☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2022
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: 333-262106
ASPEN TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware
87-3100817
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
20 Crosby Drive
Bedford
Massachusetts
01730
(Address of principal executive offices)
(Zip Code)
(781) 221-6400
(Registrant’s telephone number, including area code)
____________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Common stock, $0.0001 par value per share
AZPN
NASDAQ Global Select Market
____________________________________________
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: Yesý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
☐
Non-accelerated filer
ý
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes ☐ No ý
There were 64,771,272 shares of common stock outstanding as of January 23, 2023.
Aspen Technology, Inc. (“AspenTech”) has many registered trademarks including aspenONE and Aspen Plus. All other trade names, trademarks and service marks appearing in this Form 10-Q are the property of their respective owners.
Our fiscal year ends on June 30th, and references to a specific fiscal year are to the twelve months ended June 30th of such year (for example, “fiscal 2023” refers to the year ending June 30, 2023).
NOTES TO UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Aspen Technology, Inc., together with its subsidiaries (“AspenTech” or “Company”), is a leading industrial software company that develops solutions to address complex industrial environments where it is critical to optimize the asset design, operations and maintenance lifecycle. Through the Company’s unique combination of product capabilities and deep domain expertise and award-winning innovation, customers across diverse end markets in capital-intensive industries can improve their operational excellence while achieving sustainability goals.
On October 10, 2021, Emerson Electric Co. (“Emerson” or “Parent Company”) entered into a definitive agreement (the “Transaction Agreement”) with AspenTech Corporation. (“Heritage AspenTech”) to contribute the Emerson Industrial Software Business (the “Industrial Software Business”), along with $6.014 billion in cash, to create AspenTech (the “Transaction”). The Industrial Software Business included Open Systems International, Inc. (“OSI Inc.”) and Geological Simulation Software business (“GSS”), which we have renamed as Subsurface Science & Engineering (“SSE”). The Transaction closed on May 16, 2022 (“Closing Date”). Emerson owns 55% of AspenTech on a fully diluted basis as of December 31, 2022.
On December 23, 2022, the Company entered into a credit agreement with Emerson (the “Emerson Credit Agreement”), which will provide for an aggregate term loan commitment of $630.0 million. Refer to Note 13, “Related-Party Transactions”, to our consolidated and combined financial statements for further discussion of the Emerson Credit Agreement.
On July 27, 2022, the Company entered into a definitive agreement to acquire Mining Software Holdings Pty Ltd (“Micromine”) for AU$900.0 million in cash (approximately $623.0 million based on exchange rates when the acquisition was initially announced). Micromine is a global leader in design and operational management solutions for the metals and mining industry. The Company currently intends to finance the transaction primarily through debt financing under the Emerson Credit Agreement. The acquisition is expected to close as soon as the remaining regulatory approval is obtained.
The Company operates globally in 79 countries as of December 31, 2022.
Basis of Presentation
The accompanying consolidated and combined financial statements include the accounts of Aspen Technology, Inc. and our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The Transaction was accounted for as a business combination in accordance with U.S. GAAP, with the Industrial Software Business treated as the “acquirer” and Heritage AspenTech treated as the “acquired” company for financial reporting purposes. Accordingly, for the three- and six-month interim period ended December 31, 2021, the consolidated and combined financial statements comprise the results of the Industrial Software Business only and do not include the results of Heritage AspenTech.
We have prepared the accompanying consolidated and combined financial statements as of December 31, 2022, and for the second quarter of fiscal 2023 and 2022, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and in accordance with generally accepted accounting principles in the United States (GAAP). These consolidated and combined financial statements should be read in conjunction with the consolidated and combined financial statements and the notes thereto included in our Transition Reports on Form 10-KT for the fiscal year ended June 30, 2022.
The preparation of financial statements and related disclosures in conformity with GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated and combined financial statements and accompanying notes. The actual results that we experience may differ materially from our estimates.
Certain reclassifications have been made to the amounts in prior periods in order to conform to the current period’s presentation. We have evaluated subsequent events through the date that the financial statements were issued.
Russia and Ukraine
While the Company has no operations in Ukraine, the ongoing conflict there could negatively impact its financial position, results of operations and cash flows. The United States and other governments have imposed sanctions and taken other regulatory actions that adversely affect doing business in Russia and with Russian companies. The Company maintains
operations in Russia, licenses software and provides related services to customers in Russia and areas of Ukraine that are not under sanction. The Company had net sales of approximately $16.8 million and $26.8 million for the three- and six-month period ended December 31, 2022, respectively, and total assets of approximately $19.3 million as of December 31, 2022, related to operations in Russia. While the conflict has not had a material impact on the Company’s financial results thus far, the Company continues to evaluate the impact of the various sanctions, export control measures and business restrictions imposed by the United States and other governments on its ability to do business in Russia and areas of Ukraine that are not under sanction, maintain contracts with vendors and pay employees in Russia, as well as receive payment from customers in Russia and areas of Ukraine that are not under sanction. The outcome of these assessments will depend on how the conflict evolves and on further actions that may be taken by the United States, Russia, and other governments around the world. As a software company, no material impact to supply chain operations is expected due to the conflict in Ukraine.
If the sanctions and other retaliatory measures and restrictions imposed by the global community change, the Company may be required to cease or suspend operations in the region or, should the conflict or the effects of these sanctions, measures and restrictions worsen, the Company may voluntarily elect to do so. Any disruption to, or suspension of, the Company’s business and operations in Russia would result in the loss of revenues from the business in Russia. In addition, as a result of the risk of collectability of receivables from customers in Russia, the Company may be required to adjust accounting practices relating to revenue recognition in this region, with the result that the Company may not be able to recognize revenue until risk of revenue reversal is not probable.
2. Significant Accounting Policies
Our significant accounting policies are described in Note 2 to the consolidated and combined financial statements included in our Transition Reports on Form 10-KT for the fiscal year ended June 30, 2022. There were no material changes to our significant accounting policies during the three and six months ended December 31, 2022, other than those noted below.
(a)Derivatives and Hedging
We use derivative instruments to manage exposures to foreign currency exchange rate risks. Our primary objective of holding derivatives is to reduce the volatility of cash flows associated with changes in foreign currency exchange rates. Our derivatives expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. We do seek to mitigate such risks by limiting our counterparties to major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored. Management does not expect material losses as a result of defaults by counterparties.
The Company accounts for derivative transactions in accordance with ASC Topic 815, “Derivatives and Hedging,” and recognizes derivatives instruments as either assets or liabilities in the consolidated and combined balance sheet and measures those instruments at fair value. The Company’s foreign currency forward contracts as described in Note 11 do not qualify for hedge accounting. Accordingly, the changes in fair value of the derivative transactions are presented in earnings.
(b) Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements that will be applicable to the Company are not expected to have a material impact on the Company’s consolidated and combined financial statements.
The contract assets are subject to credit risk and are reviewed in accordance with ASC 326. The Company monitors the credit quality of customer contract asset balances on an individual basis, at each reporting date, through credit characteristics, geographic location, and the industry in which they operate. The Company recognizes an impairment on contract assets if, subsequent to contract inception, it becomes probable payment is not collectible. An allowance for expected credit loss reflects losses expected over the remaining term of the contract asset and is determined based upon historical losses, customer-specific factors, and current economic conditions.The Company’s contract assets and contract liabilities were as follows as of December 31, 2022 and June 30, 2022:
December 31, 2022
June 30, 2022
(Dollars in Thousands)
Contract assets
$
935,534
$
857,065
Contract liabilities
(176,594)
(164,408)
$
758,940
$
692,657
Contract assets and contract liabilities are presented net at the contract level for each reporting period.
The majority of the Company’s contract balances are related to arrangements where revenue is recognized at a point in time and payments are made according to contractual billing schedules. The change in the net contract balance during the six months ended December 31, 2022 was primarily due to greater revenue recognition as compared to billings. Revenue recognized from the contract liability balance, as of June 30, 2022, was $37.1 million and $72.6 million during the three and six months ended December 31, 2022, respectively.
The Company did not have any customer that accounted for 10 percent or more of the Company’s revenues for the three and six months ended December 31, 2022 and 2021, respectively.
Transaction Price Allocated to Remaining Performance Obligations
The following table includes the aggregate amount of the transaction price allocated as of December 31, 2022 to the performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period:
Year Ending June 30,
2023
2024
2025
2026
2027
Thereafter
Total
(Dollars in Thousands)
License and solutions
$
117,453
$
110,707
$
69,993
$
27,445
$
6,899
$
173
$
332,670
Maintenance
148,892
230,708
156,535
115,242
83,846
49,696
784,919
Services and other
45,306
10,465
3,948
2,874
2,183
3,865
68,641
Total
$
311,651
$
351,880
$
230,476
$
145,561
$
92,928
$
53,734
$
1,186,230
The table below reflects disaggregated revenues by business for the three and six months ended December 31, 2022 and 2021, respectively.
On August 29, 2022, the Company completed the acquisition of inmation Software GmbH (“Inmation”) for total cash consideration of $87.4 million. The purchase price consisted of $78.9 million of cash paid at closing and an additional $8.5 million to be held back until August 2023 as security for certain representations, warranties, and obligations of the sellers. The holdback is recorded in accrued expenses and other current liabilities in our consolidated and combined balance sheets. The total cash acquired from Inmation was approximately $4.0 million resulting in a net cash payment of $74.9 million. The Company recognized goodwill of $63.6 million (none of which is expected to be tax deductible) and identifiable intangible assets of $31.5 million, primarily developed technology and customer relationships, with a useful life of approximately five years for developed technology and seven years for customer relationships. The fair value of assets acquired and liabilities assumed represent the preliminary fair value estimates, and are subject to subsequent adjustments as the Company obtains additional information during the measurement period and finalizes its fair value estimates.
Inmation’s revenue and net loss included in the Company’s consolidated and combined income statement from the acquisition date to the reporting period ending on December 31, 2022 were $1.2 million and $(1.1) million, respectively. Results included amortization of developed technology and customer relationships of $1.9 million.
Prior to the closing date, Inmation was considered a related party to AspenTech as Emerson, through one of its subsidiaries, held an equity-method investment in Inmation. At the time of close, $17.6 million was paid to Emerson in exchange for all of its shares in Inmation, with another $2.0 million to be paid 12 months after the close.
Heritage AspenTech
On October 10, 2021, Emerson entered into the Transaction with Heritage AspenTech to contribute the Industrial Software Business comprised of OSI and the SSE business, along with $6.014 billion in cash, to create the Company. On the Closing Date, Emerson owned 55% of the outstanding common shares of AspenTech on a fully diluted basis, while the stockholders of Heritage AspenTech owned the remaining 45%. The acquisition-date fair value of the purchase consideration totaled $11.19 billion.
During the first two quarters of fiscal 2023, the Company recorded purchase price allocation adjustments that increased goodwill by $1.7 million. The following table sets forth the purchase price allocation of the Heritage AspenTech acquisition:
Amount
(Dollars in Thousands)
Cash and cash equivalents
$
273,728
Accounts receivable
43,163
Current and non-current contract assets
730,548
Intangible assets
4,390,667
Other net assets acquired
66,753
Total asset acquired (excluding Goodwill)
5,504,859
Accounts payable, accrued expenses, and other current liabilities
56,005
Current and non-current deferred revenue
62,319
Current and non-current borrowings under credit agreement
282,000
Deferred income taxes
1,078,463
Other net liabilities assumed
62,279
Total liabilities assumed
1,541,066
Net identifiable assets acquired
3,963,793
Goodwill
7,224,483
Net assets acquired
$
11,188,276
The following pro forma consolidated and combined financial results of operations are presented as if the Heritage AspenTech acquisition occurred on October 1, 2020. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved had the acquisition occurred as of that time.
Intangible assets consisted of the following as of December 31, 2022 and June 30, 2022:
Developed Technology
Trademarks
Customer Relationships and Backlog
Capitalized Software and Other
Total
(Dollars in Thousands)
December 31, 2022:
Gross carrying amount
$
1,903,599
$
464,400
$
3,082,541
$
10,348
$
5,460,888
Less: Accumulated amortization
(248,960)
(11,599)
(289,320)
(8,567)
(558,446)
Net carrying amount
$
1,654,639
$
452,801
$
2,793,221
$
1,781
$
4,902,442
June 30, 2022:
Gross carrying amount
$
1,882,037
$
464,400
$
3,072,738
$
10,149
$
5,429,324
Less: Accumulated amortization
(153,758)
(9,379)
(144,888)
(8,518)
(316,543)
Net carrying amount
$
1,728,279
$
455,021
$
2,927,850
$
1,631
$
5,112,781
The increase in intangible assets from June 30, 2022 was primarily due to the Inmation acquisition. See Note 4, Acquisitions. Total intangible asset amortization expense was $121.2 million for the three months ended December 31, 2022, of which $98.9 million related to the Heritage AspenTech Transaction. Total intangible asset amortization expense was $242.3 million for the six months ended December 31, 2022 of which, $1.9 million related to the Heritage AspenTech Transaction.
6. Goodwill
The changes in the carrying amount of goodwill during the six months ended December 31, 2022 were as follows:
Carrying Value
(Dollars in Thousands)
Balance, June 30, 2022
$
8,266,809
Goodwill from Inmation acquisition
63,577
Purchase accounting adjustment from Heritage AspenTech acquisition
(1,685)
Foreign currency translation
145
Balance, December 31, 2022
$
8,328,846
7. Fair Value
The Company determines fair value by utilizing a fair value hierarchy that ranks the quality and reliability of the information used in its determination. Fair values determined using “Level 1 inputs” utilize unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined using “Level 2 inputs” utilize data points that are observable, such as quoted prices, interest rates and yield curves for similar assets and liabilities.
Cash equivalents are reported at fair value utilizing quoted market prices in identical markets, or “Level 1 Inputs.” The Company’s cash equivalents consist of short-term money market instruments.
Equity method investments are reported at fair value calculated in accordance with the market approach, utilizing market consensus pricing models with quoted prices that are directly or indirectly observable, or “Level 2 Inputs.”
Our derivative instruments are primarily classified as Level 2, as they are not actively traded and are valued using pricing models that use observable market inputs.
The following table summarizes financial assets and liabilities measured and recorded at fair value on a recurring basis in the accompanying consolidated and combined balance sheets as of December 31, 2022 and June 30, 2022, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Fair Value Measurements at Reporting Date Using
Quoted Prices in Active Markets for Identical Assets
(Level 1 Inputs)
Significant Other Observable Inputs
(Level 2 Inputs)
(Dollars in Thousands)
December 31, 2022:
Cash equivalents
$
2,955
$
—
Equity method investments
—
2,231
Derivative liabilities
—
(15,319)
June 30, 2022:
Cash equivalents
$
2,998
$
—
Equity method investments
—
1,761
Financial instruments not measured or recorded at fair value in the accompanying consolidated and combined financial statements consist of accounts receivable, accounts payable and accrued liabilities. The estimated fair value of these financial instruments approximates their carrying value. The estimated fair value of the borrowings under the Amended and Restated Credit Agreement (described below in Note 8, “Credit Agreement”) approximates its carrying value due to the floating interest rate.
8. Debt
Bridge Facility
On July 27, 2022, the Company entered into a $475.0 million senior unsecured bridge facility (the “Bridge Facility”) with JPMorgan Chase Bank, N.A. (“JPMorgan”), as Administrative Agent, to finance the Micromine acquisition. The Bridge Facility was entered into under the existing Amended and Restated Credit Agreement dated as of December 23, 2019, with JPMorgan (“Credit Agreement”). The Company may elect that each incremental borrowing under the Bridge Facility bear interest at a rate per annum equal to (a) the Alternate Base Rate (“ABR”), plus the applicable margin or (b) the Adjusted Term Secured Overnight Financing Rate (“SOFR”), plus the applicable margin.
As consideration for JPMorgan’s agreement to act as administrative agent for the Bridge Facility, the Company is required to pay a fee of $50,000 per annum, payable on the closing date of the loan and every anniversary thereof during the term of the loan.
In addition, the Company incurred issuance costs associated with the Bridge Facility. For the six months ended December 31, 2022, the Company paid a total of $2.375 million in fees to JPMorgan to secure the Bridge Facility.
On December 23, 2022, the Company terminated the Bridge Facility, and at the same time entered into a credit agreement with Emerson (the “Emerson Credit Agreement”), which will provide for an aggregate term loan commitment of $630.0 million. Refer to Note 13, “Related-Party Transactions”, to our consolidated and combined financial statements for further discussion of the Emerson Credit Agreement.
The Company also has a Credit Agreement with JP Morgan that provides for a $200.0 million secured revolving credit facility and a $320.0 million secured term loan facility.
As of December 31, 2022, the Company’s current and non-current borrowings, under the term loan facility, were $264.0 million and $0.0 million, respectively. As of June 30, 2022, the Company’s current and non-current borrowings, under the term loan facility, were $28.0 million and $245.6 million, respectively. The interest rate on the term loan facility as of December 31, 2022 was 5.26%. There were no amounts outstanding under the revolving credit facility at either December 31, 2022 or June 30, 2022. Any outstanding balances of the indebtedness under the revolving credit facility mature on December 23, 2024. Refer to Note 15, “Subsequent Events”, to our consolidated and combined financial statements for further discussion of the subsequent payoff of our term loan facility of the Credit Agreement after the reporting date of December 31, 2022.
The Credit Agreement contains customary affirmative and negative covenants, which are also applicable to the Bridge Facility, including restrictions on incurrence of additional debt, liens, fundamental changes, asset sales, restricted payments (including dividends) and transactions with affiliates. There are also financial covenants measured at the end of each fiscal quarter including a maximum leverage ratio of 3.50 to 1.00 and a minimum interest coverage ratio of 2.50 to 1.00. As of December 31, 2022, the Company was in compliance with all the loan covenants.
9. Stock-Based Compensation
The stock-based compensation expense under all equity plans and its classification in the unaudited consolidated and combined statements of operations for the three and six months ended December 31, 2022 and 2021 are as follows:
Three Months Ended December 31,
Six Months Ended December 31,
2022
2021
2022
2021
(Dollars in Thousands)
Recorded as expenses:
Cost of license and solutions
$
1,200
$
—
$
1,919
$
—
Cost of maintenance
474
—
1,035
—
Cost of services and other
428
—
858
—
Selling and marketing
3,826
—
7,191
—
Research and development
4,240
—
7,858
—
General and administrative
13,273
458
22,316
826
Total stock-based compensation
$
23,441
$
458
$
41,177
$
826
During the six month period ended December 31, 2022, the Company granted 167,932 stock options and 164,693 restricted stock units (“RSUs”). The stock options granted had a weighted average exercise price of $207.79 per option and a weighted average fair value of $77.45 per option. The RSUs granted had a weighted average fair value of $207.87 per RSU.
10. Net Income Per Share
Basic income per share is determined by dividing net income by the weighted average common shares outstanding during the period. Diluted income per share is determined by dividing net income by diluted weighted average shares outstanding during the period. Diluted weighted average shares reflect the dilutive effect, if any, of potential common shares. To the extent their effect is dilutive, employee equity awards and other commitments to be settled in common stock are included in the calculation of diluted net income per share based on the treasury stock method.
Prior to the Transaction, the Industrial Software Business did not have any shares of common stock outstanding. Accordingly, net loss per share for the three and six months ended December 31, 2022 has been calculated using weighted average shares outstanding (basic and diluted) based on the number of shares of common stock issued to Emerson on the Closing Date of the Transaction.
The calculations of basic and diluted net income per share and basic and dilutive weighted average shares outstanding for the three and six months ended December 31, 2022 and 2021 are as follows:
Three Months Ended December 31,
Six Months Ended December 31,
(Dollars and Shares in Thousands, Except per Share Data)
2022
2021
2022
2021
Net (loss)
$
(66,197)
$
(760)
$
(77,441)
$
(11,962)
Basic weighted average shares outstanding
64,621
36,308
64,538
36,308
Dilutive weighted average shares outstanding
64,621
36,308
64,538
36,308
(Loss) per share
Basic
$
(1.02)
$
(0.02)
$
(1.20)
$
(0.33)
Dilutive
$
(1.02)
$
(0.02)
$
(1.20)
$
(0.33)
For the three and six months ended December 31, 2022 and 2021, certain employee equity awards were anti-dilutive based on the treasury stock method. The following employee equity awards were excluded from the calculation of dilutive weighted average shares outstanding because their effect would be anti-dilutive as of December 31, 2022 and 2021:
Three Months Ended December 31,
Six Months Ended December 31,
2022
2021
2022
2021
(Shares in Thousands)
Employee equity awards
1,574
—
1,479
—
11. Derivatives
In connection with the agreement to purchase Micromine, the Company also entered into foreign currency forward contracts on August 2, 2022 for a six-month period ending on February 6, 2023 to mitigate the impact of foreign currency exchange associated with the forecasted payment of purchase price. The acquisition is expected to close as soon as the remaining regulatory approval is obtained.
The notional amounts of our outstanding derivatives are in total AU $900 million. As of December 31, 2022, the fair values of our derivative instruments were $15.3 million and were recorded to the liability from foreign currency forward contract caption on the consolidated and combined balance sheets. For the three and six months ended December 31, 2022, the Company recognized gains of $34.9 million and losses of $15.3 million, respectively, and recorded as part of the other income (expense), net on the consolidated and combined statements of operations.
12. Benefit for Income Taxes
The Company computes its tax provision (benefit) for interim periods by applying the estimated annual effective tax rate (“AETR”) to year-to-date income from operations and adjusting for discrete items arising in that quarter. However, if the Company is unable to make a reliable estimate of its AETR, then the actual effective tax rate for the year-to-date period may be the best estimate. For the three months and six months ended December 31, 2021, the Company computed its tax provision (benefit) using the AETR approach. However, for the six months ended December 31, 2022, the Company recorded the actual effective tax rate as it was determined that the AETR approach was not the most appropriate estimate to be applied to the year to date pretax (loss) income given small changes in the forecast of pre-tax (loss) income would result in significant changes in the AETR.
Income tax expense was $49.6 million for the three months ended December 31, 2022 and income tax benefit was $0.9 million for the three months ended December 31, 2021, resulting in effective tax rates of (298.0)% and 55.1%, respectively. Our income tax was higher in the three months ended December 31, 2022 due to the current quarters' change in the Company’s approach to computing its tax provision (benefit) for the interim periods to the actual effective tax rate method.
The change resulted in a tax provision during the three months ended December 31, 2022 that reflects recording a year-to-date benefit compared to that of the three months ended September 30, 2022, which was recorded under the AETR approach.
Benefit for income taxes was $44.0 million and $5.2 million for the six months ended December 31, 2022 and December 31, 2021, respectively, resulting in effective tax rates of 36.2% and 30.5%, respectively. Income tax benefit increased due to the higher Foreign-Derived Intangible Income (“FDII”) deduction recorded in the current period as a result of non-deductible amortization of intangibles, capitalized R&D costs, and a change in the accounting methodology related to historical revenue recognition for tax purposes on multi-year software license agreements. The change resulted in the recognition of taxable income over a four-tax year period with fiscal year 2024 as the last year of the adjustment.
13. Related-Party Transactions
The Company utilizes Emerson’s centralized treasury function which manages the working capital and financing needs of its business operations. This function oversees a cash pooling arrangement which sweeps certain Company cash accounts into pooled Emerson cash accounts on a daily basis. Pooled cash and nontrade balances attributable to Emerson have been presented as receivables from related parties or due to related parties in the consolidated and combined financial statements of the Company.
Before the Closing Date, the Industrial Software Business was charged for costs directly attributable to the SSE business and OSI and was allocated a portion of Emerson’s costs, including general corporate costs, information technology costs, insurance and other benefit costs, and shared service and other costs. All of these costs are reflected in the Company’s consolidated and combined financial statements. Management believes the methodologies and assumptions used to allocate these costs are reasonable.
At the Closing Date, Emerson and the Company entered into the transition service agreement (“TSA”) for the provision of certain transitionary services from Emerson to AspenTech. Pursuant to the TSA, Emerson will provide AspenTech and its subsidiaries with certain services, including information technology, human resources and other specified services, as well as access to certain of Emerson’s existing facilities. TSA related activities have been recorded as cost of goods sold or operating expenses from related parties and resulting balances have been presented as receivable from or due to related parties in the consolidated and combined financial statements presented.
Receivables from related parties and due to related parties reported in the consolidated and combined balance sheets as of December 31, 2022 and June 30, 2022 include the following:
December 31,
June 30,
2022
2022
Interest bearing receivables from related parties
$
14,946
$
16,122
Trade receivables from related parties
153
819
Interest bearing payables to related parties
30,883
2,028
Trade payables to related parties
1,401
2,083
Allocations and charges from Emerson are as follows:
Three Months Ended December 31,
Six Months Ended December 31,
2022
2021
2022
2021
Corporate costs
$
—
$
490
$
—
$
1,091
Information technology
763
427
1,574
862
Insurance and other benefits
—
145
—
374
Shared services and other
1,157
2,848
3,895
5,635
Corporate costs, human resources, and insurance and other benefits are recorded in general and administrative expenses and information technology, facility charges, and shared services and other are allocated to cost of goods sold and operating expenses based on systematic methods.
Before the Closing Date, OSI and the SSE business engaged in various transactions to sell software and purchase goods in the ordinary course of business with affiliates of Emerson. At the Closing Date, the Company and Emerson entered into a commercial agreement to allow Emerson to distribute software and services from AspenTech (the “Commercial Agreement”). Pursuant to the Commercial Agreement as amended from time to time in accordance with the Stockholders Agreement, AspenTech will grant Emerson the right to distribute, on a non-exclusive basis, certain (i) existing Heritage AspenTech products, (ii) existing Emerson products being transferred to AspenTech pursuant to the Transaction Agreement and (iii) future AspenTech products as mutually agreed upon, in each case, to end-users through Emerson acting as an agent, reseller or original equipment manufacturer. Commercial Agreement related activities have been recorded as revenues and expenses from related parties and resulting trade balances have been presented as trade receivables from related parties in the consolidated and combined financial statements presented. Revenue from Emerson are as follows:
Three Months Ended December 31,
Six Months Ended December 31,
2022
2021
2022
2021
Revenue from Emerson affiliates
$
4
$
8
$
567
$
1,009
Purchases from Emerson affiliates
85
215
1,786
5,394
Emerson Share Maintenance Rights
Immediately following the Closing Date, Emerson beneficially owned 55% of the fully diluted shares of AspenTech common stock. Under the Shareholders Agreement, Emerson has the right to acquire additional equity securities of AspenTech pursuant to pre-agreed procedures and rights in order to maintain its 55% ownership. No additional shares of common stock, or any other equity securities of AspenTech, were issued to Emerson subsequent to the Closing Date through December 31, 2022.
Business combination with related party
The Inmation acquisition completed on August 29, 2022 was considered a related party transaction. Refer to Note 4, “Acquisitions”, to our consolidated and combined financial statements for further discussion.
Credit agreement with related party
On December 23, 2022, the Company entered into the Emerson Credit Agreement with Emerson, which provides for an aggregate term loan commitment of $630.0 million. Under the terms of the Agreement, the Company will use the proceeds from borrowings under the Agreement to (i) pay in part the cash consideration for funding acquisitions, (ii) consummate certain other loan repayments, (iii) pay the fees and expenses incurred in connection with the Emerson Credit Agreement and (iv) for other working capital and general corporate purposes.
Principal outstanding under the Emerson Credit Agreement bears interest at a rate per annum equal to Term SOFR Rate (as such term is defined in Emerson Credit Agreement) plus an amount ranging from 1.25% to 1.75%.
The term loan to be made under the Agreement is unsecured and matures on the fifth anniversary of the date the term loan is funded. The Company is permitted to prepay the term loan in whole or in part upon provision of notice in accordance with the Emerson Credit Agreement. Upon an event of default (as such term is defined in the Emerson Credit Agreement), the loan may become due and payable in full upon provision of notice in accordance with the Agreement.
In addition, the Emerson Credit Agreement includes a mandatory prepayment provision if at any time Emerson fails to beneficially own more than 40% of our common stock for a period of more than 30 consecutive days and Emerson provides us written notice requiring us to prepay the term loan. In such an event, we would have no less than either 30 days or 180 days from the date of such notice, depending upon the circumstances giving rise to the decrease in Emerson’s ownership interest, to prepay the term loan.
The Emerson Credit Agreement contains affirmative and negative covenants customary for facilities of this type, including restrictions on incurrence of additional debt, liens, fundamental changes, asset sales, restricted payments and transactions with affiliates. The Agreement also contains financial covenants regarding maintenance as of the end of each fiscal quarter of a maximum leverage ratio of 3.50 to 1.00 and a minimum interest coverage ratio of 2.50 to 1.00. As of December 31, 2022, the Company was in compliance with all the loan covenants.
There was no amount outstanding under the Emerson Credit Agreement at December 31, 2022.
14. Segment Information
Operating segments are defined as components of an enterprise that engage in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and to assess performance.
Prior to the Transaction, the Industrial Software Business had two operating and reportable segments: OSI Inc. and the GSS business (subsequently renamed Subsurface Science & Engineering Solutions, or “SSE”, after the Closing Date). The Transaction resulted in the creation of a third operating and reportable segment: Heritage AspenTech. During the three months ended September 30, 2022, the Company completed certain integration activities and changes to its organizational structure that triggered a change in the composition of its operating and reportable segments. As a result, beginning with the interim period ended September 30, 2022, the Company is now comprised of a single operating and reportable segment. Accordingly, the Company has restated its operating and reportable segment information for the three and six months ended December 31, 2021. The Company’s chief operating decision maker is its President and Chief Executive Officer.
Geographic Information
Summarized below is information about the Company’s geographic operations:
Revenue by Destination
Three Months Ended December 31,
Six Months Ended December 31,
2022
2021
2022
2021
Americas
$
114,463
$
60,041
$
245,321
$
111,938
Asia, Middle East and Africa
62,043
12,249
115,714
22,812
Europe
66,332
9,485
132,622
24,040
Total
$
242,838
$
81,775
$
493,657
$
158,790
Americas included revenue in the U.S. of $88.1 million and $53.2 million for the three months ended December 31, 2022 and 2021, respectively, and $200.4 million and $102.2 million for the six months ended December 31, 2022 and 2021, respectively.
Property, Equipment, and
Leasehold Improvements, Net
December 31, 2022
June 30, 2022
Americas
$
14,685
$
14,591
Asia, Middle East and Africa
1,686
1,154
Europe
767
1,403
Total
$
17,138
$
17,148
Property, equipment, and leasehold improvements located in the U.S. were $13.1 million and $13.0 million as of December 31, 2022 and June 30, 2022, respectively.
15. Subsequent Events
On January 17, 2023, the Company paid off the outstanding balance of our existing JPMorgan term loan facility of $264.0 million, plus accrued interest, which resulted in the long-term portion of term loan obligation being reclassified and reported as short-term borrowings as of December 31, 2022.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Caution Concerning Forward-Looking Statements
This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, prospective products, size of market, plans, objectives of management, expected market growth and the anticipated effects of the coronavirus (COVID-19) pandemic (and any COVID-19 variants, the “COVID-19 pandemic”) on our business, operating results and financial condition are forward-looking statements.
Forward-looking statements concern future circumstances and results and other statements that are not historical facts and are sometimes identified by the words “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “plan,” “could,” “would,” “project,” “predict,” “continue,” “target” or other similar words or expressions or negatives of these words, but not all forward-looking statements include such identifying words. Forward-looking statements are based upon current plans, estimates and expectations that are subject to risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. We can give no assurance that such plans, estimates or expectations will be achieved and therefore, actual results may differ materially from any plans, estimates or expectations in such forward-looking statements.
Any forward-looking statements speak only as of the date of this Quarterly Report. We undertake no obligation to update any forward-looking statements, whether as a result of new information or development, future events or otherwise, except as required by law. You should read the following discussion in conjunction with our unaudited consolidated and combined financial statements and related notes thereto contained in this report. You should also read “Item 1A. Risk Factors” of Part II for a discussion of important factors that could cause our actual results to differ materially from our expectations.
Our fiscal year ends on June 30, and references in this Quarterly Report to a specific fiscal year are the twelve months ended June 30 of such year with the exception of fiscal 2022 being the nine months ended June 30 (for example, “fiscal 2023” refers to the year ending June 30, 2023).
Business Overview
We are a global leader in asset optimization software that enables industrial manufacturers to design, operate, and maintain their operations for maximum performance. We combine decades of modeling, simulation, and optimization capabilities with industrial operations expertise and apply advanced analytics to improve the profitability and sustainability of production assets. Our purpose-built software is proven to drive value creation levers for our customers; improving operational efficiency and maximizing productivity, reducing unplanned downtime and safety risks, and minimizing energy consumption and emissions. Our technology is at the center of their sustainability and decarbonization programs, enabling circularity through improved industrial technologies, and supporting the broader energy transition with advanced solutions for power transmission and distribution, carbon capture, storage and utilization, batteries and energy storage. Cybersecurity is foundational in the design of our software.
On October 10, 2021, Heritage AspenTech and Emerson Electric Co. (“Emerson”) and certain of its subsidiaries, entered into a definitive agreement pursuant to, among other matters Emerson and its subsidiaries contributed to Heritage AspenTech shareholders $6,014,000,000 in cash and its Open Systems International, Inc. business (the “OSI business” or “OSI Inc.”) and Geological Simulation Software business, which we have renamed as Subsurface Science & Engineering (the “SSE business” or “SSE”) in exchange for 55% of our outstanding common stock (on a fully diluted basis). The Transaction closed on May 16, 2022.
By combining the software capabilities, deep domain expertise and leadership of Heritage AspenTech with the OSI and SSE businesses, we have created a company that we believe will deliver superior value to customers across diverse end markets including energy, chemicals, power transmission and distribution, engineering, procurement, and construction, pharmaceuticals, and metals and mining, among others.
For the three and six-month periods ended December 31, 2022, the consolidated and combined financial statements comprised the results of OSI Inc., SSE and Heritage AspenTech businesses, while for the same periods in the prior fiscal year, these financial statements comprised the results of only OSI Inc. and the SSE business. Certain financial information for the periods ended December 31, 2021 have been reclassed to conform to the consolidated and combined financial statements for the three and six-month period ended December 31, 2022.
We have been working through a series of business transformations relating to the OSI products and services as a result of our ongoing integration activities. In particular, as part of a change in the related go-to-market strategy, we have identified and trained several third-party implementation service partners to operate autonomously and directly with our OSI customers to implement our products. Previously, with the exception of one customer, we were the only provider able to perform these implementations. In addition, we have invested in tools and processes to simplify and streamline the implementation services to significantly reduce complexity and interdependency with our software. As a result, we anticipate a material change to the accounting treatment for OSI software licenses sold together with professional services and hardware. Previously, these products and services were treated as a single performance obligation. Beginning in the third quarter of fiscal 2023, for all new OSI contracts, we expect to account for the software license, hardware and professional services as separate and distinct performance obligations.
Recent Events
On July 27, 2022, we announced that we entered into a definitive agreement to acquire Micromine, a global leader in design and operational management solutions for the metals and mining industry, from private equity firm Potentia Capital and other sellers for AU $900.0 million in cash (approximately $623.0 million USD based on foreign currency exchange rate at the time of announcement). We currently intend to finance the transaction primarily through debt financing under the Emerson Credit Agreement. The acquisition currently is expected to close as soon as the remaining regulatory approval is obtained. In connection with the agreement to purchase Micromine, we also entered into foreign currency forward contracts on August 2, 2022 for a six-month period ending on February 6, 2023 to mitigate the impact of foreign currency exchange associated with the forecasted payment of purchase price.
Key Business Metrics
Background
We utilize key business metrics to track and assess the performance of our business. We have identified the following set of appropriate business metrics in the context of our evolving business:
•Annual Contract Value
•Total Contract Value
•Bookings
We also use the following non-GAAP business metrics in addition to GAAP measures to track our business performance:
•Free cash flow
•Non-GAAP operating income
We make these measures available to investors and none of these metrics should be considered as an alternative to any measure of financial performance calculated in accordance with GAAP.
Annual Contract Value
Annual contract value (ACV) is an estimate of the annual value of our portfolio of term license and software maintenance and support (SMS) contracts, the annual value of SMS agreements purchased with perpetual licenses, and the annual value of standalone SMS agreements purchased with certain legacy term license agreements, which have become an immaterial part of our business.
Comparing ACV for different dates can provide insight into the growth and retention rates of our recurring software business because ACV represents the estimated annual billings associated with our recurring license and maintenance
agreements at any point in time. Management uses the ACV business metric to evaluate the growth and performance of our business as well as for planning and forecasting purposes. We believe that ACV is a useful business metric to investors as it provides insight into the growth component of our software business.
ACV generally increases as a result of new term license and SMS agreements with new or existing customers, renewals or modifications of existing term license agreements that result in higher license fees due to contractually-agreed price escalation or an increase in the number of tokens (units of software usage) or products licensed, or an increase in the value of licenses delivered.
ACV is adversely affected by term license and SMS agreements that are renewed at a lower entitlement level or not renewed, a decrease in the value of licenses delivered, and, to a lesser extent, by customer agreements that become inactive during the agreement’s term because, in our determination, amounts due (or which will become due) under the agreement are not collectible. As ACV is an estimate of annual billings, it will generally not include contracts with a term of less than one year. Because ACV represents all other active term software and SMS agreements, it may include amounts under agreements with customers that are delinquent in paying invoices, that are in bankruptcy proceedings, are subject to termination by the customer or where payment is otherwise in doubt.
As of December 31, 2022, customer agreements representing approximately 85% of our ACV (by value) were denominated in U.S. dollars. For agreements denominated in other currencies, we use a fixed historical exchange rate to calculate ACV in dollars rather than using current exchange rates, so that our calculation of growth in ACV is not affected by fluctuations in foreign currencies. We have not applied this methodology retroactively for OSI software amounts delivered prior to October 2020, but do not believe this to have a material impact on our reported ACV metric due to the high USD-denominated concentration of the OSI business. As of December 31, 2022, approximately 95% of OSI ACV was denominated in USD.
For term license agreements that contain professional services or other products and services, we have included in ACV the portion of the invoice allocable to the term license under Topic 606 rather than the portion of the invoice attributed to the license in the agreement. We believe that methodology more accurately allocates any discounts or premiums to the different elements of the agreement.
We estimate that the pro forma ACV of AspenTech grew by approximately 8.7%, from $766.9 million as of December 31, 2021 to $833.7 million as of December 31, 2022.
Total Contract Value
Total Contract Value (“TCV”) is the aggregate value of all payments received or to be received under all active term license and perpetual SMS agreements, including maintenance and escalation. TCV of Heritage AspenTech, the OSI business and the SSE business was $3.4 billion and $3.1 billion as of December 31, 2022 and 2021, respectively.
Bookings
Bookings is the total value of customer term license and perpetual SMS contracts signed in the current period, less the value of such contracts signed in the current period where the initial licenses and SMS agreements are not yet deemed delivered, plus term license contracts and SMS agreements signed in a previous period for which the initial licenses are deemed delivered in the current period.
The bookings of Heritage AspenTech, the OSI business and the SSE business was $242.8 million during the three months ended December 31, 2022, compared to $208.8 million during the three months ended December 31, 2021. The bookings of Heritage AspenTech, the OSI business and the SSE business was $466.9 million during the six months ended December 31, 2022, compared to $365.0 million during the six months ended December 31, 2021. The change in bookings is related to the timing of renewals.
The following table provides a reconciliation of GAAP net cash provided by (used in) operating activities to free cash flow for the indicated periods (in thousands):
Six Months Ended December 31,
2022
2021
Net cash provided by (used in) operating activities (GAAP)
$
54,612
$
(23,984)
Purchase of property, equipment, and leasehold improvements
(2,844)
(3,393)
Payments for capitalized computer software development costs
(329)
—
Acquisition related payments
12,380
54
Free cash flow
$
63,819
$
(27,323)
The following table presents our (loss) from operations, as adjusted for stock-based compensation expense, amortization of intangible assets, and other items, such as the impact of acquisition and integration planning related fees, for the indicated periods:
Three Months Ended December 31,
Six Months Ended December 31,
2022
2021
2022
2021
GAAP (loss) from operations
$
(59,395)
$
(254)
$
(110,577)
$
(14,138)
Plus:
Stock-based compensation
23,441
458
41,177
826
Amortization of intangibles
121,161
22,176
242,321
50,985
Acquisition and integration planning related fees
1,411
—
6,269
54
Non-GAAP income from operations
$
86,618
$
22,380
$
179,190
$
37,727
Critical Accounting Estimates and Judgments
Note 2, “Significant Accounting Policies,” to the audited consolidated and combined financial statements in our Transition Reports on Form 10-KT for the fiscal year ended June 30, 2022 describes the significant accounting policies and methods used in the preparation of the consolidated and combined financial statements appearing in this report. The accounting policies that reflect our critical estimates, judgments and assumptions in the preparation of our consolidated and combined financial statements are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of our Transition Reports on Form 10-KT for the fiscal year ended June 30, 2022, and include the subsection captioned “Revenue Recognition.”
The following table sets forth the results of operations and the period-over-period percentage change in certain financial data for the three and six months ended December 31, 2022 and 2021:
The following table sets forth the results of operations as a percentage of total revenue for certain financial data for the three and six months ended December 31, 2022 and 2021:
Three Months Ended December 31,
Six Months Ended December 31,
2022
2021
2022
2021
(% of Revenue)
Revenue:
License and solutions
61.7
%
59.3
%
62.8
%
58.4
%
Maintenance
32.4
32.1
31.8
32.0
Services and other
5.9
8.6
5.4
9.6
Total revenue
100.0
100.0
100.0
100.0
Cost of revenue:
License and solutions
29.2
40.6
28.4
42.6
Maintenance
3.9
5.0
3.8
5.2
Services and other
5.2
5.2
5.1
5.8
Total cost of revenue
38.3
50.8
37.3
53.6
Gross profit
61.7
49.2
62.7
46.4
Operating expenses:
Selling and marketing
48.6
22.0
47.9
27.1
Research and development
20.6
18.8
20.2
19.5
General and administrative
17.0
8.6
17.0
8.6
Restructuring costs
—
—
—
0.2
Total operating expenses
86.1
49.5
85.1
55.3
(Loss) from operations
(24.5)
(0.3)
(22.4)
(8.9)
Other income (expense), net
15.9
(1.7)
(4.0)
(1.7)
Interest income (expense), net
1.7
—
1.9
(0.2)
(Loss) before provision for income taxes
(6.8)
(2.1)
(24.6)
(10.8)
Provision (benefit) for income taxes
20.4
(1.1)
(8.9)
(3.3)
Net (loss)
(27.3)
%
(0.9)
%
(15.7)
%
(7.5)
%
Comparison of the Three Months Ended December 31, 2022 and 2021
Revenue
Total revenue increased by $161.1 million during the three months ended December 31, 2022 as compared to the same period in prior fiscal year. Overall revenue growth is primarily due to $167.4 million in revenue from Heritage AspenTech as a result of the Transaction, an increase of $3.6 million in new and renewal contracts from the SSE business, offset by a decrease in revenue of $10.0 million from OSI due to the mix of open customer projects and the stage of completion compared to the prior period.
License and solutions revenue increased by $101.4 million during the three months ended December 31, 2022, as compared to the same period in prior fiscal year. This increase was driven primarily by $105.4 million from Heritage AspenTech as a result of the Transaction.
Maintenance revenue increased by $52.4 million during the three months ended December 31, 2022 as compared to the same period in prior fiscal year. This increase was primarily due to $53.7 million from Heritage AspenTech as a result of the Transaction.
Services and other revenue increased by $7.4 million during the three months ended December 31, 2022, as compared to the same period in prior fiscal year primarily due to $8.3 million from Heritage AspenTech as a result of the Transaction, offset by a decrease of $1.2 million in services and other revenue from OSI and SSE professional services arrangements.
Cost of revenue increased by $51.5 million during the three months ended December 31, 2022, as compared to the same period in prior fiscal year. The increase in cost of revenue is primarily due to $49.6 million from Heritage AspenTech as a result of the Transaction.
Cost of license and solutions revenue increased $37.6 million during the three months ended December 31, 2022, as compared to the same period in prior fiscal year. This increase was driven by $35.1 million from Heritage AspenTech as a result of the Transaction, $32.7 million of which is associated with additional amortization of intangible assets.
Cost of maintenance revenue increased by $5.5 million during the three months ended December 31, 2022, as compared to the same period in prior fiscal year. This increase was primarily due to $5.9 million from Heritage AspenTech as a result of the Transaction.
Cost of services and other revenue increased by $8.4 million for the three months ended December 31, 2022, as compared to the same period in prior fiscal year primarily due to $8.6 million from Heritage AspenTech as a result of the Transaction. Gross profit margin on services and other revenue was 11.6% and 38.9% for the three months ended December 31, 2022 and 2021, respectively.
Overall gross profit increased by $109.5 million for the three months ended December 31, 2022, as compared to the same period in prior fiscal year primarily due to $117.9 million from Heritage AspenTech as a result of the Transaction. Gross profit margin increased significantly to 61.7% for the three months ended December 31, 2022 from 49.2% for the same period in prior fiscal year. The increase was mainly driven by larger gross profit on license revenue from Heritage AspenTech in the current period.
Operating Expenses
Selling and marketing expense increased by $100.0 million during the three months ended December 31, 2022, as compared to the same period in prior fiscal year primarily due to $99.3 million from Heritage AspenTech as a result of the Transaction, of which $64.4 million was additional amortization of intangible assets.
Research and development expense increased by $34.6 million during the three months ended December 31, 2022, as compared to the same period in prior fiscal year primarily due to $30.8 million from Heritage AspenTech as a result of the Transaction, and an increase of $1.4 million and $2.4 million from the SSE business and OSI compensation related costs, respectively.
General and administrative expense increased by $34.2 million during the three months ended December 31, 2022, as compared to the same period in prior fiscal year primarily due to $34.1 million from Heritage AspenTech as a result of the Transaction.
Non-Operating Income (Expense)
Other income (expense), net is comprised primarily of unrealized gains and losses on foreign currency forward contracts and unrealized and realized foreign currency exchange gains and losses generated from the settlement and remeasurement of transactions denominated in currencies other than the functional currency of our entities.
Other income (expense) increased by $40.1 million during the three months ended December 31, 2022, as compared to the same period in prior fiscal year primarily due to $34.9 million associated with unrealized gains on foreign currency forward contracts, while the remaining amount was related to unrealized and realized foreign currency exchange gains and losses.
Interest income (expense) increased by $4.1 million for the three months ended December 31, 2022 as compared to the same period in prior fiscal year. The increase was largely attributable to the Transaction, which contributed $9.8 million resulting from interest income earned on Heritage AspenTech’s long-term revenue contracts, partially offset by a $5.9 million increase in interest expense due to a higher interest rate on our term loan and amortization of debt issuance costs associated with the Bridge Facility.
Comparison of the Six Months Ended December 31, 2022 and 2021
Revenue
Total revenue increased by $334.9 million during the six months ended December 31, 2022 as compared to the same period in prior fiscal year. Overall revenue growth is primarily due to $343.8 million in revenue from Heritage AspenTech as a result of the Transaction, an increase of $7.5 million in new and renewal contracts from the SSE business, offset by a decrease in revenue of $16.5 million from OSI due to the mix of open customer projects and the stage of completion compared to the prior period.
License and solutions revenue increased by $217.4 million during the six months ended December 31, 2022, as compared to the same period in prior fiscal year. This increase was driven primarily by $221.4 million from Heritage AspenTech as a result of the Transaction, partially offset by a decrease of $5.5 million from the SSE business as a result of large dollar amount of new and renewal agreements entered during the same period in the prior fiscal year.
Maintenance revenue increased by $106.2 million during the six months ended December 31, 2022 as compared to the same period in prior fiscal year. This increase was primarily due to $107.1 million from Heritage AspenTech as a result of the Transaction.
Services and other revenue increased by $11.3 million during the six months ended December 31, 2022, as compared to the same period in prior fiscal year primarily due to $15.4 million from Heritage AspenTech as a result of the Transaction, offset by a decrease in services and other revenue of $2.4 million and $1.7 million from OSI and SSE professional services arrangements, respectively.
Cost of Revenue
Cost of revenue increased by $99.1 million during the six months ended December 31, 2022, as compared to the same period in prior fiscal year. The increase in cost of revenue is primarily due to $98.9 million from Heritage AspenTech as a result of the Transaction.
Cost of license and solutions revenue increased $72.7 million during the six months ended December 31, 2022, as compared to the same period in prior fiscal year. This increase was driven by $70.4 million from Heritage AspenTech as a result of the Transaction, $65.6 million of which is associated with additional amortization of intangible assets.
Cost of maintenance revenue increased by $10.5 million during the six months ended December 31, 2022, as compared to the same period in prior fiscal year. This increase was primarily due to $11.8 million from Heritage AspenTech as a result of the Transaction.
Cost of services and other revenue increased by $15.9 million for the six months ended December 31, 2022, as compared to the same period in prior fiscal year primarily due to $16.7 million from Heritage AspenTech as a result of the Transaction. Gross profit margin on services and other revenue was 5.6% and 39.9% for the six months ended December 31, 2022 and 2021, respectively.
Overall gross profit increased by $235.7 million for the six months ended December 31, 2022, as compared to the same period in prior fiscal year primarily due to $244.9 million from Heritage AspenTech as a result of the Transaction. Gross profit margin increased significantly to 61.7% for the six months ended December 31, 2022 from 46.4% for the same period in prior fiscal year. The increase was mainly driven by larger gross profit on license revenue from Heritage AspenTech in the current period.
Operating Expenses
Selling and marketing expense increased by $193.2 million during the six months ended December 31, 2022, as compared to the same period in prior fiscal year primarily due to $200.2 million from Heritage AspenTech as a result of the Transaction, of which $128.6 million was additional amortization of intangible assets.
Research and development expense increased by $68.8 million during the six months ended December 31, 2022, as compared to the same period in prior fiscal year primarily due to $63.6 million from Heritage AspenTech as a result of the Transaction, and the remaining increase was from OSI and the SSE business mainly attributable to increased compensation related costs.
General and administrative expense increased by $70.4 million during the six months ended December 31, 2022, as compared to the same period in prior fiscal year primarily due to $71.3 million from Heritage AspenTech as a result of the Transaction.
Non-Operating Income (Expense)
Other income (expense), net is comprised primarily of unrealized gains and losses on foreign currency forward contracts and unrealized and realized foreign currency exchange gains and losses generated from the settlement and remeasurement of transactions denominated in currencies other than the functional currency of our entities.
Other income (expense) increased by $17.2 million during the six months ended December 31, 2022, as compared to the same period in prior fiscal year primarily due to $15.3 million associated with unrealized losses on foreign currency forward contracts, while the remaining amount was related to unrealized and realized foreign currency exchange gains and losses.
Interest income (expense) increased by $9.4 million for the six months ended December 31, 2022 as compared to the same period in prior fiscal year. The increase was largely attributable to the Transaction, which contributed $19.1 million resulting from interest income earned on Heritage AspenTech’s long-term revenue contracts, and a $10.3 million increase in interest expense on our term loan and amortization of debt issuance costs associated with the Bridge Facility.
Benefit for Income Taxes
Three Months Ended December 31,
Increase / (Decrease) Change
Six Months Ended December 31,
Increase / (Decrease) Change
2022
2021
$
%
2022
2021
$
%
(Dollars in Thousands)
Provision (benefit) for income taxes
$
49,565
$
(933)
$
50,498
(5412)
%
$
(43,982)
$
(5,246)
$
(38,736)
738.4
%
Effective tax rate
(298.0)
%
55.1
%
36.2
%
30.5
%
We compute our tax provision (benefit) for interim periods by applying the estimated annual effective tax rate (“AETR”) to year-to-date income from operations and adjusting for discrete items arising in that quarter. However, if we are unable to make a reliable estimate of our AETR, then the actual effective tax rate for the year-to-date period may be the best estimate. For the three months and six months ended December 31, 2021, we computed our tax provision (benefit) using the AETR approach. However, for the six months ended December 31, 2022, we recorded the actual effective tax rate as it was determined that the AETR approach was not the most appropriate estimate to be applied to the year to date pretax (loss) income given small changes in the forecast of pre-tax (loss) income would result in significant changes in the AETR.
Income tax expense was $49.6 million for the three months ended December 31, 2022 and income tax benefit was $0.9 million for the three months ended December 31, 2021, resulting in effective tax rates of (298.0)% and 55.1%, respectively. Our income tax was higher in the three months ended December 31, 2022 due to the current quarters' change in our approach to computing our tax provision (benefit) for the interim periods to the actual effective tax rate method. The change resulted in a tax provision during the three months ended December 31, 2022 that reflects recording a year-to-date benefit compared to that of the three months ended September 30, 2022, which was recorded under the AETR approach.
Benefit for income taxes was $44.0 million and $5.2 million for the six months ended December 31, 2022 and December 31, 2021, respectively, resulting in effective tax rates of 36.2 % and 30.5 %, respectively. Income tax benefit increased due to the higher Foreign-Derived Intangible Income (“FDII”) deduction recorded in the current period as a result of non-deductible amortization of intangibles, capitalized R&D costs, and a change in the accounting methodology related to historical revenue recognition for tax purposes on multi-year software license agreements. The change resulted in the recognition of taxable income over a four-tax year period with fiscal year 2024 as the last year of the adjustment.
As of December 31, 2022 and June 30, 2022, our principal sources of liquidity consisted of $446.1 million and $449.7 million, respectively, in cash and cash equivalents.
We believe our existing cash on hand and cash flows generated by operations are sufficient for at least the next 12 months to meet our operating requirements, including those related to salaries and wages, working capital, capital expenditures, and other liquidity requirements associated with operations. We may need to raise additional funds if we decide to make one or more acquisitions of businesses, technologies or products. If additional funding for such purposes is required beyond existing resources and our Amended and Restated Credit Agreement described below, we may not be able to affect a receivable, equity or debt financing on terms acceptable to us or at all.
Bridge Facility
On July 27, 2022, the Company entered into a $475.0 million senior unsecured bridge facility (the “Bridge Facility”) with JPMorgan Chase Bank, N.A. (“JPMorgan”), as Administrative Agent, to finance the acquisition of all of the equity interests of Mining Software Holdings Pty Ltd (“Micromine acquisition”). The Bridge Facility was entered into under the existing Amended and Restated Credit Agreement dated as of December 23, 2019, with JPMorgan (“Credit Agreement”). The Company may elect that each incremental borrowing under the Bridge Facility bear interest at a rate per annum equal to (a) the Alternate Base Rate (“ABR”), plus the applicable margin or (b) the Adjusted Term Secured Overnight Financing Rate (“SOFR”), plus the applicable margin.
On December 23, 2022, the Company terminated the Bridge Facility and entered into a credit agreement with Emerson Electric Co. (the “Emerson Credit Agreement”), which will provide for an aggregate term loan commitment of $630.0 million.
Refer to Note 13, “Related-Party Transactions”, to our consolidated and combined financial statements for further discussion of the Emerson Credit Agreement.
Credit Agreement
The Credit Agreement provides for a $200.0 million secured revolving credit facility and a $320.0 million secured term loan facility.
The interest rate as of December 31, 2022 was 5.26% on $264.0 million in outstanding borrowings on its term loan facility.
As of December 31, 2022, the Company’s current and non-current borrowings, under the term loan facility, were $264.0 million and $0.0 million, respectively. As of June 30, 2022, the Company’s current and non-current borrowings, under the term loan facility, were $28.0 million and $245.6 million, respectively.
On January 17, 2023, the Company paid off the outstanding balance of our existing term loan facility of $264 million, plus accrued interest, which resulted in the long-term portion of term loan obligation being reclassified and reported as short-term borrowings at December 31, 2022.
For a more detailed description of the Credit Agreement, see Note 8, “Debt”, to our Unaudited Consolidated and Combined Financial Statements in Part 1, Item 1 of this Form 10-Q.
Cash Balance Sheet and Cash Flows
Our cash and cash equivalents were $446.1 million and $27.7 million as of December 31, 2022 and 2021, respectively. The following table summarizes our free cash flow (in thousands):
Net cash provided by (used in) operating activities (GAAP)
$
54,612
$
(23,984)
Purchase of property, equipment, and leasehold improvements
(2,844)
(3,393)
Payments for capitalized computer software development costs
(329)
—
Acquisition related payments
12,380
54
Free cash flow (non-GAAP)
$
63,819
$
(27,323)
Total free cash flow increased $91.1 million during the six-month period ended December 31, 2022 as compared to the same period in prior fiscal year, primarily due to the contribution from Heritage AspenTech as a result of the Transaction and was mainly driven by the cash flows provided by operating activities.
Contractual Obligations
Standby letters of credit for $21.5 million and $28.7 million secured our performance on professional services contracts, certain facility leases and potential liabilities as of December 31, 2022 and June 30, 2022, respectively. The letters of credit expire at various dates through fiscal 2027.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In the ordinary course of conducting business, we are exposed to certain risks associated with potential changes in market conditions. These market risks include changes in currency exchange rates and interest rates which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, if considered appropriate, we may enter into derivative financial instruments such as forward currency exchange contracts.
Foreign Currency Exchange Risk
Our foreign exchange forward contracts outstanding as of the respective period-ends are summarized as follows (in thousands):
December 31, 2022
June 30, 2022
Notional Amount
Fair Value
Notional Amount
Fair Value
Forward contracts:
Purchased
AU $900,000
$
(15,319)
—
$
—
During the three months ended December 31, 2022 and 2021, 8.3% and 7.8% of our total revenue was denominated in a currency other than the U.S. dollar, respectively. During the six months ended December 31, 2022 and 2021, 10.0% and 6.5% of our total revenue was denominated in a currency other than the U.S. dollar, respectively. In addition, certain of our operating costs incurred outside the United States are denominated in currencies other than the U.S. dollar. We conduct business on a worldwide basis and as a result, a portion of our revenue, earnings, net assets, and net investments in foreign affiliates is exposed to changes in foreign currency exchange rates. We measure our net exposure for cash balance positions and for cash inflows and outflows in order to evaluate the need to mitigate our foreign exchange risk. We may enter into foreign currency forward contracts to minimize the impact related to unfavorable exchange rate movements related to our cash positions and cash flows, although we have not done so during the three months ended December 31, 2022 and 2021. Currently, our largest exposures to foreign exchange rates exist primarily with the Euro, Pound Sterling, Canadian Dollar, Japanese Yen, Norwegian Krone, and Russian Ruble.
We recorded $3.6 million and $1.5 million of net foreign currency exchange gain and loss during the three months ended December 31, 2022 and 2021, respectively, and $4.7 million and $3.0 million of net foreign currency exchange losses during the six months ended December 31, 2022 and 2021, respectively, related to the settlement and remeasurement of transactions denominated in currencies other than the functional currency of our operating units. Our analysis of operating results transacted in various foreign currencies indicated that a hypothetical 10% change in the foreign currency exchange rates could have increased or decreased the consolidated and combined results of operations by approximately $3.1 million and $1.2 million for the three months ended December 31, 2022 and 2021, respectively, and by approximately $5.6 million and $2.3 million for the six months ended December 31, 2022 and 2021, respectively.
We may also enter into foreign exchange forward contracts to reduce the short-term effects of foreign currency fluctuations on receivables and payables that are denominated in currencies other than the functional currencies of the entities, although we have not done so during the three months ended December 31, 2022 and 2021. The market risks associated with these foreign currency receivables and payables relate primarily to variances from our forecasted foreign currency transactions and balances. We do not enter into foreign exchange forward contracts for speculative purposes.
Interest Rate Risk
We place our investments in money market instruments. Our analysis of our investment portfolio and interest rates at December 31, 2022 indicated that a hypothetical 100 basis point increase or decrease in interest rates would not have a material impact on the fair value of our investment portfolio determined in accordance with an income-based approach utilizing portfolio future cash flows discounted at the appropriate rates.
As of December 31, 2022, our current borrowings of $264.0 million consist of the term loan facility under the Credit Agreement. A hypothetical 10% increase or decrease in interest rates paid on outstanding borrowings under the Credit Agreement would not have a material impact on our financial position, results of operations or cash flows.
The Company owns an interest in a limited partnership investment fund. The primary objective of this partnership is investing in equity and equity-related securities (including convertible debt) of venture growth- stage businesses. We account for the investment in accordance with Topic 323, Investments - Equity Method and Joint Ventures. Our total commitment under this partnership is $5.0 million CAD ($4.0 million USD). Under the conditions of the equity method investment, unfavorable future changes in market conditions could lead to a potential loss up to the full value of our $5.0 million CAD ($4.0 million USD) commitment. As of December 31, 2022, the investment value is $2.9 million CAD ($2.3 million USD), representing our payment towards the total commitment, and is recorded in non-current assets in our consolidated balance sheet.
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2022. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2022, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective.
b)Changes in Internal Controls Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the six months ended December 31, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We will continue to review and document our disclosure controls and procedures, including our internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.
The risks described in “Item 1A. Risk Factors” in our Transition Reports on Form 10-KT for the fiscal year ended June 30, 2022, could materially and adversely affect our business, financial condition and results of operations. These risk factors do not identify all risks that we face—our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. The Risk Factors section of our 2022 Transition Reports on Form 10-KT remains current in all material respects, with the exception of the revised risk factor below.
A significant portion of our revenue is attributable to operations outside the United States, and our operating results therefore may be materially affected by the economic, political, military, regulatory and other risks of foreign operations or of transacting business with customers outside the United States, including in Russia.
Customers outside the United States account for a significant portion of our total revenue and will for the foreseeable future. Our operating results attributable to operations outside the United States are subject to additional risks, including:
•unexpected changes in regulatory or environmental requirements, tariffs and other barriers, including, for example, international trade disputes, changes in climate regulations, sanctions or other regulatory restrictions imposed by the United States or foreign governments;
•less effective protection of intellectual property;
•requirements of foreign laws and other governmental controls;
•difficulties in collecting trade accounts receivable in other countries;
•adverse tax consequences;
•the challenges of managing legal disputes in foreign jurisdictions.
•difficulties in staffing and managing foreign operations;
•limited protection for the enforcement of contract and intellectual property rights in certain countries where we may sell our products or work with suppliers or other third parties;
•potentially longer sales and payment cycles and potentially greater difficulties in collecting accounts receivable;
•costs and difficulties of customizing products for foreign countries;
•challenges in providing solutions across a significant distance, in different languages and among different cultures;
•laws and business practices favoring local competition;
•being subject to a wide variety of complex foreign laws, treaties and regulations and adjusting to any unexpected changes in such laws, treaties and regulations, including local labor laws;
•strict laws and regulations governing privacy and data security, including the European Union’s General Data Protection Regulation;
•uncertainty and resultant political, financial and market instability arising from the United Kingdom’s exit from the European Union;
•compliance with U.S. laws affecting activities of U.S. companies abroad, including the U.S. Foreign Corrupt Practices Act;
•tariffs, trade barriers and other regulatory or contractual limitations on our ability to sell or develop our products in certain foreign markets;
•operating in countries with a higher incidence of corruption and fraudulent business practices;
•changes in regulatory requirements, including export controls, tariffs and embargoes, other trade restrictions, competition, corporate practices and data privacy concerns;
•seasonal reductions in business activity in certain parts of the world, particularly during the summer months in Europe and at year end globally;
•rapid changes in government, economic and political policies and conditions; and
•political or civil unrest or instability, acts of war, terrorism or epidemics and other similar outbreaks or events.
While we license our products primarily through a direct sales force located throughout the world, we also leverage sales relationships with Emerson and other channel partners to market our products in certain locations. In the event that we are unable to adequately staff and maintain our foreign operations, we could face difficulties managing our international operations.
In addition, the ongoing conflict in Ukraine could adversely impact our business, financial position, cash flows and results of operations in Russia and Ukraine which may in turn spread and impact our overall business, financial position, cash flows and results of operations. We maintain operations in Russia and license software and provide related services to customers in Russia and areas of Ukraine that are not under sanction. We have net sales of approximately $16.8 million and $26.8 million for the three- and six-month period ended December 31, 2022, and total assets of approximately $19.3 million as of December 31, 2022, related to operations in Russia. As a software company, no material impact to supply chain operations is expected as a result of the conflict in Ukraine and the conflict has not had a material impact on our financial results thus far. However, we continue to evaluate the impact, if any, of the various sanctions, export control measures and business restrictions imposed by the United States, other governments, and financial institutions on our ability to do business in Russia and areas of Ukraine that are not under sanction, maintain contracts with vendors and pay employees in Russia, receive payment from customers in Russia and areas of Ukraine that are not under sanction, and assess our operations for potential asset impairment.
We assess our operations for potential asset impairment in accordance with our accounting practices, and are periodically evaluating the impact, if any, of the various sanctions, export controls measures and business restrictions imposed by the United States, other governments and others on our ability to do business in Russia, maintain contracts with vendors and pay employees in Russia, as well as receive payment from customers in Russia or Ukraine. The outcome of these assessments and their potential impact on our ability to continue to conduct business to the same extent as currently conducted will depend on how the conflict evolves and on further actions that may be taken by the United States, Russia, other governments, and others.
If the sanctions and other retaliatory measures and restrictions imposed by the global community change, we may be required to cease or suspend operations in the region or, should the conflict or the effects of these sanctions, measures and restrictions worsen, we may voluntarily elect to do so. Any disruption to, or suspension of, our business and operations in Russia would result in the loss of revenues from the business in Russia. In addition, as a result of the risk of collectability of receivables from our customers in Russia, we may be required to adjust our accounting practices relating to revenue recognition in this region, with the result that we may not be able to recognize revenue until there is no significant risk of revenue reversal. We may also suffer reputational harm as a result of our continued operations in Russia, which may adversely impact our sales and other businesses in other countries.
While the precise effects of the ongoing military conflict and sanctions on the Russian and global economies remain uncertain, they have already resulted in significant volatility in financial markets and depreciation of the Russian ruble and the Ukrainian hryvnia against the U.S. dollar, as well as in an increase in energy and commodity prices globally. Should the conflict continue or escalate, there may be various economic and security consequences including, but not limited to, supply shortages of different kinds, further increases in prices of commodities, including piped gas, oil and agricultural goods, reduced consumer purchasing power, significant disruptions in logistics infrastructure, telecommunications services and risks relating to the unavailability of information technology systems and infrastructure. The resulting impacts to the global economy, financial markets, inflation, interest rates and unemployment, among others, could adversely impact economic and financial conditions, and may disrupt the global economy’s ongoing recovery following the COVID-19 pandemic. Other potential consequences include, but are not limited to, growth in the number of popular uprisings in the region, increased political discontent, especially in the regions most affected by the conflict or economic sanctions, increase in cyberterrorism activities and attacks, displacement of persons to regions close to the areas of conflict and an increase in the number of refugees fleeing across Europe, among other unforeseen social and humanitarian effects. As a result of the ongoing conflict between Russia and Ukraine, we may experience other risks, difficulties and challenges in the way we conduct our business and operations generally.
Continued conflict between Russia and the Ukraine, any escalation of that conflict, and the financial and economic sanctions and import and/or export controls imposed on Russia by the United States, the United Kingdom, the European Union, Canada and others, as well as other business restrictions imposed by financial institutions and the above-mentioned adverse effects on our operations (both in this region and generally) and on the wider global economy and market conditions could, in turn, have a material adverse impact on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares to decline.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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.
Aspen Technology, Inc.
Date: January 30, 2023
By:
/s/ ANTONIO J. PIETRI
Antonio J. Pietri
President and Chief Executive Officer
(Principal Executive Officer)
Date: January 30, 2023
By:
/s/ CHANTELLE BREITHAUPT
Chantelle Breithaupt
Senior Vice President, Chief Financial Officer and Treasurer
