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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 July 31, 2001
OR
_ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number: 0-14338
AUTODESK, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2819853
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 McInnis Parkway
San Rafael, California 94903
(Address of principal executive offices)
Telephone Number (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 Securities Exchange Act of 1934 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 __
---
As of July 31, 2001, there were approximately 54.1 million shares of the
Registrant's Common Stock outstanding.
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AUTODESK, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations
Three and six months ended July 31, 2001 and 2000 ..................... 3
Condensed Consolidated Balance Sheets
July 31, 2001 and January 31, 2001 .................................... 4
Condensed Consolidated Statements of Cash Flows
Six months ended July 31, 2001 and 2000 ............................... 5
Notes to Condensed Consolidated Financial Statements ................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............. 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................................... 19
Item 4. Submission of Matters to a Vote of Securities Holders .................. 19
Item 6. Exhibits and Reports on Form 8-K ....................................... 19
Signatures ............................................................. 20
2
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three months ended Six months ended
July 31, July 31,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net revenues $ 231,360 $ 232,841 $ 477,100 $ 464,100
--------- --------- --------- ---------
Costs and expenses:
Cost of revenues 35,193 39,209 71,918 75,935
Marketing and sales 86,552 76,965 173,557 154,467
Research and development 43,583 42,272 89,742 82,527
General and administrative 31,696 33,123 65,639 64,928
Amortization of goodwill and
purchased intangibles 5,174 7,272 10,481 15,060
Nonrecurring charges (credits) 9,774 - 9,774 (800)
--------- --------- --------- ---------
211,972 198,841 421,111 392,117
--------- --------- --------- ---------
Income from operations 19,388 34,000 55,989 71,983
Interest and other income, net 8,002 4,301 12,988 7,274
--------- --------- --------- ---------
Income before income taxes 27,390 38,301 68,977 79,257
Provision for income taxes (8,217) (12,234) (20,693) (25,339)
Equity in net loss of affiliate -- (5,314) (1,211) (7,559)
--------- --------- --------- ---------
Net income $ 19,173 $ 20,753 $ 47,073 $ 46,359
========= ========= ========= =========
Basic net income per share $ 0.35 $ 0.36 $ 0.87 $ 0.79
========= ========= ========= =========
Diluted net income per share $ 0.34 $ 0.35 $ 0.85 $ 0.77
========= ========= ========= =========
Shares used in computing basic net
income per share 54,012 57,752 53,885 58,397
========= ========= ========= =========
Shares used in computing diluted net
income per share 55,710 59,073 55,558 60,579
========= ========= ========= =========
See accompanying notes.
3
AUTODESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
July 31, 2001 January 31, 2001
ASSETS ------------------ ------------------
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 119,028 $ 116,391
Marketable securities 155,771 142,961
Accounts receivable, net 159,367 157,422
Inventories 20,567 17,255
Deferred income taxes 29,134 26,696
Prepaid expenses and other current assets 35,835 30,596
----------- -----------
Total current assets 519,702 491,321
----------- -----------
Marketable securities 157,904 163,148
Computer equipment, furniture, and leasehold improvements, at cost:
Computer equipment and furniture 192,942 171,176
Leasehold improvements 29,389 27,145
Less accumulated depreciation (155,873) (144,325)
----------- -----------
Net computer equipment, furniture, and leasehold
improvements 66,458 53,996
Purchased technologies and capitalized software, net 14,410 16,403
Goodwill, net 44,743 54,273
Deferred income taxes 19,334 18,242
Other assets 7,865 10,376
----------- -----------
$ 830,416 $ 807,759
=========== ===========
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 54,241 $ 47,962
Accrued compensation 48,983 55,907
Accrued income taxes 103,626 97,109
Deferred revenues 59,000 50,993
Other accrued liabilities 92,964 81,942
----------- -----------
Total current liabilities 358,814 333,913
----------- -----------
Other liabilities 667 1,208
Commitments and contingencies
Minority interest 11,549 12,964
Stockholders' equity:
Common stock and additional paid-in capital 417,811 424,652
Accumulated other comprehensive loss (19,538) (16,104)
Deferred compensation (1,139) (1,172)
Retained earnings 62,252 52,298
----------- -----------
Total stockholders' equity 459,386 459,674
----------- -----------
$ 830,416 $ 807,759
=========== ===========
See accompanying notes
4
AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended
July 31,
----------------------------
2001 2000
--------- ---------
Operating activities
Net income $ 47,073 $ 46,359
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 31,685 36,302
Net loss on asset disposals 1,411 1,381
Equity in net loss of affiliate 1,211 7,559
Tax benefits from employee stock plans 5,530 19,054
Changes in operating assets and liabilities 9,385 (18,450)
--------- ---------
Net cash provided by operating activities 96,295 92,205
--------- ---------
Investing activities
Net (purchases) maturities of marketable securities (8,691) 80,808
Capital and other expenditures (26,297) (18,265)
Investments in unconsolidated entities -- (22,800)
Other investing activities (3,961) 3,616
--------- ---------
Net cash (used in) provided by investing activities (38,949) 43,359
--------- ---------
Financing activities
Repayment of notes payable and borrowings (276) (214)
Repurchases of common stock (74,966) (233,528)
Proceeds from issuance of common stock, net of issuance costs 31,953 92,244
Dividends paid (6,477) (6,952)
Minority interest (1,415) --
--------- ---------
Net cash used in financing activities (51,181) (148,450)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (3,528) (6,156)
--------- ---------
Net increase (decrease) in cash and cash equivalents 2,637 (19,042)
Cash and cash equivalents at beginning of year 116,391 108,641
--------- ---------
Cash and cash equivalents at end of period $ 119,028 $ 89,599
========= =========
Supplemental cash flow information:
Cash paid during the period for income taxes $ 12,148 $ 3,723
========= =========
See accompanying notes.
5
AUTODESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. These statements should
be read in conjunction with the consolidated financial statements and notes,
together with management's discussion and analysis of financial condition and
results of operations, contained in Autodesk's fiscal 2001 Annual Report on Form
10-K. The results of operations for the three and six months ended July 31, 2001
are not necessarily indicative of the results for the entire fiscal year ending
January 31, 2002.
2. Recently Issued Accounting Standards
------------------------------------
During July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141").
This Statement requires all business combinations to be accounted for using the
purchase method accounting and redefines goodwill and other intangibles that
should be recognized separate from goodwill. SFAS 141 is effective for all
business combinations initiated after June 30, 2001. Autodesk is currently
evaluating the impact of SFAS 141 on its financial statements and related
disclosures.
During July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). This Statement requires that goodwill and other intangibles with
an indefinite useful life not be amortized, but be tested for impairment at
least annually. SFAS 142 is effective for Autodesk beginning fiscal 2003;
however, for new business combinations that occur after June 30, 2001, SFAS 142
is effective for those transactions. Autodesk is currently evaluating the impact
of SFAS 142 on its financial statements and related disclosures.
3. Financial Instruments
---------------------
On February 1, 2001 Autodesk, or the Company, adopted the provisions of
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). Under SFAS 133, all
derivatives, whether in hedging relationships or not, are required to be
recorded on the balance sheet at fair value. Gains and losses resulting from
changes in fair value are accounted for depending upon the use of the derivative
and whether it is designated and qualifies for hedge accounting. The adoption of
SFAS 133 did not have a material impact on the Company's financial position and
results of operations.
The Company uses derivative instruments to manage its earnings and cash flow
exposures to fluctuations in foreign currency exchange rates. Under its risk
management strategy, the Company uses foreign currency forward and option
contracts to manage its exposures of underlying assets, liabilities and other
obligations, which exist as part of the ongoing business operations. Generally,
the Company's practice is to hedge a majority of its short-term foreign exchange
transaction exposures. Contracts are primarily denominated in European and Asian
currencies, and Autodesk does not enter into any foreign exchange derivative
instruments for trading or speculative purposes.
The Company's forward contracts, which are not designated as hedging instruments
under SFAS 133, have average maturities of 60 days or less. The forwards are
used to reduce the exchange rate risk associated primarily with receivables and
payables. Forward contracts are marked-to-market at the end of each reporting
period, with gains and losses recognized as other income or expense to offset
the gains or losses resulting from the settlement of the underlying foreign
currency denominated receivables and payables.
6
In addition to the forward contracts, Autodesk utilizes foreign currency option
contracts to reduce the exchange rate impact on the net revenue of certain
anticipated transactions. These option contracts, which are designated and
documented as cash flow hedges and qualify for hedge accounting treatment under
SFAS 133, have maturities of less than three months and settle before the end of
each fiscal quarter. Autodesk's financial exposure is generally limited to the
amount paid for the options.
Gains, if any, from the effective portion of the option contracts, as
determinable under SFAS 133, are recognized as net revenues, while the
ineffective portion of the gain is recorded as other income. During the first
six months of fiscal 2002, the Company recognized $0.9 million of settlement
gains as net revenues; of this amount, $0.4 million was recognized during the
first quarter. Amounts associated with the settlement gains totaling $0.2
million were recorded as other income during the first six months of fiscal
2002.
4. Net Income Per Share
--------------------
The following is a reconciliation of the numerators and denominators used in the
basic and diluted net income per share amounts:
Three months ended Six months ended
July 31, July 31,
---------------------- ----------------------
(In thousands) 2001 2000 2001 2000
------- ------- ------- -------
Numerator:
Numerator for basic and diluted per share amount -- net
income $19,173 $20,753 $47,073 $46,359
======= ======= ======= =======
Denominator:
Denominator for basic net income per share -- weighted
average shares 54,012 57,752 53,885 58,397
Effect of dilutive common stock options 1,698 1,321 1,673 2,182
------- ------- ------- -------
Denominator for dilutive net income per share 55,710 59,073 55,558 60,579
======= ======= ======= =======
For the three months ended July 31, 2001 and 2000, options to purchase 4.7
million and 5.5 million shares, respectively, were excluded from the computation
of diluted net income per share. For the six months ended July 31, 2001 and 2000
options to purchase 4.8 million and 3.4 million shares, respectively, were
excluded from the computation of diluted net income per share. These options
were excluded because the options' exercise prices were greater than the average
market prices of Autodesk's common stock during the respective periods.
5. Comprehensive Income
--------------------
Autodesk's total comprehensive income was as follows:
Three months ended Six months ended
July 31, July 31,
--------------------------- ---------------------------
(In thousands) 2001 2000 2001 2000
-------- -------- -------- --------
Net income $ 19,173 $ 20,753 $ 47,073 $ 46,359
Other comprehensive (loss) income, net (816) 826 (3,434) (1,047)
-------- -------- -------- --------
Total comprehensive income $ 18,357 $ 21,579 $ 43,639 $ 45,312
======== ======== ======== ========
7
6. Investment in Affiliates - Buzzsaw.com, Inc.
--------------------------------------------
Autodesk currently maintains approximately a 40% interest in Buzzsaw.com, a
provider of online collaboration applications for the building industry, formed
by Autodesk during the third quarter of fiscal 2000. Autodesk accounts for this
investment under the equity method of accounting.
During the six months ended July 31, 2001, Autodesk recognized $1.2 million of
losses associated with its equity investment in Buzzsaw.com. None of these
losses were recognized during the second quarter since Autodesk had previously
expensed all prior investments made. During the six months ended July 31, 2000,
Autodesk recognized $7.6 million of losses, of which $5.3 million were
recognized during the second quarter of fiscal 2001.
In August 2001, Autodesk acquired the remaining 60% of Buzzsaw.com for $15
million in cash plus the assumption of liabilities. The acquisition will be
accounted for under the purchase method of accounting.
7. Minority Interest - RedSpark, Inc.
----------------------------------
In April 2000, Autodesk formed RedSpark, Inc. In October 2000, RedSpark received
$14.0 million of third party venture funding. Autodesk currently maintains a
majority interest in RedSpark, and consolidates RedSpark's financial position
and results of operations.
The minority interest at July 31, 2001 represents equity funding received by
RedSpark from third party investors, net of allocated losses.
8. Nonrecurring Charges
--------------------
During the second quarter of fiscal 2002, Autodesk approved an exit plan and
recorded nonrecurring charges totaling $9.8 million which resulted from a
corporate restructuring and reorganization to reduce operating expenses. Of this
amount, $8.8 million related to office closure costs and $1.0 million related to
one-time reorganization costs. Office closure costs included losses on operating
leases and the write-off of leasehold improvements and equipment related to
these operating leases. At July 31, 2001, the remaining liability associated
with these charges totaled $8.9 million.
During the first six months of fiscal 2001, Autodesk reversed $0.8 million
related to one-time accruals ($0.6 million related to restructuring) established
in a prior year.
9. Segments
--------
Autodesk's operating results have been aggregated into two reportable segments:
the Discreet Segment and the Design Solutions Segment.
The Discreet Segment derives revenues from the sale of its products to creative
professionals for a variety of applications, including feature films, television
programs, commercials, music and corporate videos, interactive game production,
live broadcasting and Web design.
The Design Solutions Segment derives revenues from the sale of design software
products for professionals, occasional users or consumers who design, draft and
diagram, and from the sale of mapping and geographic information systems
technology to public and private users. The Design Solutions Segment consists of
the following business divisions, all of which have industry specific focuses:
Design Platforms Group; Manufacturing; Building Industry Division, formerly
known as Architecture, Engineering and Construction; Location Services; and
Geographic Information Services.
Autodesk evaluates each segment's performance on the basis of income from
operations before income taxes. Autodesk currently does not separately
accumulate and report asset information by segment. Information concerning the
operations of the reportable segments is as follows:
8
Three months ended Six months ended
July 31, July 31,
----------------------------- ----------------------------
(In thousands) 2001 2000 2001 2000
----------- ----------- ----------- -----------
Net revenues:
Design Solutions $ 191,640 $ 182,680 $ 388,271 $ 367,335
Discreet 39,720 50,161 88,829 96,765
----------- ----------- ----------- -----------
$ 231,360 $ 232,841 $ 477,100 $ 464,100
=========== =========== =========== ===========
Income (loss) from operations:
Design Solutions $ 132,585 $ 115,773 $ 266,848 $ 238,692
Discreet (5,490) 1,894 1,351 3,006
Unallocated amounts/1/ (107,707) (83,667) (212,210) (169,715)
----------- ---------- ----------- ----------
$ 19,388 $ 34,000 $ 55,989 $ 71,983
=========== ========== =========== ===========
/1/ Unallocated amounts are attributed primarily to other geographic costs and
expenses that are managed outside the reportable segments.
10. Stock Repurchase Program
------------------------
During the six months ended July 31, 2001, Autodesk repurchased and retired 2.0
million shares of its common stock, of which 0.2 million shares were repurchased
and retired during the second quarter, at an average repurchase price of $34.23
per share. As a result of the stock repurchase activity during the past six
months, common stock and additional paid-in capital and retained earnings were
reduced by $44.3 million and $30.6 million, respectively.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion below 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. All statements, trend
analyses and other information contained below relating to markets for our
products and trends in revenue, as well as other statements including such words
as "anticipate," "believe," "plan," "estimate," "expect," "goal," and "intend"
and other similar expressions involving future trends or uncertainties,
constitute forward-looking statements. These forward-looking statements are
subject to business and economic risks, and our actual results could differ
materially from those set forth in the forward-looking statements as a result of
the factors set forth below, including "Risk Factors Which May Impact Future
Operating Results" as well as factors set forth in our fiscal 2001 Annual Report
on Form 10-K.
Results of Operations
Three Months Ended July 31, 2001 and 2000
- -----------------------------------------
Net revenues. Our net revenues for the second quarter of fiscal 2002 were $231.4
million, as compared to $232.8 million for the second quarter of the prior
fiscal year. Increases in the America's net revenues of 9 percent were offset by
a decrease of 17 percent in Europe's net revenues. Asia/Pacific's net revenues
remained relatively constant. Net revenues for the Design Solutions Segment
increased by 5 percent as compared to the second quarter in the prior fiscal
year. Sales of AutoCAD and AutoCAD upgrades, which were reflected in the net
revenues for the Design Solutions Segment, accounted for approximately 34
percent of our consolidated net revenues in the second quarter of fiscal 2002
and 33 percent of our consolidated net revenues in the same period last year.
Net revenues for the Discreet Segment decreased to $39.7 million, a decline of
21 percent as compared to the second quarter in the prior fiscal year.
The stronger value of the US dollar, relative to international currencies and as
compared to the second quarter of last year, had a negative impact on net
revenues. Had the rates from the prior year been in effect in the second quarter
of fiscal 2002, translated international revenue billed in local currencies
would have been $8.8 million higher. If exchange rates move unfavorably in the
future, they will have a negative impact on net revenues. International sales,
including exports from the U.S., accounted for approximately 60 percent of our
net revenues in the second quarter of fiscal 2002 as compared to 64 percent in
the same period of last year.
Product returns, consisting principally of stock rotation, are recorded as a
reduction of net revenues. Product returns as a percentage of revenues have
historically ranged from two to six percent quarterly. We anticipate that the
level of product returns in future periods will continue to be impacted by the
timing of new product releases, as well as the quality and market acceptance of
new products.
Cost of revenues. When expressed as a percentage of net revenues, cost of
revenues was 15 percent for the second quarter of fiscal 2002 and 17 percent for
the same period last year. The difference was primarily due to a lower
proportion of Discreet segment sales which have a higher cost of revenue as well
as slightly lower material costs resulting from the current product sales mix.
Cost of revenues as a percentage of net revenues will continue to be impacted by
the mix of product sales, software amortization costs, royalty rates for
licensed technology embedded in our products, and the geographic distribution of
sales.
Marketing and sales. Marketing and sales expenses were 37 percent of net
revenues in the second quarter of fiscal 2002, as compared to 33 percent in the
second quarter of fiscal 2001. This difference was primarily due to higher
employee-related expenses as we increase our focus on direct sales to major
accounts. We expect to continue to make significant investments in marketing and
sales, both in absolute dollars and as a percentage of net revenues.
10
Research and development. Research and development expenses were $43.6 million
in the second quarter of fiscal 2002 as compared to $42.3 million in the second
quarter of the prior year. The difference was primarily due to higher employee
related costs, efforts associated with our location services initiatives and
research and development costs incurred by RedSpark, Inc., a company that we
formed in April 2000. We expect that research and development spending will
continue to be significant as we continue to support product development efforts
by our market groups.
General and administrative. General and administrative expenses as a percentage
of net revenues remained constant at 14 percent for the second quarter of fiscal
2002 and 2001. Higher employee-related costs were offset by lower professional
fees and depreciation costs. We expect that general and administrative expenses,
as a percentage of net revenues, will remain consistent with levels recently
experienced.
Amortization of goodwill and purchased intangibles. Amortization of goodwill and
purchased intangibles was $5.2 million in the second quarter of fiscal 2002 as
compared to $7.3 million in the same period last year. This decrease was due to
some intangibles becoming fully amortized.
Nonrecurring charges. During the second quarter of fiscal 2002, we announced and
formally adopted a plan to reduce operating expense levels. As a result, we
incurred $9.8 million related to restructuring and reorganization expenses.
These expenses consist primarily of office closure costs of $8.8 million and
one-time reorganization costs of $1.0 million. As a result of the restructuring
we expect to realize quarterly savings of $1.5 million, of which $0.8 million
per quarter will be realized immediately. These total savings are expected to
last for the next several quarters and will be reflected in each on-going cost
and expense line item in the consolidated statements of operations. The savings
will be offset over time by costs associated with, among other things, possible
acquisitions of complimentary businesses. We anticipate additional restructuring
and reorganization charges in future periods. For additional information
regarding nonrecurring charges see Note 8. Nonrecurring Charges in the Notes to
Condensed Consolidated Financial Statements.
Interest and other income. Interest and other income, net was $8.0 million in
the second quarter of fiscal 2002 and $4.3 million in the corresponding period
last year. The increase was primarily due to higher investment income, mostly
due to realized gains associated with the sale of marketable securities, foreign
exchange-related gains and one-time transactions.
Provision for income taxes. Our effective income tax rate was 30 percent for the
second quarter of fiscal 2002 and 32 percent for the second quarter of fiscal
2001. The lower effective tax rate is primarily due to the impact associated
with our foreign earnings, which are taxed at rates different from the federal
statutory rate, and non-deductible goodwill amortization. The effective tax rate
for both periods is less than the federal statutory rate of 35 percent due to
the amount of benefits associated with our foreign earnings, research credits
and tax-exempt interest, partially offset by non-deductible goodwill
amortization.
Equity in net loss of affiliate. Through the first quarter of fiscal 2002, we
recognized net losses up to our equity investment in Buzzsaw.com. Consequently,
no additional losses were recognized during the second quarter of fiscal 2002.
We recognized $5.3 million of equity in net losses during the second quarter of
last year.
In August 2001, Autodesk acquired the remaining 60% of Buzzsaw.com for $15
million in cash plus the assumption of liabilities. Consequently, from the date
of acquisition Buzzsaw.com's on-going revenues and expenses will be included in
each of the respective line items in the consolidated statements of operations.
RedSpark, Inc. In April of last year, we formed RedSpark. We currently maintain
a majority interest in RedSpark, and as such the financial position and results
of operations of RedSpark are consolidated and included within the operating
expense categories of our statement of operations. We expect to continue to
consolidate RedSpark through most of fiscal 2002. The extent of our exposure to
RedSpark's results of
11
operations is dependent upon our future level of ownership interest, which will
depend in part on the amount of RedSpark equity issued to other investors in the
future.
Six Months Ended July 31, 2001 and 2000
- ---------------------------------------
Net revenues. Our net revenues for the six months ended July 31, 2001 were
$477.1 million, as compared to $464.1 million for the same period of the prior
fiscal year. Increases in the America's net revenues of 3 percent and
Asia/Pacific's net revenues of 13 percent were partially offset by a decrease of
5 percent in Europe's net revenues. Net revenues for the Design Solutions
Segment increased by 6 percent as compared to the first six months of the prior
fiscal year. Sales of AutoCAD and AutoCAD upgrades, which were reflected in the
net revenues for the Design Solutions Segment, accounted for approximately 33
percent of our consolidated net revenues in the first six months of fiscal 2002
and 32 percent of our consolidated net revenues in the first six months of
fiscal 2001. Net revenues for the Discreet Segment decreased to $88.8 million, a
decline of 8 percent as compared to the first six months of the prior fiscal
year.
The stronger value of the US dollar, relative to international currencies and as
compared to the first six months of the prior fiscal year, had a negative impact
on net revenues. Had the rates from the prior year been in effect during the
first six months of fiscal 2002, translated international revenue billed in
local currencies would have been $18.0 million higher. If exchange rates move
unfavorably in the future, they will have a negative impact on net revenues.
Product returns, consisting principally of stock rotation, are recorded as a
reduction of revenues and represented approximately 4 percent of consolidated
revenues during the six months ended July 31, 2001 as compared to 2 percent
during the same period last year. We anticipate that the level of product
returns in future periods will continue to be impacted by the timing of new
product releases, as well as the quality and market acceptance of new products.
Cost of revenues. When expressed as a percentage of net revenues, cost of
revenues was 15 percent for the first six months of fiscal 2002 and 16 percent
for the same period last year. The difference was primarily due to slightly
lower material costs resulting from the current product sales mix and lower
software amortization costs, offset in part by higher royalty costs. Software
amortization was less due to some intangibles being fully amortized by the end
of last year. Cost of revenues as a percentage of net revenues will continue to
be impacted by the mix of product sales, software amortization costs, royalty
rates for licensed technology embedded in our products, and the geographic
distribution of sales.
Marketing and sales. Marketing and sales expenses were 36 percent of net
revenues in the first six months of fiscal 2002, as compared to 33 percent in
the first six months of fiscal 2001. This difference was primarily due to higher
employee-related expenses as we increase our focus on direct sales to major
accounts. We expect to continue to make significant investments in marketing and
sales, both in absolute dollars and as a percentage of net revenues.
Research and development. Research and development expenses were $89.7 million
in the first six months of fiscal 2002 as compared to $82.5 million in the first
six months of fiscal 2001. The difference was primarily due to higher employee
related costs, efforts associated with our location services initiatives and
research and development costs incurred by RedSpark, Inc., a company that we
formed in April 2000. We expect that research and development spending will
continue to be significant as we continue to support product development efforts
by our market groups.
General and administrative. General and administrative expenses as a percentage
of net revenues remained constant at 14 percent for the first six months of
fiscal 2002 and 2001. Higher employee-related costs were offset by lower
professional fees and depreciation costs. We expect that general and
administrative expenses, as a percentage of net revenues, will remain consistent
with levels recently experienced.
12
Amortization of goodwill and purchased intangibles. Amortization of goodwill and
purchased intangibles was $10.5 million in the first six months of fiscal 2002
as compared to $15.1 million in the same period last year due to some
intangibles becoming fully amortized.
Nonrecurring charges (credits). During the second quarter of fiscal 2002, we
incurred $9.8 million related to restructuring and reorganization expenses.
These expenses consist primarily of office closure costs and one-time
reorganization costs.
During the first six months of fiscal 2001, we reversed $0.8 million related to
one-time accruals established in fiscal 2000. Of the $0.8 million, $0.6 million
related to restructuring accruals established in fiscal 2000. The accruals were
settled for less than originally estimated.
Interest and other income. Interest and other income, net was $13.0 million in
the first six months of fiscal 2002 and $7.3 million in the same period last
year. The increase was primarily due to higher investment income, mostly due to
sales of marketable securities, and one-time transactions.
Provision for income taxes. Our effective income tax rate was 30 percent for the
first six months of fiscal 2002 and 32 percent for the first six months of
fiscal 2001. The lower effective tax rate is primarily due to the impact
associated with our foreign earnings, which are taxed at rates different from
the federal statutory rate, and non-deductible goodwill amortization. The
effective tax rate for both periods is less than the federal statutory rate of
35 percent due to the amount of benefits associated with our foreign earnings,
research credits and tax-exempt interest, partially offset by non-deductible
goodwill amortization.
Equity in net loss of affiliate. We recognized $1.2 million of equity in net
losses during the first six months of fiscal 2002 and $7.6 million during the
same period last year. These amounts are related to our investment in
Buzzsaw.com.
Risk Factors Which May Impact Future Operating Results
We operate in a rapidly changing environment that involves a number of risks,
many of which are beyond our control. The following discussion highlights some
of these risks and the possible impact of these factors on future results of
operations.
You should carefully consider these risks before making an investment decision.
If any of the following risks actually occur, our business, financial condition
or results of operations may be adversely impacted. In that case, the trading
price of our common stock could decline, and you could lose all or part of your
investment.
Our operating results fluctuate within each quarter and from quarter to quarter
making our future revenues and operating results difficult to predict.
Our quarterly operating results have fluctuated in the past and are likely to do
so in the future. These fluctuations could cause our stock price to
significantly fluctuate or experience declines. Some of the factors that could
cause our operating results to fluctuate include, among other things the timing
of the introduction of new products by us or our competitors, changes in
marketing or operating expenses, changes in product pricing or product mix,
platform changes, delays in product releases, competitive factors, distribution
channel management, changes in compensation practices, the timing of systems
sales and general economic conditions.
We have also experienced fluctuations in operating results in interim periods in
certain geographic regions due to seasonality or regional economic conditions.
In particular, our operating results in Europe during the third quarter are
usually impacted by a slow summer period, and the Asia Pacific operations
typically experience seasonal slowing in the third and fourth quarters.
Additionally, our operating expenses are based in part on our expectations for
future revenues and are relatively fixed in the short term. Accordingly, any
revenue shortfall below expectations could have an
13
immediate and significant adverse effect on our business. Further, gross margins
may be adversely affected if our sales of low-end CAD products and AutoCAD
upgrades, which historically have had lower margins, grow at a faster rate than
sales of our higher-margin products.
Because we derive a substantial portion of our net revenues from a limited
number of products, if these products are not successful, our net revenues will
be adversely affected.
We derive a substantial portion of our net revenues from sales of AutoCAD
software, AutoCAD upgrades, and products that are interoperable with AutoCAD. As
such, any factor adversely affecting sales of AutoCAD and AutoCAD upgrades,
including product life cycle, market acceptance, product performance and
reliability, reputation, price competition and the availability of third-party
applications, would likely harm our operating results.
Existing and increased competition in the design software market may reduce our
net revenues, profits and market share.
The software industry has limited barriers to entry, and the availability of
desktop computers with continually expanding capabilities at progressively lower
prices contributes to the ease of market entry. Since customers increasingly
rely on the Internet, new platforms and technologies can be expected to be
developed in the design industries. The design software market in particular is
characterized by vigorous competition in each of the vertical markets in which
we compete, both by entry of competitors with innovative technologies and by
consolidation of companies with complementary products and technologies. In
addition, the availability of third-party application software is a competitive
factor within the CAD market. Because of these and other factors, competitive
conditions in the industry are likely to intensify in the future. Increased
competition could result in price reductions, reduced net revenues and profit
margins and loss of market share, any of which could harm our business.
Furthermore, some of our competitors have greater financial, technical, sales
and marketing and other resources.
We believe that our future results depend largely upon our ability to offer new
products, and to continue to provide existing product offerings, that compete
favorably with respect to reliability, performance, ease of use, range of useful
features, continuing product enhancements, reputation, price and training.
Our efforts to develop and introduce new products expose us to risks such as
costs related to product defects, large expenditures that may not result in
additional net revenues and dependence on third party developers.
Rapid technological change as well as changes in customer requirements and
preferences characterize the software industry. The software products we offer
are internally complex, and despite extensive testing and quality control, may
contain errors or defects. These defects or errors could result in corrective
releases to our software products, damage to our reputation, loss of revenues,
an increase in product returns or lack of market acceptance of our products, any
of which could harm our business.
With the prevalence of new Internet technologies and the demand for increased
customer connectivity, new platforms and technologies can be expected to be
developed in the design industries. We are devoting significant resources to the
development of such technologies as well as transitioning to new business
models, requiring a considerable investment of technical and financial
resources. Such investments may not result in sufficient revenue generation to
justify their costs, or competitors may introduce new products and services that
will achieve acceptance among our current customers, adversely affecting our
competitive position.
Independent firms and contractors perform some of our product development
activities, while other technologies are licensed from third parties. We
generally either own or license the software developed by third parties. Because
talented development personnel are in high demand, independent developers,
including those who currently develop products for us, may not be able to
provide development support to us in the future. Similarly, we may not be able
to obtain and renew license agreements on favorable terms, if at all, and any
failure to do so could harm our business.
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Our business strategy has historically depended in part on our relationships
with third-party developers, who provide products that expand the functionality
of our design software. Some developers may elect to support other products or
may experience disruption in product development and delivery cycles. In
particular markets, this disruption could negatively impact these third-party
developers and end users, which could harm our business.
Our international operations expose us to significant regulatory, intellectual
property, collections, exchange fluctuations and other risks, which could
adversely impact our future net revenues.
We anticipate that international operations will continue to account for a
significant portion of our consolidated net revenues. Risks inherent in our
international operations include the following: unexpected changes in regulatory
practices and tariffs, difficulties in staffing and managing foreign operations,
longer collection cycles for accounts receivable, potential changes in tax laws,
greater difficulty in protecting intellectual property and the impact of
fluctuating exchange rates between the U.S. dollar and foreign currencies in
markets where we do business.
Our risk management strategy uses derivative financial instruments in the form
of foreign currency option contracts and forward contracts for the purpose of
hedging foreign currency market exposures, which exist as a part of our ongoing
business operations. Our international results may also be impacted by general
economic and political conditions in these foreign markets. These and other
factors may adversely impact our future international operations and
consequently our business as a whole.
If we do not maintain our relationship with the members of our distribution
channel, our ability to generate net revenues will be adversely affected.
We sell our software products primarily to distributors and value-added
resellers, or VARs. Our ability to effectively distribute our products depends
in part upon the financial and business condition of our VAR network. Although
we have not recently experienced any material problems with the financial
viability of our VAR network, computer software dealers and distributors are
typically not highly capitalized, have previously experienced difficulties
during times of economic contraction and may do so in the future. In addition,
the changing distribution models resulting from the Internet, from increased
focus on direct sales to major accounts or from two-tiered distribution may
impact our VAR network in the future. While no single customer accounted for
more than 10 percent of our consolidated net revenues in fiscal 2001, the loss
of or a significant reduction in business with any one of our major
international distributors or large U.S. resellers could harm our business.
Product returns by VARs could exceed our estimates and harm our net revenues.
With the exception of some distributors, agreements with our VARs do not contain
specific product-return privileges. However, we permit our VARs to return
product in certain instances, generally during periods of product transition and
during update cycles. We anticipate that product returns in future periods will
continue to be impacted by product update cycles, new product releases and
software quality.
We establish reserves, including reserves for stock balancing and product
rotation. These reserves are based on estimated future returns of product and,
after taking into account channel inventory levels, the timing of new product
introductions and other factors. While we maintain strict measures to monitor
channel inventories and to provide appropriate reserves, actual product returns
may differ from our reserve estimates, and such differences could harm our
business.
If we are not able to adequately protect our proprietary rights, our business
could be harmed.
We rely on a combination of patents, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. Despite such efforts to protect our proprietary rights,
unauthorized parties from time to time have copied aspects of our software
products or have obtained and used information that we regard as proprietary.
Policing unauthorized use of our software products is time-consuming and costly.
While we have recovered some revenues resulting from
15
the unauthorized use of our software products, we are unable to measure the
extent to which piracy of our software products exists, and software piracy can
be expected to be a persistent problem. Furthermore, our means of protecting our
proprietary rights may not be adequate, and our competitors may independently
develop similar technology.
We may face intellectual property infringement claims that could be costly to
defend and result in our loss of significant rights.
We expect that software product developers will be increasingly subject to
infringement claims as the number of products and competitors in our industry
segments grows and as the functionality of products in different industry
segments overlaps. Infringement, invalidity claims, or misappropriation claims
may be asserted against us, and any such assertions could harm our business. Any
such claims, whether with or without merit, could be time-consuming, result in
costly litigation and diversion of resources, cause product shipment delays, or
require us to enter into royalty or licensing agreements. In addition, such
royalty or license agreements, if required, may not be available on acceptable
terms, if at all, which would likely harm our business.
We rely on third party technologies and if we are unable to use or integrate
these technologies, our product and service development may be delayed.
We rely on certain software that we license from third parties, including
software that is integrated with internally developed software and used in our
products to perform key functions. These third-party software licenses may not
continue to be available on commercially reasonable terms, and the software may
not be appropriately supported, maintained or enhanced by the licensors. The
loss of licenses to, or inability to support, maintain and enhance any such
software could result in increased costs, or in delays or reductions in product
shipments until equivalent software could be developed, identified, licensed and
integrated, which could harm our business.
The loss of key personnel or the inability to attract and retain additional
personnel, particularly in Northern California where we are headquartered, could
harm our business.
Our continued growth and success depends significantly on the continued service
of highly skilled employees. Competition for these employees in today's
marketplace, especially in the technology industries, is intense. Our ability to
attract and retain employees is dependent on a number of factors, including our
continued ability to grant stock incentive awards. The loss of key employees or
inability to recruit new employees would negatively impact our business. In
addition, we may experience increased compensation costs to attract and retain
skilled personnel.
The transition to a single European currency could negatively impact our
international operations.
As a result of the introduction of the Euro and during the transition period,
which will end on January 1, 2002, we will continue to modify the internal
systems that will be affected by this conversion. We may not be able to complete
such modifications to comply with Euro requirements, which could harm our
business. We are currently evaluating the impact of the introduction of the Euro
on our foreign exchange activities, functional currency designations, and
pricing strategies in the new economic environment. In addition, we face risks
to the extent that banks and vendors upon whom we rely and their suppliers are
unable to make appropriate modifications to support our operations with respect
to Euro transactions.
Our business could suffer as a result of risks associated with strategic
acquisitions and investments.
We periodically acquire or invest in businesses, software products and
technologies that are complementary to our business through strategic alliances,
debt and equity investments, and the like. The risks associated with such
acquisitions or investments include, among others, the difficulty of
assimilating the operations and personnel of the companies, the failure to
realize anticipated synergies, and the diversion of management's time and
attention. In addition, such investments and acquisitions may involve
significant transaction-related costs. We may not be successful in overcoming
such risks and such
16
investments and acquisitions may negatively impact our business. In addition,
such investments and acquisitions may contribute to potential fluctuations in
quarterly results of operations. The fluctuations could arise from
merger-related costs and charges associated with eliminating redundant expenses
or write-offs of impaired assets recorded in connection with acquisitions. These
costs or charges could negatively impact results of operations for a given
period or cause lack of a consistent increase quarter to quarter in our
operating results and financial condition.
We periodically make investments in related entities, such as Buzzsaw.com and
RedSpark, which typically do not expect to earn significant revenues in the
initial period of operations and which incur considerable start-up costs. Such
investments may negatively impact our results of operations and financial
condition.
Fluctuations in the price of our common stock due to net revenues or earnings
shortfalls or the volatility of the market generally may cause the market price
of our stock to decline, which could harm our business.
The market price for our common stock has experienced significant fluctuations
and may continue to fluctuate significantly. The market price for our common
stock may be affected by a number of factors, including the following: net
revenues or earnings shortfalls and changes in estimates or recommendations by
securities analysts; the announcement of new products or product enhancements by
us or our competitors; quarterly variations in our or our competitors' results
of operations; developments in our industry; and general market conditions and
other factors, including factors unrelated to our operating performance or the
operating performance of our competitors.
In addition, stock prices for many companies in the technology sector have
experienced wide fluctuations that have often been unrelated to the operating
performance of such companies. After periods of volatility in the market price
of a particular company's securities, securities class action litigation has
often been brought against that company. We are currently involved in this type
of litigation, and may become involved in this type of litigation in the future.
This type of litigation is often expensive and diverts management's attention
and resources, which could adversely affect our financial condition or results
of operations. Such factors and fluctuations, as well as general economic,
political and market conditions, may cause the market price of our common stock
to decline, which could harm our business.
General economic conditions may reduce our net revenues and harm our business.
As our business has grown, we have become increasingly subject to the risks
arising from adverse changes in domestic and global economic conditions. Because
of the recent economic slowdown in the U.S., many industries are delaying or
reducing technology purchases. The impact of this slowdown on us is difficult to
predict, but it may result in reductions in sales of our products, longer sales
cycles and increased price competition. As a result, if the current economic
slowdown continues or worsens, we may fall short of our revenue expectations for
any given quarter in fiscal 2002 or for the entire year. These conditions would
negatively affect our business and results of operations. In addition, weakness
in the end-user market could negatively affect the cash flow of our distributors
and VARs who could, in turn, delay paying their obligations to us. This would
increase our credit risk exposure, which could harm our profitability and
financial condition.
Business interruptions could adversely affect our business.
Our operations are vulnerable to interruption by fire, earthquake, power loss,
telecommunications failure and other events beyond our control. Our facilities
in Northern California are currently subject to electrical blackouts as a
consequence of a shortage of available electrical power. In the event these
blackouts continue or increase in severity, they could disrupt the operations of
our affected facilities. In connection with the shortage of available power,
prices for electricity have risen dramatically, and will likely continue to
increase for the foreseeable future. Such price changes will increase our
operating costs, which could in turn hurt our profitability.
17
Liquidity and Capital Resources
Cash, cash equivalents, and marketable securities totaled $432.7 million at July
31, 2001, compared to $422.5 million at January 31, 2001. The primary uses of
cash during the first six months of fiscal 2002 were: the repurchase of 2.0
million shares of our common stock for $75.0 million, capital and other
expenditures of $26.3 million and dividend payments totaling $6.5 million. The
primary sources of cash were cash provided by operating activities of $96.3
million and stock issuances resulting from our employee stock plans of $32.0
million.
The Board of Directors approved plans to repurchase up to 22.0 million shares of
our common stock. Of these 22.0 million shares, 14.1 million have been
repurchased as of July 31, 2001. The primary purpose of the stock repurchase
programs is to help offset the dilution to earnings per share caused by the
issuance of stock under our employee stock plans.
We have a U.S. line of credit permitting short-term, unsecured borrowings of up
to $75.0 million, which may be used from time to time for working capital or
other business needs. At July 31, 2001, there were no borrowings outstanding
under this agreement, which expires in January 2002.
Principal commitments at July 31, 2001 consisted of obligations under operating
leases for facilities and some computer equipment.
We believe that our existing cash, cash equivalents, marketable securities,
available line of credit, and cash generated from operations will be sufficient
to satisfy our currently anticipated short-term and longer-term cash
requirements. Longer-term cash requirements, other than normal operating
expenses, are anticipated for the development of new software products and
incremental product offerings resulting from the enhancement of existing
products; financing anticipated growth; dividend payments; the share repurchase
programs; investments in related entities; and the acquisition of businesses,
software products or technologies complementary to our business.
Our international operations are subject to currency fluctuations. To minimize
the impact of these fluctuations, we use foreign currency option contracts to
hedge our exposure on anticipated transactions and forward contracts to hedge
our exposure on firm commitments, primarily certain payables and receivables
denominated in foreign currencies. Our foreign currency instruments generally
have maturities of less than three months, and the option contracts settle
before the end of a quarterly period. The principal currencies hedged during the
three months ended July 31, 2001 were the Euro, British pound, and Japanese yen.
We monitor our foreign exchange exposures to ensure the overall effectiveness of
our foreign currency hedge positions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have no material changes to the disclosure on this matter made in our report
on Form 10-K for the fiscal year ended January 31, 2001.
18
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
We are involved in various legal proceedings arising from the normal course of
business activities. In addition, in March and April 2000, three class action
complaints were filed against us and certain of our officers and directors,
alleging violations of the Securities Exchange Act of 1934. The United States
District Court for the Northern District of California consolidated these
complaints into one lawsuit in August 2000. The plaintiffs seek to act on behalf
of purchasers of Autodesk common stock during the period between September 14,
1998 and May 4, 1999 and are seeking unspecified damages. On November 14, 2000
the Court granted our motion to dismiss the lawsuit, allowing the plaintiffs to
amend their complaint. The plaintiffs filed an amended complaint and we have
filed a motion to dismiss the amended complaint. The motion is not yet scheduled
for a hearing. We believe we have meritorious defenses to the amended complaint
and we intend to vigorously defend the action.
In our opinion, resolution of these matters is not expected to have a material
adverse impact on our consolidated results of operations or our financial
position. However, depending on the amount and timing, an unfavorable resolution
of a matter could materially affect our future results of operations or cash
flows in a particular period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Stockholders held on June 21, 2001, the following
individuals were re-elected to the Board of Directors. Each director will serve
for the ensuing year.
Votes For Votes Withheld
--------- --------------
Carol A. Bartz 48,544,056 1,441,733
Mark A. Bertelsen 48,576,653 1,409,136
Crawford W. Beveridge 49,357,338 628,451
J. Hallam Dawson 49,355,692 630,097
Per-Kristian Halvorsen 49,359,107 626,682
Paul S. Otellini 49,359,842 625,947
Mary Alice Taylor 49,352,396 633,393
Larry Wangberg 49,358,993 626,796
The following proposal was approved at our Annual Meeting:
Affirmative Negative Votes
Votes Votes Withheld
----- ----- --------
Ratify the appointment of Ernst & Young
LLP as independent auditors for the fiscal
year ending January 31, 2002. 49,613,289 202,982 169,518
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
No exhibits were filed as part of this Form 10-Q.
Reports on Form 8-K
- -------------------
No reports on Form 8-K were filed during the quarter ended July 31,
2001.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 23, 2001
AUTODESK, INC.
(Registrant)
/S/ CAROL A. BARTZ
-------------------
Carol A. Bartz
Chairman, Chief Executive Officer and President
/S/ STEVE CAKEBREAD
--------------------
Steve Cakebread
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
20
