
$
20.2

 
$
25.0


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

 
April 30, 2014
 
Cost
 
Fair Value
Due in 1 year
$
468.1

 
$
468.1

Due in 1 year through 5 years
288.6

 
288.4

Due in 5 years through 10 years

 

Due after 10 years

 

Total
$
756.7

 
$
756.5


As of April 30, 2014 and January 31, 2014, Autodesk did not have any securities in a continuous unrealized loss position for greater than twelve months.

Autodesk also has direct investments in privately held companies accounted for under the cost method, which are periodically assessed for other-than-temporary impairment. If Autodesk determines that an other-than-temporary impairment has occurred, Autodesk writes down the investment to its fair value. Autodesk estimates fair value of its cost method investments considering available information such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. During the three months ended April 30, 2014 and 2013, Autodesk recorded no other-than-temporary impairment on its privately held equity investments.

The sales or redemptions of “available-for-sale securities” during the three months ended April 30, 2014 and 2013 resulted in a gain of $0.4 million and a loss of $0.2 million, respectively. Gains and losses resulting from the sale or redemption of "available-for-sale securities" are recorded in “Interest and other (expense) income, net” on the Company's Condensed Consolidated Statement of Operations.

Proceeds from the sale and maturity of marketable securities for the three months ended April 30, 2014 and 2013 were $222.3 million and $197.0 million, respectively.


10



Derivative Financial Instruments

Under its risk management strategy, Autodesk uses derivative instruments to manage its short-term exposures to fluctuations in foreign currency exchange rates which exist as part of ongoing business operations. Autodesk's general practice is to hedge a portion of transaction exposures denominated in euros, Japanese yen, Swiss francs, British pounds, Canadian dollars and Australian dollars. These instruments have maturities between one to twelve months in the future. Autodesk does not enter into derivative instrument transactions for trading or speculative purposes.

The bank counterparties to the derivative contracts potentially expose Autodesk to credit-related losses in the event of their nonperformance. However, to mitigate that risk, Autodesk only contracts with counterparties who meet the Company's minimum requirements under its counterparty risk assessment process. Autodesk monitors ratings, credit spreads and potential downgrades on at least a quarterly basis. Based on Autodesk's on-going assessment of counterparty risk, the Company will adjust its exposure to various counterparties. Autodesk generally enters into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty.  However, Autodesk does not have any master netting arrangements in place with collateral features.

Foreign currency contracts designated as cash flow hedges

Autodesk uses foreign currency contracts to reduce the exchange rate impact on a portion of the net revenue or operating expense of certain anticipated transactions. These contracts are designated and documented as cash flow hedges. The effectiveness of the cash flow hedge contracts is assessed quarterly using regression analysis as well as other timing and probability criteria. To receive cash flow hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge and the hedges are expected to be highly effective in offsetting changes to future cash flows on hedged transactions. The gross gains and losses on these hedges are included in “Accumulated other comprehensive income (loss)” and are reclassified into earnings at the time the forecasted revenue or expense is recognized. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, Autodesk reclassifies the gain or loss on the related cash flow hedge from “Accumulated other comprehensive income (loss)” to “Interest and other (expense) income, net” in the Company's Condensed Consolidated Financial Statements at that time.

The net notional amount of these contracts are presented net settled and were $379.8 million at April 30, 2014 and $351.7 million at January 31, 2014. Outstanding contracts are recognized as either assets or liabilities on the balance sheet at fair value. The majority of the net gain of $0.2 million remaining in “Accumulated other comprehensive income (loss)” as of April 30, 2014 is expected to be recognized into earnings within the next twelve months.

Derivatives not designated as hedging instruments

Autodesk uses foreign currency contracts which are not designated as hedging instruments to reduce the exchange rate risk associated primarily with foreign currency denominated receivables and payables. These forward contracts are marked-to-market at the end of each fiscal quarter with gains and losses recognized as “Interest and other (expense) income, net.” These derivative instruments do not subject the Company to material balance sheet risk due to exchange rate movements because gains and losses on these derivative instruments are intended to offset the gains or losses resulting from the settlement of the underlying foreign currency denominated receivables and payables. The net notional amounts of these foreign currency contracts are presented net settled and were $25.1 million at April 30, 2014 and $205.5 million at January 31, 2014.

From time to time and consistent with its risk management policy, Autodesk also uses derivative instruments to hedge its economic exposure related to committed, in-process acquisitions priced in foreign currency.  Such derivatives do not qualify for hedge accounting and are marked-to-market through earnings, with any gain or loss reflected immediately in “Interest and other (expense) income, net,” in each period. 

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


11



Fair Value of Derivative Instruments

The fair value of derivative instruments in Autodesk’s Condensed Consolidated Balance Sheets were as follows as of April 30, 2014 and January 31, 2014:

 
Balance Sheet Location
 
Fair Value at
 
April 30, 2014
 
January 31, 2014
Derivative Assets
 
 
 
 
 
Foreign currency contracts designated as cash flow hedges
Prepaid expenses and other current assets (1)
 
$
2.7

 
$
4.4

Derivatives not designated as hedging instruments
Prepaid expenses and other current assets and Other assets
 
4.8

 
16.9

Total derivative assets
 
 
$
7.5

 
$
21.3

Derivative Liabilities
 
 
 
 
 
Foreign currency contracts designated as cash flow hedges
Other accrued liabilities (2)
 
$
0.5

 
$
1.7

Total derivative liabilities
 
 
$
0.5

 
$
1.7

____________________ 
(1)
Considering Autodesk's master netting arrangements, these contracts are presented net settled. The gross balance is $4.3 million and $5.9 million at April 30, 2014 and January 31, 2014, respectively.
(2)
Considering Autodesk's master netting arrangements, these contracts are presented net settled. The gross balance is $2.1 million and $3.2 million at April 30, 2014 and January 31, 2014, respectively.

The effects of derivatives designated as hedging instruments on Autodesk’s Condensed Consolidated Statements of Operations were as follows for the three months ended April 30, 2014 and 2013, respectively (amounts presented include any income tax effects):

 
Foreign Currency 
Contracts
 
Three Months Ended April 30,
 
2014
 
2013
Amount of (loss) gain recognized in accumulated other comprehensive income on derivatives (effective portion)
$
(2.6
)
 
$
13.6

Amount and location of gain (loss) reclassified from accumulated other comprehensive income into income (effective portion)
 
 
 
Net revenue
$
1.4

 
$
4.3

Operating expenses
(0.8
)
 
(0.5
)
Total
$
0.6

 
$
3.8

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

 
$
0.1


The effects of derivatives not designated as hedging instruments on Autodesk’s Condensed Consolidated Statements of Operations were as follows for the three months ended April 30, 2014 and 2013, respectively (amounts presented include any income tax effects):

 
Three Months Ended April 30,
 
2014
 
2013
Amount and location of (loss) gain recognized in income on derivatives
 
 
 
Interest and other (expense) income, net
$
(5.7
)
 
$
1.5



12



5. Stock-based Compensation Expense

Stock Plans

As of April 30, 2014, Autodesk maintained two active stock plans for the purpose of granting equity awards to employees and to non-employee members of Autodesk’s Board of Directors: the 2012 Employee Stock Plan (“2012 Employee Plan”), which is available only to employees, and the Autodesk 2012 Outside Directors’ Plan (“2012 Directors' Plan”), which is available only to non-employee directors. Additionally, there are eight expired or terminated plans with options outstanding. The exercise price of all stock options granted under these plans was equal to the fair market value of the stock on the grant date.

The 2012 Employee Plan was approved by Autodesk's stockholders and became effective on January 6, 2012. On January 14, 2014, Autodesk's stockholders approved amendments to the 2012 Employee Plan, which increased the number of shares reserved for issuance under the plan by 11.4 million shares and added additional performance goals to the plan. The 2012 Employee Plan replaced the 2008 Employee Stock Plan, as amended ("2008 Plan") and no further equity awards may be granted under the 2008 Plan. The 2012 Employee Plan reserves up to 32.6 million shares which includes 26.6 million shares reserved under the 2012 Employee Plan, as well as up to 6.0 million shares forfeited under certain prior employee stock plans during the life of the 2012 Employee Plan. The 2012 Employee Plan permits the grant of stock options, restricted stock units and restricted stock awards. Each restricted stock unit or restricted stock award granted will be counted against the shares authorized for issuance under the 2012 Employee Plan as 1.79 shares. If a granted option, restricted stock unit or restricted stock award expires or becomes unexercisable for any reason, the unpurchased or forfeited shares that were granted may be returned to the 2012 Employee Plan and may become available for future grant under the 2012 Employee Plan. As of April 30, 2014, 16.1 million shares subject to options or restricted stock unit awards have been granted under the 2012 Employee Plan. Options and restricted stock units that were granted under the 2012 Employee Plan vest over periods ranging from immediately upon grant to over a three-year period and options expire 10 years from the date of grant. The 2012 Employee Plan will expire on June 30, 2022. At April 30, 2014, 17.7 million shares were available for future issuance under the 2012 Employee Plan.

The 2012 Outside Directors' Plan ("2012 Directors' Plan) was approved by Autodesk's stockholders and became effective on January 6, 2012. The 2012 Directors' Plan replaced the 2010 Outside Directors' Stock Plan, as amended ("2010 Plan"). The 2012 Directors' Plan permits the grant of stock options, restricted stock units and restricted stock awards to non-employee members of Autodesk’s Board of Directors. Each restricted stock unit or restricted stock award granted will be counted against the shares authorized for issuance under the 2012 Directors' Plan as 2.11 shares. As of April 30, 2014, 0.4 million shares subject to restricted stock unit awards have been granted under the 2012 Directors' Plan. Restricted stock units that were granted under the 2012 Directors' Plan vest over one to three years from the date of grant. The 2012 Directors' Plan reserved 2.6 million shares of Autodesk common stock. The 2012 Directors' Plan will expire on June 30, 2022. At April 30, 2014, 2.2 million shares were available for future issuance under the 2012 Directors' Plan.

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


13



Stock Options:

A summary of stock option activity for the three months ended April 30, 2014 is as follows:
 
 
Number of
Shares
 
Weighted average exercise price per share
 
Weighted
average remaining contractual term
 
Aggregate Intrinsic Value (3)
 
(in millions)
 
 
 
(in years)
 
(in millions)
Options outstanding at January 31, 2014
5.9

 
$
33.54

 
 
 
 
Granted (1)

 

 
 
 
 
Exercised
(1.2
)
 
32.24

 
 
 
 
Canceled/Forfeited

 

 
 
 
 
Options outstanding at April 30, 2014
4.7

 
$
33.88

 
4.7
 
$
66.7

Options vested and exercisable at April 30, 2014
4.3

 
$
33.44

 
4.5
 
$
62.9

Options vested as of April 30, 2014 and expected to vest thereafter (2)
4.7

 
$
33.88

 
4.7
 
$
66.7

Options available for grant at April 30, 2014
19.9

 
 
 
 
 
 
 _______________
(1)
Autodesk did not grant stock options in the three months ended April 30, 2014.
(2)
Options expected to vest reflect an estimated forfeiture rate.
(3)
Represents the total pre-tax intrinsic value, based on Autodesk’s closing stock price of $48.02 per share as of April 30, 2014, which would have been received by the option holders had all option holders exercised their options as of that date.

As of April 30, 2014, compensation cost of $4.3 million related to non-vested options is expected to be recognized over a weighted average period of 0.8 year.

The following table summarizes information about the pre-tax intrinsic value of options exercised and the weighted average grant date fair value per share of options granted during the three months ended April 30, 2014 and 2013:
 
 
Three Months Ended
 
April 30, 2014
 
April 30, 2013
Pre-tax intrinsic value of options exercised (1)
$
22.8

 
$
32.8

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

 
$

 _______________
(1)
The intrinsic value of options exercised is calculated as the difference between the exercise price of the option and the market value of the stock on the date of exercise.
(2)
The weighted average grant date fair value per share of stock options granted is calculated, as of the stock option grant date, using the BSM option pricing model. For the three months ended April 30, 2014 and 2013, Autodesk did not grant stock options.



14



The following table summarizes information about options outstanding and exercisable at April 30, 2014:

 
Options Vested and Exercisable
 
Options Outstanding
 
Number of
Shares
(in millions)
 
Weighted
average
contractual
life
(in years)
 
Weighted
average
exercise
price
 
Aggregate
intrinsic
value (1)
(in millions)
 
Number of
Shares
(in millions)
 
Weighted
average
contractual
life
(in years)
 
Weighted
average
exercise
price
 
Aggregate
intrinsic
value (1)
(in millions)
Range of per-share exercise prices:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$2.28 - $29.49
1.5

 
 
 
$
23.25

 
 
 
1.6

 
 
 
$
23.47

 
 
$29.50 - $38.55
0.9

 
 
 
33.17

 
 
 
1.0

 
 
 
33.42

 
 
$41.62 - $43.81
1.9

 
 
 
42.06

 
 
 
2.1

 
 
 
42.16

 
 
 
4.3

 
4.5
 
$
33.44

 
$
62.9

 
4.7

 
4.7
 
$
33.88

 
$
66.7

 _______________
(1)
Represents the total pre-tax intrinsic value, based on Autodesk’s closing stock price of $48.02 per share as of April 30, 2014, which would have been received by the option holders had all option holders exercised their options as of that date.

These options will expire if not exercised at specific dates ranging through September 2022.

Restricted Stock Units:

A summary of restricted stock unit activity for the three months ended April 30, 2014 is as follows:
 
 
Unvested
Restricted
Stock Units
 
Weighted
average grant
date fair value
per share
 
(in thousands)
 
 
Unvested restricted stock units at January 31, 2014
6,515.6

 
$
39.15

Granted
1,049.5

 
49.96

Vested
(731.0
)
 
40.24

Canceled/Forfeited
(74.9
)
 
40.20

        Performance Adjustment (1)
(74.7
)
 
42.23

Unvested restricted stock units at April 30, 2014
6,684.5

 
$
40.67

 _______________
(1)
Based on Autodesk's financial results for both the fiscal 2013 and 2014 performance period. The performance stock units were earned at 92.3% and 65.8% of the target award for granted in fiscal 2013 and fiscal 2014, respectively.

For the restricted stock units granted during the three months ended April 30, 2014 and 2013, the weighted average grant date fair value was $49.96 and $41.58, respectively. The grant date fair value of the shares vested during the three months ended April 30, 2014 and 2013 was $29.4 million and $33.6 million, respectively.

During the three months ended April 30, 2014, Autodesk granted 0.6 million restricted stock units. The restricted stock units vest over periods ranging from immediately upon grant to a pre-determined date that is typically within three years from the date of grant. Restricted stock units are not considered outstanding stock at the time of grant, as the holders of these units are not entitled to any of the rights of a stockholder, including voting rights. The fair value of the restricted stock units is primarily expensed ratably over the vesting period. Autodesk recorded stock-based compensation expense related to restricted stock units of $22.9 million during the three months ended April 30, 2014. Autodesk recorded stock-based compensation expense related to restricted stock units of $16.0 million during the three months ended April 30, 2013. As of April 30, 2014, total compensation cost not yet recognized of $156.0 million related to non-vested restricted stock units, is expected to be recognized over a weighted average period of 1.8 years. At April 30, 2014, the number of restricted stock units granted but unvested was 5.7 million.

During the three months ended April 30, 2014, Autodesk granted 0.5 million performance restricted stock units (“PSUs”) for which the ultimate number of shares earned is determined based on the achievement of performance criteria at the end of the stated performance period. The performance criteria for these grants are based upon billings and subscriptions goals

15



adopted by the Compensation and Human Resource Committee, as well as total stockholder return compared against the S&P Computer Software Select Index (“Relative TSR”). Each PSU covers a three year period:

Up to one third of the PSU may vest following year one depending upon the achievement of the billings and subscriptions goals for year one as well as 1 year Relative TSR (covering year one).

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

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

PSUs are not considered outstanding stock at the time of grant, as the holders of these units are not entitled to any of the rights of a stockholder, including voting rights. Autodesk has determined the grant-date fair value for these awards using a Monte Carlo simulation model since the awards are subject to a market condition. The fair value of the PSUs is expensed using the accelerated attribution method over the vesting period. Autodesk recorded stock-based compensation expense related to PSUs of $3.0 million for the three months ended April 30, 2014. Autodesk recorded stock-based compensation expense related to PSUs of $2.7 million during the three months ended April 30, 2013. As of April 30, 2014, total compensation cost not yet recognized of $15.1 million related to non-vested performance restricted stock units, is expected to be recognized over a weighted average period of 1.6 years. At April 30, 2014, the number of PSUs granted but not vested was 0.9 million.

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

Under Autodesk’s ESP Plan, which was approved by stockholders in 1998, eligible employees may purchase shares of Autodesk’s common stock at their discretion using up to 15% of their eligible compensation subject to certain limitations, at not less than 85% of fair market value as defined in the ESP Plan. At April 30, 2014, a total of 37.0 million shares were available for future issuance. This amount automatically increases on the first trading day of each fiscal year by an amount equal to the lesser of 10.0 million shares or 2% of the total of (1) outstanding shares plus (2) any shares repurchased by Autodesk during the prior fiscal year. Under the ESP Plan, the Company issues shares on the first trading day following March 31 and September 30 of each fiscal year. The ESP Plan expires during fiscal 2018.

Autodesk issued 1.1 million shares under the ESP Plan during the three months ended April 30, 2014, with an average price of $33.66 per share. During the three months ended April 30, 2013, Autodesk issued 1.5 million shares under the ESP Plan, at average price of $22.32 per share. The weighted average grant date fair value of awards granted under the ESP Plan was $14.26 during the three months ended April 30, 2014, calculated as of the award grant date using the Black-Scholes-Merton option pricing model. The weighted average grant date fair value of awards granted under the ESP Plan during the three months ended April 30, 2013, calculated as of the award grant date using the Black-Scholes-Merton option pricing model, was $11.84 per share.

Stock-based Compensation Expense

The following table summarizes stock-based compensation expense for the three months ended April 30, 2014 and 2013, respectively, as follows:
 
 
Three Months Ended April 30, 2014
 
Three Months Ended April 30, 2013
Cost of license and other revenue
$
0.9

 
$
0.9

Cost of subscription
0.8

 
0.6

Marketing and sales
14.0

 
14.1

Research and development
10.9

 
10.9

General and administrative
7.0

 
7.0

Stock-based compensation expense related to stock awards and ESP Plan purchases
33.6

 
33.5

Tax benefit
(9.2
)
 
(9.3
)
Stock-based compensation expense related to stock awards and ESP Plan purchases, net of tax
$
24.4

 
$
24.2


16




Stock-based Compensation Expense Assumptions

Autodesk determines the grant-date fair value of its share-based payment awards using a Black-Scholes Merton Option pricing model or the quoted stock price on the date of grant, unless the awards are subject to market conditions, in which case Autodesk uses a binomial-lattice model (e.g., Monte Carlo simulation model). The Monte Carlo simulation model utilizes multiple input variables to estimate the probability that market conditions will be achieved. Autodesk uses the following assumptions to estimate the fair value of stock-based awards:
 
 
Three Months Ended April 30, 2014
 
Three Months Ended April 30, 2013
 
Performance Stock Unit
 
ESP Plan
 
Performance Stock Unit
 
ESP Plan
Range of expected volatilities
30%
 
30 - 33%
 
34%
 
27 - 36%
Range of expected lives (in years)
N/A
 
0.5 - 2.0
 
N/A
 
0.5 - 2.0
Expected dividends
—%
 
—%
 
—%
 
—%
Range of risk-free interest rates
0.1%
 
0.1 - 0.4%
 
0.1%
 
0.1 - 0.3%
Expected forfeitures
7.2%
 
7.2%
 
7.7%
 
7.7%

Autodesk estimates expected volatility for stock-based awards based on the average of the following two measures. The first is a measure of historical volatility in the trading market for the Company’s common stock, and the second is the implied volatility of traded forward call options to purchase shares of the Company’s common stock. The expected volatility for PSUs subject to market conditions includes the expected volatility of Autodesk's peer companies within the S&P Computer Software Select Index.

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

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

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

Autodesk recognizes expense only for the stock-based awards that are ultimately expected to vest. Therefore, Autodesk has developed an estimate of the number of awards expected to cancel prior to vesting (“forfeiture rate”). The forfeiture rate is estimated based on historical pre-vest cancellation experience and is applied to all stock-based awards. The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates.

6. Income Tax

Autodesk’s effective tax rate was 21% during the three months ended April 30, 2014, compared to 23% during the three months ended April 30, 2013. Autodesk's effective tax rate decreased 2% during the three months ended April 30, 2014 as compared to the same period in the prior fiscal year primarily due to greater tax rate benefits from foreign earnings partially offset by tax rate detriments from stock-based compensation expense, accrual for uncertain tax positions and expiration of the federal research and development tax credit provision. Excluding the impact of discrete tax items, the effective tax rate for the three month period ended April 30, 2014 was 25% and was lower than the Federal statutory tax rate of 35% primarily due to foreign income taxed at lower rates partially offset by the impact of non-deductible stock based compensation expense and accrual for uncertain tax positions.

As of April 30, 2014, the Company had $226.2 million of gross unrecognized tax benefits, excluding interest, of which approximately $218.6 million represents the amount of unrecognized tax benefits that would impact the effective tax rate, if recognized. It is possible that the amount of unrecognized tax benefits will change in the next twelve months; however, an estimate of the range of the possible change cannot be made at this time.


17



At April 30, 2014, Autodesk had net deferred tax assets of $148.1 million. Pursuant to the adoption of ASU 2013-11, an additional $35.5 million of unrecognized tax benefits have been presented as a reduction of deferred tax assets at April 30, 2014. The Company believes that it will generate sufficient future taxable income in appropriate tax jurisdictions to realize these assets.

7.     Acquisitions

During the three months ended April 30, 2014, Autodesk completed the business combinations described below. The results of operations for the following acquisitions are included in the accompanying Condensed Consolidated Statement of Operations since their respective acquisition dates. Pro forma results of operations have not been presented because the effects of the acquisitions, individually and in the aggregate, were not material to Autodesk’s Condensed Consolidated Financial Statements.

For acquisitions accounted for as business combinations, Autodesk recorded the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The fair values assigned to the identifiable intangible assets acquired were based on estimates and assumptions determined by management. Autodesk recorded the excess of consideration transferred over the aggregate fair values as goodwill. The goodwill recorded is primarily attributable to synergies expected to arise after the acquisitions.

On February 6, 2014, Autodesk acquired the entire issued and to be issued share capital of Delcam plc (“Delcam”), for $284.6 million. Delcam was previously listed as a public company (LON: DLC) and is a leading supplier of advanced CADCAM and industrial measurement solutions for the manufacturing industry. With this transaction Autodesk gains Delcam’s range of design, manufacturing and inspection software that provide automated CADCAM solutions for a variety of industries, ranging from aerospace to toys and sports equipment. The transaction was structured as a cash offer for all the outstanding shares of Delcam, and Delcam will be integrated into Autodesk's Manufacturing ("MFG") reportable segment. The amount of goodwill that is expected to be deductible for tax purposes is $196.2 million.

During the three months ended April 30, 2014, Autodesk also completed a total of four other business combinations for total cash consideration of approximately $64.2 million. These business combinations were not material individually or in aggregate to Autodesk’s Condensed Consolidated Statement of Operations.

The following table summarizes the fair value of the assets acquired and liabilities assumed by major class for the business combinations completed during the three months ended April 30, 2014:
 
 
Delcam
 
Other
Developed technologies
 
$
28.9

 
$
9.8

Customer relationships and other non-current intangible assets
 
39.7

 
5.5

Trade name
 
16.5

 
1.9

Goodwill
 
196.2

 
50.3

Deferred revenue (current and non-current)
 
(10.4
)
 

Deferred tax (liability)
 
(15.3
)
 
(2.1
)
Net tangible assets (liabilities)
 
29.0

 
(1.2
)
Total
 
$
284.6

 
$
64.2


For Delcam and certain other business combinations, the allocation of purchase price consideration to certain assets and liabilities is not yet finalized. Autodesk's estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). The primary areas of the preliminary purchase price allocation that are not yet finalized are amounts for tax assets and liabilities, pending finalization of estimates and assumptions in respect of certain tax aspects of the transaction and residual goodwill.


18



8. Other Intangible Assets, Net

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

 
April 30, 2014
 
January 31, 2014
Developed technologies, at cost
$
501.7

 
$
462.4

Customer relationships, trade names, patents, and user list, at cost (1)
333.1

 
268.1

 
834.8

 
730.5

Less: Accumulated amortization
(650.3
)
 
(626.2
)
Other intangible assets, net
$
184.5

 
$
104.3

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

9. Goodwill

The change in the carrying amount of goodwill during the three months ended April 30, 2014, is as follows:
 
 
Platform
Solutions and
Emerging
Business
 
Architecture,
Engineering
and
Construction
 
Manufacturing
 
Media and
Entertainment
 
Total
Balances as of January 31, 2014
 
 
 
 
 
 
 
 
 
Goodwill
$
142.3

 
$
415.2

 
$
411.6

 
$
190.0

 
$
1,159.1

Accumulated impairment losses

 

 

 
(149.2
)
 
(149.2
)
 
142.3

 
415.2

 
411.6

 
40.8

 
1,009.9

Delcam

 

 
196.2

 

 
196.2

Addition arising from other acquisitions
24.4

 
10.6

 

 
15.3

 
50.3

Effect of foreign currency translation and purchase accounting adjustments
0.2

 
1.6

 
5.0

 
(0.2
)
 
6.6

Balance as of April 30, 2014
 
 
 
 
 
 
 
 
 
Goodwill
166.9

 
427.4


612.8


205.1


1,412.2

Accumulated impairment losses

 

 

 
(149.2
)
 
(149.2
)
 
$
166.9

 
$
427.4

 
$
612.8

 
$
55.9

 
$
1,263.0


Goodwill consists of the excess of cost over the fair value of net assets acquired in business combinations. Autodesk assigns goodwill to the reportable segment associated with each business combination, and tests goodwill for impairment annually in its fourth fiscal quarter or more often if circumstances indicate a potential impairment. For purposes of the goodwill impairment test, a reporting unit is an operating segment or one level below. Autodesk's operating segments are aligned with the management principles of Autodesk's business.

When goodwill is assessed for impairment, Accounting Standard Update No. 2011-08, "Testing Goodwill for Impairment" provides Autodesk the option to perform an assessment of qualitative factors of impairment (“optional assessment”) prior to necessitating a two-step quantitative impairment test. Should the optional assessment be used for any given fiscal year, qualitative factors to consider include cost factors; financial performance; legal, regulatory, contractual, political, business, or other factors; entity specific factors; industry and market considerations, macroeconomic conditions, and other relevant events and factors affecting the reporting unit. If, after assessing the totality of events or circumstances, it is more likely than not that the fair value of the reporting unit is greater than its carrying value, then performing the two-step impairment test is unnecessary.


19



Therefore, the two-step quantitative impairment test is necessary when either Autodesk does not use the optional assessment or, as a result of the optional assessment, it is not more likely than not that the fair value of the reporting unit is greater than its carrying value. In performing the two-step impairment test, Autodesk uses discounted cash flow models which include assumptions regarding projected cash flows. Variances in these assumptions could have a significant impact on Autodesk's conclusion as to whether goodwill is impaired, or the amount of any impairment charge. Impairment charges, if any, result from instances where the fair values of net assets associated with goodwill are less than their carrying values. As changes in business conditions and assumptions occur, Autodesk may be required to record impairment charges. The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. The value of Autodesk’s goodwill could also be impacted by future adverse changes such as: (i) declines in Autodesk’s actual financial results, (ii) a sustained decline in Autodesk’s market capitalization, (iii) significant slowdown in the worldwide economy or the industries Autodesk serves, or (iv) changes in Autodesk’s business strategy or internal financial results forecasts.

10. Deferred Compensation

At April 30, 2014, Autodesk had marketable securities totaling $778.3 million, of which $42.0 million related to investments in debt and equity securities that are held in a rabbi trust under non-qualified deferred compensation plans. The total related deferred compensation liability was $42.0 million at April 30, 2014, of which $4.6 million was classified as current and $37.4 million was classified as non-current liabilities. The value of debt and equity securities held in the rabbi trust at January 31, 2014 was $38.9 million. The total related deferred compensation liability at January 31, 2014 was $38.9 million, of which $1.9 million was classified as current and $37.0 million was classified as non-current liabilities. The securities are recorded in the Condensed Consolidated Balance Sheets under the current portion of "Marketable Securities". The current and non-current portions of the liability are recorded in the Condensed Consolidated Balance Sheets under “Accrued compensation” and “Other liabilities,” respectively.

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

Computer equipment, software, furniture, leasehold improvements and the related accumulated depreciation were as follows:
 
 
April 30, 2014
 
January 31, 2014
Computer software, at cost
$
83.9

 
$
80.9

Computer hardware, at cost
171.2

 
163.0

Leasehold improvements, land and buildings, at cost
172.1

 
163.7

Furniture and equipment, at cost
55.7

 
51.7

 
482.9

 
459.3

Less: Accumulated depreciation
(340.8
)
 
(329.0
)
Computer software, hardware, leasehold improvements, furniture
and equipment, net
$
142.1

 
$
130.3


12. Borrowing Arrangements

In December 2012, Autodesk issued $400.0 million aggregate principal amount of 1.95% senior notes due December 15, 2017 and $350.0 million aggregate principal amount of 3.6% senior notes due December 15, 2022, (collectively, the “Senior Notes”). Autodesk received net proceeds of $739.3 million from issuance of the Senior Notes, net of a discount of $4.5 million and issuance costs of $6.1 million. Both the discount and issuance costs are being amortized to interest expense over the respective terms of the Senior Notes using the effective interest method. The proceeds of the Senior Notes are available for general corporate purposes. Autodesk may redeem the Senior Notes at any time, subject to a make whole premium. In addition, upon the occurrence of certain change of control triggering events, Autodesk may be required to repurchase the Senior Notes, at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. The Senior Notes contain restrictive covenants that limit Autodesk's ability to create certain liens, to enter into certain sale and leaseback transactions and to consolidate or merge with, or convey, transfer or lease all or substantially all of its assets, subject to significant qualifications and exceptions. Based on quoted market prices, the fair value of the Senior Notes was approximately $742.1 million as of April 30, 2014.


20



Autodesk’s line of credit facility permits unsecured short-term borrowings of up to $400.0 million, with an option to request an increase in the amount of the credit facility by up to an additional $100.0 million, and is available for working capital or other business needs. This credit agreement contains customary covenants that could restrict the imposition of liens on Autodesk’s assets, and restrict the Company’s ability to incur additional indebtedness or make dispositions of assets if Autodesk fails to maintain the financial covenants. The line of credit is syndicated with various financial institutions, including Citibank, N.A., an affiliate of Citigroup, which is one of the lead lenders and an agent. The credit facility expires in May 2018. At April 30, 2014, Autodesk had no outstanding borrowings on this line of credit.

13. Restructuring

During the third quarter of fiscal 2014, the Board of Directors of the Company approved a world-wide restructuring plan in order to re-balance staffing levels to better align them with the evolving needs of the business. The Company authorized plan included a reduction of approximately 85 positions and the consolidation of four leased facilities, with a total cost of approximately $15.0 million ("Fiscal 2014 Plan"). The Company expects to substantially pay the one-time termination benefits and facility related liabilities related to the Fiscal 2014 Plan by the end of its second quarter of fiscal 2015.

During the three months ended April 30, 2014, Autodesk recorded restructuring charges of $2.3 million. The following table sets forth the restructuring activities during the three months ended April 30, 2014:

 
Balance at January 31, 2014
 
Additions
 
Payments
 
Adjustments (1)
 
Balance at April 30, 2014
Fiscal 2014 Plan
 
 
 
 
 
 
 
 
 
Employee termination costs
$
3.5

 
$
2.1

 
$
(3.4
)
 

 
$
2.2

Lease termination and asset costs
1.3

 
0.1

 
(0.1
)
 
0.1

 
1.4

Total
$
4.8

 
$
2.2

 
$
(3.5
)
 
$
0.1

 
$
3.6

Current portion (2)
$
3.8

 
 
 
 
 
 
 
$
2.7

Non-current portion (2)
1.0

 
 
 
 
 
 
 
0.9

Total
$
4.8

 
 
 
 
 
 
 
$
3.6

____________________
(1)
Adjustments include the impact of foreign currency translation.
(2)
The current and non-current portions of the reserve are recorded in the Condensed Consolidated Balance Sheets under “Other accrued liabilities” and “Other liabilities,” respectively.

14. Commitments and Contingencies

Guarantees and Indemnifications

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

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

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


21



Legal Proceedings

Autodesk is involved in a variety of claims, suits, investigations and proceedings in the normal course of business activities including claims of alleged infringement of intellectual property rights, commercial, employment, piracy prosecution, business practices and other matters. In the Company’s opinion, resolution of pending matters is not expected to have a material adverse impact on its consolidated results of operations, cash flows or its financial position. Given the unpredictable nature of legal proceedings, there is a reasonable possibility that an unfavorable resolution of one or more such proceedings could in the future materially affect the Company’s results of operations, cash flows or financial position in a particular period, however, based on the information known by the Company as of the date of this filing and the rules and regulations applicable to the preparation of the Company’s financial statements, any such amount is either immaterial or it is not possible to provide an estimated amount of any such potential loss.

15. Common Stock Repurchase Program

Autodesk has a stock repurchase program that is used to offset dilution from the issuance of stock under the Company’s employee stock plans and for such other purposes as may be in the interests of Autodesk and its stockholders, which has the effect of returning excess cash generated from the Company’s business to stockholders. During the three months ended April 30, 2014, Autodesk repurchased and retired 2.0 million shares at an average repurchase price of $51.26 per share. Common stock and additional paid-in capital and retained earnings were reduced by $49.4 million and $53.1 million, respectively, during the three months ended April 30, 2014.

At April 30, 2014, 19.8 million shares remained available for repurchase under the repurchase program approved by the Board of Directors. During the three months ended April 30, 2014, Autodesk repurchased its common stock through open market purchases. The number of shares acquired and the timing of the purchases are based on several factors, including general market and economic conditions, the number of employee stock option exercises and stock issuances, the trading price of Autodesk common stock, cash on hand and available in the United States, cash requirements for acquisitions, and Company defined trading windows.

16. Accumulated Other Comprehensive Loss

Accumulated other comprehensive income (loss), net of taxes, consisted of the following at April 30, 2014 and January 31, 2014:
 
 
April 30, 2014
 
January 31, 2014
Net gain on derivative instruments
$
0.2

 
$
3.5

Net unrealized gain on available-for-sale securities
1.2

 
1.8

Defined benefit pension items
(7.7
)
 
(7.7
)
Foreign currency translation adjustments
11.9

 
1.8

Accumulated other comprehensive income (loss)
$
5.6

 
$
(0.6
)

Pre-tax reclassifications from “Accumulated other comprehensive income (loss)” to the Company's Condensed Consolidated Statement of Operations for the three months ended April 30, 2014 and 2013 were $1.0 million and $3.8 million, respectively.
 

22



17. Net Income Per Share

Basic net income per share is computed using the weighted average number of shares of common stock outstanding for the period, excluding stock options and restricted stock units. Diluted net income per share is based upon the weighted average number of shares of common stock outstanding for the period and potentially dilutive common shares, including the effect of stock options and restricted stock units under the treasury stock method. The following table sets forth the computation of the numerators and denominators used in the basic and diluted net income per share amounts:

 
Three Months Ended April 30,
 
2014
 
2013
Numerator:
 
 
 
Net income
$
28.3

 
$
55.6

Denominator:
 
 
 
Denominator for basic net income per share—weighted average shares
227.0

 
223.8

Effect of dilutive securities
4.6

 
5.5

Denominator for dilutive net income per share
231.6

 
229.3

Basic net income per share
$
0.12

 
$
0.25

Diluted net income per share
$
0.12

 
$
0.24


The computation of diluted net income per share does not include shares that are anti-dilutive under the treasury stock method because their exercise prices are higher than the average market value of Autodesk’s stock during the period. For the three months ended April 30, 2014, there were no potentially anti-dilutive shares. For the three months ended April 30, 2013, 8.2 million potentially anti-dilutive shares, were excluded from the computation of diluted net income per share.

18. Segments

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

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

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

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


23



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

M&E consists of two product groups: Animation, including design visualization, and Creative Finishing. Animation products, such as Autodesk Maya, Autodesk 3ds Max, and the Autodesk Entertainment Creation Suites, provide tools for digital sculpting, modeling, animation, effects, rendering and compositing, for design visualization, visual effects and games production. M&E products are also included in a number of PSEB, AEC, and MFG focused suites. Creative Finishing products provide editing, finishing and visual effects design and color grading.

All of Autodesk’s reportable segments distribute their respective products primarily through authorized resellers and distributors and, to a lesser extent, through direct sales to end-users.

The accounting policies of the reportable segments are the same as those described in Note 1, “Business and Summary of Significant Accounting Policies” of Autodesk's Annual Report on Form 10-K for the fiscal year ended January 31, 2014. Autodesk evaluates each segment’s performance on the basis of gross profit. Autodesk currently does not separately accumulate and report asset information by segment, except for goodwill, which is disclosed in Note 9, “Goodwill.”

Information concerning the operations of Autodesk’s reportable segments is as follows:
 
 
Three Months Ended April 30,
 
2014
 
2013
Net revenue:
 
 
 
Platform Solutions and Emerging Business
$
211.9

 
$
212.7

Architecture, Engineering and Construction
195.5

 
172.1

Manufacturing
147.3

 
139.1

Media and Entertainment
37.8

 
46.5

 
$
592.5

 
$
570.4

Gross profit:
 
 
 
Platform Solutions and Emerging Business
$
191.0

 
$
195.2

Architecture, Engineering and Construction
175.6

 
155.5

Manufacturing
132.7

 
127.5

Media and Entertainment
29.0

 
37.0

Unallocated (1)
(14.5
)
 
(12.3
)
 
$
513.8

 
$
502.9

 _______________
(1)
Unallocated amounts primarily relate to corporate expenses and other costs and expenses that are managed outside the reportable segments, including stock-based compensation expense.


24



Information regarding Autodesk’s operations by geographic area is as follows:
 
 
Three Months Ended April 30,
 
2014
 
2013
Net revenue:
 
 
 
Americas
 
 
 
U.S.
$
169.5

 
$
166.4

Other Americas
36.2

 
35.8

Total Americas
205.7

 
202.2

Europe, Middle East and Africa
225.5

 
216.2

Asia Pacific
 
 
 
Japan
86.6

 
76.8

Other Asia Pacific
74.7

 
75.2

Total Asia Pacific
161.3

 
152.0

Total net revenue
$
592.5

 
$
570.4


19. Subsequent Events

On May 29, 2014, Autodesk acquired all the outstanding shares of Within Technologies Limited ("Within”) for approximately $88.0 million cash.  Within is a United Kingdom based developer of design and simulation software for next generation manufacturing processes.  The Within acquisition will accelerate Autodesk’s development of tools and technologies for advanced manufacturing.  Within will be integrated into Autodesk’s PSEB reportable segment.  The initial accounting for this acquisition was not complete as of June 3, 2014, due to the timing of the acquisition.  Autodesk used its non-U.S.-based cash for the transaction.



25



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

The discussion in our MD&A and elsewhere in this Form 10-Q contains trend analyses and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are any statements that look to future events and consist of, among other things, our business strategies, including those discussed in “Strategy” and “Overview of the Three Months Ended April 30, 2014-Business Outlook” below, anticipated future net revenue, future GAAP and non-GAAP earnings per share, operating margin and other future financial results (by product type and geography) and operating expenses, the effectiveness of our efforts to successfully manage transitions to new business models and markets, expected market trends, including the growth of cloud, mobile and social computing, the effect of unemployment and availability of credit, the effects of weak global economic conditions, the effects of revenue recognition, our backlog, expected trends in certain financial metrics, the impact of acquisitions and investment activities, the effects of fluctuations in exchange rates and our hedging activities on our financial results, our abilities to successfully expand adoption of our products, our ability to gain market acceptance of new businesses and sales initiatives, our ability to successfully increase sales of product suites as part of our overall sales strategy, and the impact of economic volatility and geopolitical activities in certain countries, particularly emerging economy countries, and the resulting effect on our financial results. In addition, forward-looking statements also consist of statements involving expectations regarding product acceptance, continuation of our stock repurchase program, statements regarding our liquidity and short-term and long-term cash requirements, as well as statements involving trend analyses and statements including such words as “may,” “believe,” “could,” “anticipate,” “would,” “might,” “plan,” “expect,” and similar expressions or the negative of these terms or other comparable terminology. These forward-looking statements speak only as of the date of this Form 10-Q and are subject to business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of the factors set forth below in Part II, Item 1A, “Risk Factors,” and in our other reports filed with the U.S. Securities and Exchange Commission. We assume no obligation to update the forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made, except as required by law.

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

Strategy

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

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

Autodesk was founded during the platform transition from mainframes and engineering workstations to personal computers. We developed and sustained a compelling value proposition based upon desktop software for the personal computer. Just as the transition from mainframes to personal computers transformed the industry thirty years ago, we believe our industry is undergoing a similar transition from the personal computer to cloud, social, and mobile computing. To address this transition we have accelerated our move to the cloud and are offering more flexible licenses. For example, in fiscal 2014, we began offering Autodesk BIM 360, PLM 360, Sim 360 and Fusion 360, a few of our cloud based offerings, which provide tools, including social and mobile capabilities, to help streamline design, collaboration, and data management processes. We believe that customer adoption of these new offerings will continue to grow as customers across a range of industries begin to take advantage of the scalable computing power and flexibility provided through these new services.
Our strategy is to lead our customers and the industries they serve to the new cloud and mobile platforms. This entails both a technological shift and a business model shift. During fiscal 2014, we announced more flexible term-based license offerings, including term-based desktop subscriptions, for certain products. These offerings are designed to give our customers even more flexibility with how they use our products and service offerings and address new types of customers such as project-based users and small businesses. 

26



Over the next four years, we expect to significantly increase our subscription base and the annual value per subscription, which we believe will help drive billings growth. During the transition, revenue, deferred revenue, operating margin, and earnings per share will be impacted as more revenue is recognized ratably rather than up front and as new offerings bring a wider variety of price points.
For the three months ended April 30, 2014, our billings increased 10% as compared to the same period in the prior fiscal year. The 6 percentage point delta from our 4% year over year growth in GAAP revenue and our 10% year over year growth in billings is the result of 7 percentage points from the change in deferred revenue offset by 1 percentage point primarily related to the change in acquisition-related deferred revenue. At April 30, 2014 and January 31, 2014, our total subscriptions were approximately 1.94 million and 1.85 million, respectively.
For the past three years, suites have been an important growth area to our overall strategy. As our customers in all industries adopt our design suites, we believe they will experience an increase in their productivity and the value of their design data. For the three months ended April 30, 2014, revenue from suites increased 19% as compared to the same period in the prior fiscal year. As a percentage of revenue, suites increased to 35% in the three months ended April 30, 2014 as compared to 31% of our net revenue in the three months ended April 30, 2013.

Expanding our geographic coverage is another key element of our growth strategy. Much of the growth in the world’s construction and manufacturing is happening in emerging economies. Further, emerging economies face many of the challenges that our design technology can help address, including infrastructure build-out and innovative design and manufacturing. Revenue from emerging countries increased 5% during the three months ended April 30, 2014 as compared to the same period of the prior fiscal year. We believe that emerging economies continue to present long-term growth opportunities for us. Revenue from emerging countries represented 13% for both the three months ended April 30, 2014 and 2013. While we believe there are long-term growth opportunities in emerging economies, conducting business in these countries presents significant challenges, including economic volatility, geopolitical risk, local competition, intellectual property protection, poorly developed business infrastructure, scarcity of talent, software piracy and different purchase patterns as compared to the developed world.

Today, complex challenges such as globalization, urbanization, and sustainable design are driving our customers to new levels of performance and competitiveness, and we are committed to helping them address those challenges and take advantage of new opportunities. To achieve these goals, we are capitalizing on two of our strongest competitive advantages: our ability to bring advanced technology to mainstream markets, and the breadth and depth of our product portfolio.
By innovating within existing technology categories, we bring powerful new design capabilities to volume markets. Our products are designed to be easy-to-learn and use, and to provide customers with a low cost of deployment, a low total cost of access to our software offerings, and a rapid return on investment. In addition, our software architecture allows for extensibility and integration with other products. The breadth of our technology and product line gives us a unique competitive advantage, because it allows our customers to address a wide variety of problems in ways that transcend industry and disciplinary boundaries. This is particularly important in helping our customers address the complex challenges mentioned above. We also believe that our technological leadership and global brand recognition have positioned us well for long-term growth and industry leadership.
In addition to the competitive advantages afforded by our technology, our large global network of distributors, resellers, third-party developers, customers, educational institutions, faculty and students is a key competitive advantage. This network of relationships provides us with a broad and deep reach into volume markets around the world. Our distributor and reseller network is extensive and provides our customers with the resources to purchase, deploy, learn, and support our products quickly and easily. We have a significant number of registered third-party developers who create products that work well with our products and extend them for a variety of specialized applications.
We are committed to helping fuel a lifelong passion for design in students of all ages, and inspiring and supporting educators. As such, we offer extensive educational programs supporting our software and services including a new program, initiated in fiscal 2014, under which we grant software licenses to educational institutions in select regions and to key partners for little or no fees. Through these programs we intend to further Science, Technology, Engineering, Digital Arts, and Math (STEAM) education initiatives. With an extensive global community of students who are experienced with our software and poised to become the next generation of professional users, our goal is to reduce the cost of training and education of new talent for our customers.


27



Our strategy includes improving our product functionality and expanding our product offerings through internal development as well as through the acquisition of products, technology and businesses. Acquisitions often increase the speed at which we can deliver product functionality to our customers; however, they entail cost and integration challenges and may, in certain instances, negatively impact our operating margins. We continually review these trade-offs in making decisions regarding acquisitions. We currently anticipate that we will continue to acquire products, technology and businesses as compelling opportunities become available.

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

Critical Accounting Policies and Estimates

Our Condensed Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles. In preparing our Condensed Consolidated Financial Statements, we make assumptions, judgments and estimates that can have a significant impact on amounts reported in our Condensed Consolidated Financial Statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We regularly reevaluate our assumptions, judgments and estimates. Our significant accounting policies are described in Note 1, “Business and Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements in our Form 10-K for the fiscal year ended January 31, 2014. In addition, we highlighted those policies that involve a higher degree of judgment and complexity with further discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in such Form 10-K. We believe these policies are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

Overview of the Three Months Ended April 30, 2014 and 2013
 
(in millions)
Three Months Ended April 30, 2014
 
As a % of Net
Revenue
 
Three Months Ended April 30, 2013
 
As a % of Net
Revenue
Net Revenue
$
592.5

 
100
%
 
$
570.4

 
100
%
Cost of revenue
78.7

 
13
%
 
67.5

 
12
%
Gross Profit
513.8

 
87
%
 
502.9

 
88
%
Operating expenses
471.6

 
80
%
 
421.5

 
74
%
Income from Operations
$
42.2

 
7
%
 
$
81.4

 
14
%
 
During the three months ended April 30, 2014, as compared to the same period in the prior fiscal year, net revenue increased 4%, and gross profit increased 2%, while income from operations decreased 48%. Our business experienced year over year growth in our Architecture, Engineering and Construction ("AEC") and Manufacturing ("MFG") segments, many of our major products, particularly our AEC suites, and all of our geographic areas, especially within the Asia Pacific ("APAC") geography. Also contributing to the year over year impact to revenue during the three months ended April 30, 2014, were increases in subscription revenue partially offset by decreases in license and other revenue.

During the latter part of fiscal year 2014, we announced a business model transition as we began offering more flexible license and service offerings that have ratable revenue streams. As expected, we experienced growth in our total subscriptions and billings during the three months ended April 30, 2014, and our income from operations was negatively impacted by increased spend, including higher employee-related costs, as a result of this transition.

The reasons for these changes are discussed below under the heading “Results from Operations.”


28



Revenue Analysis

Revenue from flagship products was 50% of total net revenue during the three months ended April 30, 2014 and decreased 4% as compared to the same period in the prior fiscal year. Revenue from suites was 35% of total net revenue for the three months ended April 30, 2014 and increased 19% as compared to the same period in the prior fiscal year. Revenue from new and adjacent products was 14% of total net revenue for the three months ended April 30, 2014 and increased 2% as compared to the same period in the prior fiscal year. We anticipate that, as our new and existing customers migrate from our stand-alone products to suites, our revenue from suites will increase as a percentage of revenue and that our revenue from our flagship and new and adjacent products will continue to decline as a percentage of revenue.

We rely significantly upon major distributors and resellers in both the U.S. and international regions, including Tech Data Corporation and its global affiliates (collectively, “Tech Data”). Tech Data accounted for 26% and 25% of Autodesk’s total net revenue for the three months ended April 30, 2014 and 2013, respectively. We believe our business is not substantially dependent on Tech Data. Our customers through Tech Data are the resellers and end users who purchase our software licenses and services. Should any of the agreements between Tech Data and us be terminated for any reason, we believe the resellers and end users who currently purchase our products through Tech Data would be able to continue to do so under substantially the same terms from one of our many other distributors without substantial disruption to our revenue.

Operating Margin Analysis

Income from operations decreased 48% in the three months ended April 30, 2014 due to a $50.1 million or 12% increase in our operating expenses and an $11.2 million or 17% increase in cost of revenue, as compared to the same period in the prior fiscal year. Partially offsetting the increase in our spend was a $22.1 million or 4% increase in net revenue, as compared to the same period in the prior fiscal year. Our operating margin decreased to 7% for the three months ended April 30, 2014 from 14% for the three months ended April 30, 2013. The increase in operating expenses and the corresponding decrease in operating margin was primarily related to higher employee-related costs and professional fees during the three months ended April 30, 2014. The increase in employee-related costs was primarily due to an increase in salaries, coupled with an increase in bonuses, both of which were primarily driven by an increase in headcount compared to the corresponding period in the previous fiscal year.

Further discussion regarding the cost of goods sold and operating expense activities are discussed below under the heading “Results of Operations.”

Foreign Currency Analysis

We generate a significant amount of our revenue in the U.S., Japan, Germany, France, and the United Kingdom. Our revenue was negatively impacted by foreign exchange rate changes during the three months ended April 30, 2014, as compared to the same periods in the prior fiscal year. Had applicable exchange rates from the three months ended April 30, 2013 been in effect during the three months ended April 30, 2014 and had we excluded foreign exchange hedge gains and losses from the three months ended April 30, 2014, (“on a constant currency basis”), net revenue would have increased 5% during the three months ended April 30, 2014, as compared to the same period in the prior fiscal year.

Our total spend, defined as cost of revenue plus operating expenses, during the three months ended April 30, 2014 increased 13% on an as reported basis as compared to the same period in the prior fiscal year. Had applicable exchange rates from the three months ended April 30, 2013 been in effect during the three months ended April 30, 2014 and had we excluded foreign exchange hedge gains and losses from the three months ended April 30, 2014, total spend would have been minimally impacted by foreign exchange rate changes and would have increased 13% on a constant currency basis compared to the same period in the prior fiscal year.

Changes in the value of the U.S. dollar may have a significant effect on net revenue, total spend and income from operations in future periods. We use foreign currency contracts to reduce the exchange rate effect on a portion of the net revenue of certain anticipated transactions but do not attempt to completely mitigate the impact of fluctuations of such foreign currency against the U.S. dollar.

Balance Sheet and Cash Flow Items

At April 30, 2014, we had $2,387.9 million in cash and marketable securities. We completed the three months ended April 30, 2014 with higher deferred revenue and lower accounts receivable balances as compared to the end of the fiscal year ended January 31, 2014. Our deferred revenue balance at April 30, 2014 included $848.1 million of deferred subscription

29



revenue primarily related to customer maintenance contracts, which will be recognized as revenue ratably over the life of the contracts. The term of our maintenance contracts is typically between one and three years. Our cash flow from operations decreased 2% to $218.7 million as of April 30, 2014 from $224.1 million at April 30, 2013. We repurchased 2.0 million shares of our common stock for $102.5 million during the three months ended April 30, 2014. Comparatively, we repurchased 3.2 million shares of our common stock for $129.2 million during the three months ended April 30, 2013. Further discussion regarding the balance sheet and cash flow activities are discussed below under the heading “Liquidity and Capital Resources.”

Business Outlook

Autodesk's business model is evolving. We continue to assess current business offerings including introducing more flexible license and service offerings that have ratable revenue streams. The accounting impact of these offerings and other business decisions are expected to result in an increase in the percentage of our ratable revenue, making for a more predictable business over time, while correspondingly reducing our upfront revenue stream. Over time, we expect our business model transition to expand our customer base by eliminating higher up-front licensing costs and providing more flexibility with how customers use our products. However, we expect the business model transition to cause our traditional perpetual license revenue to decline without a corresponding decrease in expenses. In the future, we expect this business model transition will increase our long-term revenue growth rate by increasing the annual value per subscription and increasing total subscriptions over time.
We expect net revenue for the second quarter of fiscal 2015 will range from $595 million to $610 million, and that GAAP diluted earnings per share will range from $0.05 to $0.10 while non-GAAP diluted earnings per share will range from $0.25 to $0.30. Non-GAAP earnings per diluted share exclude $0.11 related to stock-based compensation expense and $0.09 related to the amortization of acquisition related intangibles, net of tax.
We expect net revenue for fiscal 2015 to increase by approximately 4% to 6% compared to fiscal 2014. We expect billings for fiscal 2015 to increase by approximately 7% to 9% compared to fiscal 2014. Autodesk anticipates fiscal 2015 GAAP operating margin to be approximately 3% to 5% and non-GAAP operating margin to be approximately 14% to 16%.  The 14% to 16% non-GAAP operating margin excludes 7 percentage points related to stock-based compensation expense, and 4 percentage points related to the amortization of acquisition related intangibles. Autodesk expects to add 150,000-200,000 subscriptions during fiscal 2015.
We remain diligent about managing our spend while making essential investments to drive growth. If we are unable to successfully achieve our major business initiatives we may not achieve our financial goals.


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Results of Operations

Net Revenue

 
Three Months Ended
 
(Decrease)/ Increase compared to
prior fiscal year
 
Three Months Ended
(in millions)
April 30, 2014
$    
 
%    
 
April 30, 2013
Net Revenue:
 
 
 
 
 
 
 
License and other
$
316.2

 
$
(7.3
)
 
(2
)%
 
$
323.5

Subscription
276.3

 
29.4

 
12
 %
 
246.9

 
$
592.5

 
$
22.1

 
4
 %
 
$
570.4

Net Revenue by Geographic Area:
 
 
 
 
 
 
 
Americas
$
205.7

 
$
3.5

 
2
 %
 
$
202.2

Europe, Middle East and Africa
225.5

 
9.3

 
4
 %
 
216.2

Asia Pacific
161.3

 
9.3

 
6
 %
 
152.0

 
$
592.5

 
$
22.1

 
4
 %
 
$
570.4

Net Revenue by Operating Segment:
 
 
 
 
 
 
 
Platform Solutions and Emerging Business
$
211.9

 
$
(0.8
)
 
 %
 
$
212.7

Architecture, Engineering and Construction
195.5

 
23.4

 
14
 %
 
172.1

Manufacturing
147.3

 
8.2

 
6
 %
 
139.1

Media and Entertainment
37.8

 
(8.7
)
 
(19
)%
 
46.5

 
$
592.5

 
$
22.1

 
4
 %
 
$
570.4


License and Other Revenue

License and other revenue consists of two components: (1) all forms of product license revenue and (2) other revenue. Product license revenue includes software license revenue from the sale of seat licenses, software license revenue from the sale of seat term-based licenses from our desktop subscription and enterprise offerings, and upgrades and product revenue for Creative Finishing. Other revenue includes revenue from consulting, training, Autodesk Developers Network and Creative Finishing customer support, and is recognized as the services are performed.

Total License and other revenue decreased 2% during the three months ended April 30, 2014, as compared to the three months ended April 30, 2013. This decrease was primarily due to a 1% decrease in product license revenue as compared to the same period in the prior fiscal year. The decline in product license revenue was primarily due to a decrease of 4% in revenue from our flagship products partially offset by an increase of 6% in our suites products.

During the three months ended April 30, 2014, the 1% decrease in product license revenue was due to a 4% decrease in the number of seats sold partially offset by a 3% increase in the average net revenue per seat. Product license revenue, as a percentage of License and other revenue, was 87% for the three months ended April 30, 2014 and 86% for the three months ended April 30, 2013.

During the three months ended April 30, 2014, total other revenue represented 13% of License and other revenue. Other revenue decreased by 10% during the three months ended April 30, 2014, as compared to the three months ended April 30, 2013 primarily due to a 44% decrease in revenue from our education products as a result of our transition to granting software licenses to educational institutions in select regions and to key partners, consistent with our strategy.

Backlog related to current software license product orders that had not shipped at the end of the quarter increased by $12.3 million during the three months ended April 30, 2014 from