UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KT
(Mark One)
or
For the transition period from October 1, 2021 to June 30, 2022
Commission file number: 333-262106
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(formerly Emersub CX, Inc.)
(Exact name of registrant as specified in its charter)
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Registrant’s telephone number, including area code: 781 -221-6400
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The registrant was not a public company as of December 31, 2021, the last business day of its most recently completed second fiscal quarter, and therefore, cannot calculate the aggregate market value of its voting and non-voting common equity held by non-affiliates as of such date.
There were 64,432,764 shares of common stock outstanding as of August 11, 2022.
DOCUMENTS INCORPORATED BY REFERENCE
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Aspen Technology, Inc. ("AspenTech") has many registered trademarks including aspenONE and Aspen Plus. All other trademarks, trade names and service marks appearing in this Transition Report on Form 10-KT are the property of their respective owners.
We approved a change to our fiscal year end from September 30 to June 30. References to a specific fiscal year are the nine-month period ended June 30, 2022 ("fiscal 2022"), and our fiscal years 2021 and 2020 are for the twelve months ended September 30, 2021 and September 30, 2020 unless otherwise noted.
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Explanatory Note
On May 16, 2022 (the “Closing Date”), the transaction contemplated by the Transaction Agreement and Plan of Merger, as amended by Amendment No. 1, dated as of March 23, 2022 (as it may be further amended from time to time, the “Transaction Agreement”) was consummated between Aspen Technology, Inc. ("Heritage AspenTech") and Emerson Electric Co. (“Emerson”) and certain of its subsidiaries, pursuant to which, among other matters, Emerson and its subsidiaries contributed Heritage AspenTech shareholders $6,014,000,000 in cash and its Open Systems International, Inc. business (the "OSI business") and Geological Simulation Software business, which we have renamed as Subsurface Science & Engineering (the “SSE business”) in exchange for 55% of our outstanding common stock (on a fully diluted basis) (the “Transaction”). The combined business of Heritage AspenTech, the OSI business and the SSE business are referred to herein as “New AspenTech.”
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Transition Report on Form 10-KT and documents incorporated by reference herein contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 ("Securities Act") and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"). Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” "may,” “potential,” “should,” “target,” "would," or the negative of these terms or other similar words. These statements are only predictions and are based on current expectations of management. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause our, our customer’ or our industry’s actual results, levels of activity, performance or achievements expressed or implied by these forward-looking statements, to differ. “Item 1. Business,” “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as other sections in this Transition Report on Form 10-KT, discuss some of the factors that could contribute to these differences. The forward-looking statements made in this Transition Report on Form 10-KT relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. The industry in which we operate is subject to a high degree of uncertainty and risk due to variety of factors, including those described in “Item 1A. Risk Factors.” You should read this Transition Report on Form 10-KT completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
PART I
Item 1. 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 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 our customers' sustainability and decarbonization programs, enabling circularity through improved industrial technologies and more degradable and recyclable plastics, 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.
Emerson Transaction
On May 16, 2022, we consummated the Transaction. The Transaction has been accounted for as a business combination in accordance with U.S. GAAP, with the OSI business and the SSE business combined treated as the acquirer and Heritage AspenTech treated as the acquiree. 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
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customers across diverse end markets including energy, chemicals, power transmission and distribution, engineering, procurement, construction, pharmaceuticals, and metals and mining, among others.
About AspenTech
Heritage AspenTech
Heritage AspenTech was founded over 40 years ago with a focus on industrial process efficiency and optimization. As a global leader in asset optimization software, Heritage AspenTech combines decades of modeling and operations expertise with big data, artificial intelligence, and advanced analytics. Heritage AspenTech’s unique asset lifecycle approach and market-leading solutions help customers achieve new levels of efficiency, accelerate innovation and reduce emissions and waste, without compromising safety.
Heritage AspenTech has developed its applications to design and optimize industrial operations across three principal business areas: engineering, manufacturing and supply chain, and asset performance management. Heritage AspenTech is the recognized technology leader in providing process optimization and asset performance management software for each of these business areas. With its mission to digitally transform the industries we serve by optimizing their assets to run safer, greener, longer and faster, we believe that Heritage AspenTech is also a global leader in helping companies achieve their sustainability goals while achieving operational excellence.
Customers use our solutions to help advance sustainability technology pathways in improving resource efficiencies, such as energy, water or feedstock; supporting energy transition and decarbonization initiatives, including integrating renewable and alternative energy sources, such as biofuels; innovating new approaches for the hydrogen economy and carbon capture; and, enabling recycling efficiencies for waste reduction throughout operations with advanced simulation and scale-up solutions.
OSI Business (Digital Grid Management)
Our OSI business offers operational technology (OT) solutions that enable electric, gas, and water utilities and asset operators to manage and optimize the digital grid, incorporating all types of generation, industrial cogeneration, transmission, distribution, and microgrids. Our OSI business’ systems are also crucial in expanding electrification as the world’s power demand is anticipated to double by 2050 under International Energy Agency (IEA) and U.S. Energy Information Administration (EIA) scenarios. Utilities, industry, and institutions use OSI solutions to transform and digitize the grid to seamlessly incorporate renewable energy and storage, to achieve reliability, maximize cybersecurity, and minimize peak loading.
Our OSI business' energy management solution (EMS) monitors, controls, and optimizes the increasingly interconnected transmission networks and generation fleets to manage grid stability and ensure security and regulatory compliance. Our advanced distribution management solution (ADMS), distributed energy resource management solution (DERMS) and Outage Management offerings provide system resiliency, efficiency, and safety by monitoring, controlling and modeling the distribution network as utilities seek to increase reliability, predict and react to increasingly dynamics supply and demand patterns, resolve outages faster and in a more automated manner, and manage field service digitally.
SSE Business (Subsurface Science & Engineering)
Our SSE business is a global provider of geoscience and modeling software for optimization across subsurface engineering and operations. With over 30 years of technology leadership in geophysics, petrophysics, geological and reservoir modeling, SSE software empowers decision makers to reduce uncertainty, improve confidence, minimize risk, and support responsible asset management. Used extensively by the global energy industry, SSE solutions also have applications that extend into geothermal energy and carbon capture and storage.
Our SSE business provides end-to-end workflows from seismic analysis and interpretation to reservoir and production simulation and from asset appraisal to operational planning and execution, to optimize production and utilization and minimize energy use, water use, and fugitive emissions. SSE software is also employed to screen and assess oil and saline aquifer reservoirs for CO2 sequestration and to monitor CO2 storage.
Change in Fiscal Year
In connection with the Transaction, we approved a change in our fiscal year end from September 30 to June 30. Our results of operations, cash flows, and all transactions impacting shareholders' equity presented in this Transition Report on
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Form 10-KT are for the nine-month period ended June 30, 2022 ("fiscal 2022" or "fiscal year 2022"), and our fiscal years 2021 and 2020 are for the twelve months ended September 30, 2021 and September 30, 2020 unless otherwise noted.
Industries We Serve: Challenges and Opportunities
Our primary customers are in capital-intensive industries, including the Energy market (Oil & Gas Exploration & Production or Upstream; Oil & Gas Processing & Distribution or Midstream, and Downstream Refining and Marketing); Bulk & Specialty Chemicals; Power Transmission & Distribution, Engineering & Construction; Metals & Mining, and Pharmaceuticals. These capital-intensive industries consist of companies that operate complex assets to produce and distribute a wide range of end products that are critical to society and quality of life. Examples include:
•manufacture of finished products by applying a controlled chemical process either to a raw material that is fed continuously through the facility or to a specific batch of raw material;
•management and operation of an increasingly complex electrical grid resulting from the growth in renewable power sources; and
•production of mined resources and their processing to produce the finished metal.
Capital-intensive industry characteristics and dynamics are complex, and the scale of operation is very large; therefore, any small improvement in their design, operation, or reliability, can have a significant impact on the efficiency of the assets and productivity of the personnel. As a result, operators, as well as the engineering and construction firms that partner with them, have extensive technical requirements and need sophisticated, integrated software to help design, operate and maintain their complex assets. The unique characteristics associated with operations and manufacturing create special demands for business applications that frequently exceed the capabilities of generic software packages and tools.
Companies in different segments of the capital-intensive industries face specific challenges driving their need for software solutions that design, operate, and maintain manufacturing environments more effectively:
Energy. Our energy markets are comprised of three primary sectors: Exploration & Production, also called “upstream,” Oil & Gas Processing & Distribution, also called “midstream,” and Refining and Marketing, also called “downstream”:
•Companies engaged in Exploration and Production explore for and produce hydrocarbons. They target reserves in increasingly diverse geographies involving geological, logistical, and political challenges. They need to design and develop ever larger, more complex and more remote production, gathering, and processing facilities as quickly as possible with the objective of optimizing production and ensuring regulatory compliance.
•Companies engaged in Oil & Gas Processing & Distribution produce and gather oil and natural gas from well heads, clean it, process it, and separate it into oil, dry natural gas, and natural gas liquids in preparation for transport to downstream markets. The processing capacity of oil and gas processing plants in North America has increased significantly in recent years to process the oil and gas extracted from shale deposits.
•Companies engaged in Refining and Marketing convert crude oil through a thermal and chemical manufacturing process into end products such as gasoline, jet and diesel fuels, and into intermediate products for downstream chemical manufacturing companies. These companies are characterized by high volumes and low operating margins. To deliver better margins, they focus on optimizing feedstock selection and product mix, resourceful design of biofuel processes, reducing energy, maximizing throughput, and minimizing inventory, all while operating safely and in accordance with regulations.
Chemicals. The chemicals industry includes both bulk and specialty chemical companies:
•Bulk chemical producers manufacture commodity chemicals and compete primarily on price. They seek to achieve economies of scale and manage operating margin pressure by building larger, more complex plants located near feedstock sources.
•Specialty chemical manufacturers, which primarily manufacture highly differentiated customer-specific products, face challenges in managing diverse product lines, multiple plants, complex supply chains and product quality.
Engineering and construction. Engineering and construction firms that work with manufacturers compete on a global basis by bidding on and executing complex, large-scale projects. They need a digital environment in which optimal asset designs can be produced quickly and efficiently, incorporating highly accurate modeling, analysis and cost estimation technology. In addition, these projects require software that enables significant collaboration internally, with the manufacturer, and in many cases, with other engineering and construction firms.
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Power Transmission & Distribution. The power transmission and distribution industry is responsible for generating and delivering reliable and safe power to balance commercial, industrial, and residential load demand. Utilities are actively investing in modernizing the electrical grid to support the significant growth in distributed and renewable energy sources, more grid device connectivity and data management, as well as increased consumer demand. Real-time Operational Technology (OT) software used in utility control rooms is critical for utilities to model, monitor, control, optimize, and bid into markets for comprehensive management and optimization of networks increasing in complexity.
Metals and Mining. The metals and mining industry is essential to meet the growing demand for various metals necessary for the energy transition. These metals, such as lithium, copper, and gold, are key drivers to building clean energy solutions including storage devices. Mining companies are accelerating their digital initiatives to increase their efficiencies and stability, focusing on areas such as geological modeling, mine planning and scheduling, predictive maintenance, and design and operational management.
Pharmaceuticals. The pharmaceutical industry relies on agility and certainty within their operations. Pharmaceutical manufacturers are highly focused on their speed to deliver drugs to the market, data management, use of contract manufacturing sites, continuous and advanced manufacturing and ensured agility and flexibility to produce biologics, cell and gene therapy and personalized medicines. Digitalization of these processes is essential, with key areas such as batch execution management, supply chain planning and scheduling, process analytical technology and predictive/prescriptive maintenance.
Other Industries. The commercial agreement signed with Emerson Electric will expand the use of our products and solutions into other capital-intensive industries such as pulp and paper, and water and wastewater that require a far more connected digital infrastructure than the one they have now and are seeking asset optimization solutions that help them improve their processes and quality, reduce costs, and improve their financial and operating results in the face of varied manufacturing challenges.
The capital-intensive industries view sustainability efforts as an urgent priority due to a variety of factors including governmental regulations, environmental stewardship, and new market opportunities. Achieving sustainability goals requires manufacturers to focus on their environmental footprints, which include everything from reducing the use of resources, such as water and energy, to decreasing carbon emissions or shifting to renewable energy sources such as wind, solar, or hydrogen. Strategies used to meet these goals can include sustainability tracking, process intensification, process redesign, and making better use of feedstocks and other resources. Our products and solutions can help customers address their sustainability goals with one or more of these strategies.
Complexities of the Capital-Intensive Industries
Companies in the capital-intensive industries constantly face pressure on margins causing them to continually seek ways to operate more efficiently. At the same time, these manufacturers face complexity because of:
Market volatility. Industrial manufacturers must react quickly to frequent changes in feedstock prices, temporary or longer-term feedstock shortages, and rapid changes in finished product prices. Unpredictable commodity markets strain the manufacturing and supply chain operations, requiring manufacturers to evaluate and implement changes in inventory levels, feedstock inputs, equipment usage, and operational processes to remain competitive.
Environmental and safety regulations. Companies must comply with an expanding array of data management and reporting requirements under governmental and regulatory mandates, and the global nature of their operations can subject them to numerous regulatory regimes. Manufacturers are increasingly relying upon software applications to model potential outcomes, store operating data, and develop reporting capabilities in response to heightened scrutiny and oversight because of environmental, safety, and other implications of their products and manufacturing processes.
Evolving Workforce. Manufacturers must adapt to the changing nature of the technical workforce. A generation of highly experienced operators and engineers is nearing retirement. New entrants to the workforce must be able to effectively leverage organization knowledge to become productive with far fewer years of experience.
Opportunities
Sustainability. We are hard at work every day helping companies meet the increasing demand for resources driven by a growing population with rising standards of living, while also addressing sustainability goals.
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By enabling our customers — through the application of our software — to increase resource efficiencies, reduce waste, and lower emissions, we support our customer's overall business goals to create safer, greener, more efficient, and more reliable operations.
Our latest software release provides organizations with more than 60 sustainability models to improve operational efficiencies and meet reduced emissions targets. This approach accelerates value creation for customers in achieving their sustainability goals, including Scope 1 and 2 emission reduction targets. Using these models, customers can identify how to reduce emissions across the entire value chain; reduce usage of energy, water and feedstocks; transition to new energy sources, such as biofuels and hydrogen; and enable the circular economy through processes such as plastics recycling and waste-to-chemicals.
Operational Excellence. The digitalization of industrial sectors is becoming critical at the highest levels of an organization – and we seek to be a leader on this path to a new era of safety, sustainability, and profitability. Through our digital technologies, we give customers the opportunity to create more resilient operations that thrive regardless of market conditions, gain insights and automate processes, and take advantage of flexible cloud deployment options to provide anytime, anywhere access and accelerated time to value. Our solutions can help businesses achieve operational excellence through a combination of asset optimization, energy reduction, process safety, advanced process control, data visualization capabilities, and other software innovations.
Organizational Excellence. In today's increasingly volatile and complex world, digital technologies offer significant opportunity to create more resilient organizations that thrive regardless of market conditions. We are helping to lead organizations on their digitalization journey with solutions that help increase agility to respond to market volatility, rapidly addressing changes in demand and supply. We deliver knowledge about our solutions in different settings and to the needs of our customers. We are also increasingly focused on coupling solutions knowledge with the operations and functional knowledge to help users successfully capture the value derived from our solutions in their domain area. By partnering with us, we believe businesses can unlock previously untapped value of industrial data across the enterprise and value network to make more powerful decisions and uncover hidden insights.
Artificial Intelligence. Increasingly, industrial organizations are focusing on how AI can be applied to address domain-specific industrial challenges. They are concentrating on tangible business outcomes from AI-enabled use cases to further validate the case for widespread industrial AI adoption. These initiatives involve shifting from mass data collection to more strategic industrial data management with a specific focus on data integration, contextualization, mobility, and accessibility across the enterprise. As a result, integrated data management, edge and cloud infrastructure, and production-grade AI environments are in demand to build, deploy and host industrial AI applications at the appropriate speeds and scale.
Growth Strategy
We have a significant opportunity to accelerate growth across end markets by enabling existing and new customers to accelerate digitalization, to implement industrial internet of things solutions, and to realize sustainability goals, in particular, our collective focus on reducing industrial emissions, increasing carbon capture, and the electrification of industry and transport sectors. We seek to achieve this growth by leveraging our enhanced product portfolio, culture of innovation, and go-to-market capabilities. In addition to our existing product portfolio, we plan to bring more innovative solutions to market faster and more cost-effectively by utilizing the combined domain expertise, technology, and engineering cultures of Heritage AspenTech and the OSI and SSE businesses. Our go-to-market capabilities will be enhanced through commercial agreements with Emerson, providing us access to Emerson Automation Solutions’ large global installed base and go-to-market capabilities, expanding our presence in existing and new markets, including pharmaceuticals, metals and mining, alternative energy, and other asset-intensive industries, as well as geographies where Emerson has a stronger presence.
We seek to maintain and extend our position as a leading global provider of industrial software to capital-intensive industries. We have introduced a new strategy to evolve our scope of optimization from the production units in a facility to the process and equipment, or entire asset. We have expanded our reach in optimization from conceptualization and design, operations, and supply chain to the maintenance aspects of the facility. We plan to continue to build on our expertise in process optimization, our installed base, and long-term customer relationships to further expand our reach in the maintenance area. By focusing on asset optimization, we will be able to optimize the design and operations of a facility considering the performance and constraints of equipment to optimize the full asset lifecycle.
We also expect to be well-positioned to further develop our business through the pursuit of organic and inorganic growth initiatives, which we expect will be an important element of our growth strategy.
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Our primary growth strategy is to expand organically within our core verticals by leveraging our market leadership position and driving increased usage and product adoption of the broad capabilities in our solution offerings. We believe this strategy is proving effective as our customers are increasingly facing a dual challenge in today’s environment – meeting the demand for resources and higher standards of living from a growing population while also addressing sustainability goals, reductions in emissions and reductions in plastic waste. This means achieving new levels of operational excellence while simultaneously addressing sustainability targets. In this complex and uncertain environment, companies require the agility in operations to address volatility, the flexibility to operate across different scenarios, and access to critical supply chain insights. These requirements in turn necessitate digitalization across the enterprise to deliver increased safety in operations, greater reliability, and improved efficiencies. In combination, these results drive greater sustainability by delivering safer, greener, and faster operations, all while supporting increased profitability.
Additionally, we seek acquisitions to accelerate our overall growth in the design, operation, optimization, and maintenance of industrial assets; product acquisitions that expand our footprint and relevance to these industries in their pursuit of operational excellence and greater sustainability, or acquisitions that introduce us to or allow us to further penetrate new industries with a focus on industrial operations. For example 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 mining industry, for AUD$900 million in cash (approximately $623 million USD). The acquisition is expected to close in the fiscal second quarter of 2023, subject to receipt of regulatory approvals.
We continue to provide innovative, market-leading solutions. Our recent product release, aspenONE V12, embeds artificial intelligence (AI) across the product portfolio, uses the cloud for delivery and provides enterprise-wide analytics and insights for increased safety, sustainability, and improved margins. We now provide over 60 sustainability models and further support our industrial AI solutions.
aspenONE V12 solutions have industrial AI hybrid model capability that is purpose-built for the capital-intensive industries. AspenTech Hybrid Models capture data from assets across the enterprise, and then apply AI, engineering first principles and our domain expertise to deliver comprehensive, more accurate models at enterprise speed and scale. With Heritage AspenTech’s more than four decades of knowledge about the unique challenges of building solutions for capital-intensive industries, aspenONE V12 enables customers to apply AI to critical processes.
aspenONE V12 further enables manufacturers to improve margins, increase asset uptime and reliability, and maximize utilization of assets. Companies can accelerate their digitalization journey and leverage industrial AI to make progress toward the Self-Optimizing Asset while increasing margins, achieving sustainability and reliable, safe operations, and reducing capital cost and time in bringing assets online.
We seek to expand our market and growth through a commercial agreement into which we entered with Emerson, which granted a subsidiary of Emerson the right to distribute, on a non-exclusive basis, certain (i) existing Heritage AspenTech products, (ii) existing Emerson products transferred to New AspenTech pursuant to the Transaction and (iii) future New AspenTech products as mutually agreed upon by the parties during the term of the commercial agreement, in each case, to end-users through such subsidiary of Emerson acting as an agent, reseller or original equipment manufacturer.
We will also continue to pursue the following activities:
Penetrate existing customer base. We have an installed base of approximately 3,000 customers. Many of our customers use a subset of our solutions. We work with our customers to identify ways in which they can improve their business performance by using the entire licensed suite of aspenONE solutions, both at an individual user level and across all their facilities.
Drive increased usage and adoption into the existing customer base. We strive for our customers to adopt and sustain the use of our products by maximizing the value they gain from our software. We do so by focusing our go-to-market resources through specific customer success management activities that generate and sustain the value from our products by ensuring that customers are using the latest version of our products, that our software is deployed in the most optimal manner, and that our customers are familiar with the latest value enhancing functionality in our products.
Leverage existing capabilities for energy transition and circular economy. Our software is also scalable and adaptable to address the needs of the emerging green energy markets and well-positioned to support blue-chip customers’ sustainability needs in existing and new markets such as biofuels, hydrogen, carbon capture, and management of current and future power grid infrastructure. We continue to work with our customers to help them minimize their environmental impact, accelerate the transition to new and renewable energy sources, and eliminate waste.
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Increase Total Addressable Market through organic and inorganic innovation. The relevance of our solutions in the markets we serve means that we can leverage third parties interested in building or expanding their businesses to increase our market penetration. The breadth of relationships that we establish will depend on the profile of the third-party company and the objectives specified to be achieved from the promotion and implementation of our products and solutions. As part of our make-vs-buy analyses, we regularly explore and evaluate acquisitions. Heritage AspenTech made several acquisitions in recent years and believe the opportunity exists to do more, especially as we seek to evolve our strategy to asset optimization across the asset lifecycle as well as diversify the industries we serve.
Expand to adjacent industries and market segments. Our focus on innovation also means introducing product capabilities or new product categories that create value for our customers and therefore expand our total addressable market. For example, the needs of pharmaceutical customers are evolving by requiring more agility while still meeting high expectations for quality. This momentum, in particular the increasing role of digitalization, electronic batch release, and online process models, is creating additional opportunities for our software.
We expect to benefit from the following strengths:
•Our Portfolio Spans the Asset Lifecycle: We will provide differentiated offerings in asset optimization, including Heritage AspenTech’s leading software for engineering, modeling and design, asset optimization, and asset predictive maintenance, as well as our OSI business’ Digital Grid Management and our SSE business’ portfolio of geoscience and subsurface modeling software. With the addition of software products and solutions from the OSI and SSE businesses, we have an enhanced end-to-end software portfolio in industries that better positions us to help these customers improve their safety, reliability, and productivity while reducing their carbon footprint.
•Diversified End Markets with Blue-Chip Customer Base: With the capabilities of the OSI and SSE businesses, we will expand into new markets. For example, the addition of the OSI business enables us to provide its Power Transmission & Distribution (T&D) software to support power grid management and reliability, particularly as utilities increase the amount of generation from renewable sources. In addition, we believe we will be better positioned to expand in existing and new end markets through investments we have made in fiscal year 2022. Through commercial agreements with Emerson, we will have access to Emerson’s global capabilities, including its installed base and sales force, which will help accelerate adoption of our solutions in pharmaceuticals and other markets. For example, we plan to leverage Emerson’s global life sciences capabilities, including 3,000 installed control systems, 30 locations and nearly 1,000 project engineering and consulting employees dedicated to active pharmaceuticals (life sciences) projects.
•Significant Revenue and Cost Synergy Opportunities: Over time, we believe we will drive revenue growth and synergy opportunities by offering a more comprehensive product portfolio delivering superior value to customers, transitioning the OSI and SSE businesses to subscription-based business models, and leveraging the expanded existing strategic alliance between Emerson and AspenTech.
◦Deliver Higher Value to Customers with Joint Platform: We believe our enhanced portfolio, providing differentiated offerings in asset optimization, including Transmission & Distribution asset management and expanded reservoir modeling and optimization, will be better positioned to drive increased penetration with existing customers and adoption by new customers in existing and new markets.
◦Business Model Transformation: By transitioning the OSI and SSE businesses to token and subscription-based business models, including commercializing the recurring value of certain service offerings into a standardized solution under a token model, we believe we will provide enhanced flexibility and broader access to our software suite for customers and improve our long-term revenue and profitability. Heritage AspenTech has significant expertise in such business model transitions, having successfully implemented them in its existing portfolio.
◦Expanded Strategic Alliance: The recent Emerson transaction will enhance our existing commercial alliance with Emerson and increase our collaboration with Emerson to drive innovation, develop new products, and pursue joint go-to-market opportunities leveraging our comprehensive product portfolio and Emerson’s global installed base and its sales force.
In addition to revenue synergy opportunities, the recent Emerson transaction is expected to create cost synergies, which are expected to be driven by scale efficiencies, including shared R&D and SG&A organizations between Heritage AspenTech and the OSI and SSE businesses, and overhead and spend optimization.
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•Strong Financial Profile: As a leader in the industrial software market with scale, significant recurring revenue and strong free cash flow generation we are positioned to drive innovation and growth. Over time, as we deliver on our synergy opportunities and complete the business model transitions of the OSI and SSE businesses, we believe we will have the potential to deliver a better software and recurring revenue mix and even stronger adjusted EBITDA and free cash flow margins.
•Strong Platform for Future Acquisitions: We expect that mergers and acquisitions will be a key pillar of our go-forward strategy given the continued evolution and consolidation of the industrial software industry. With an expanded solution set, broader global footprint and larger installed base, we will have the ability to execute on a wider range of acquisition and investment transactions across industries, products, and geographies. With greater financial flexibility and the strategic relationship with Emerson, we will have the scale and financial capacity to pursue larger strategic transactions, quickly integrate targets, and realize synergies.
•Diversity, Equality & Inclusion (DEI): We promote an inclusive culture at AspenTech, advocating equal opportunities for all and encouraging all employees to support and empathize with their peers through positive actions, not just words. As one of our corporate values, DEI is a fundamental pillar to our culture. We have four employee-led chapters within our DEI group: Women’s Leadership Forum, Black Leadership Forum, LGBTQ Forum, and Latinx Forum. The four pillars are to: 1) proactively identify, attract and retain a globally diverse workforce to increase employee engagement; 2) advance a climate that fosters inclusion excellence. Engage, empower, inform and hold individuals accountable for fostering an environment where every person feels responsible for advancing diversity and inclusion excellence; 3) promote diversity and inclusion training, external engagements, development opportunities, talent acquisition and total rewards at AspenTech; and 4) measure effectiveness to ensure accountability across AspenTech.
Product Suites
Customers use our solutions to improve profitability and sustainability by increasing throughput, advancing energy efficiencies, and production levels; reducing unplanned downtime, emissions, and safety risks; increasing confidence in exploration and production decisions; transforming and digitizing operations to incorporate renewable energy resources more seamlessly; and decreasing working capital requirements. In addition to Heritage AspenTech’s three long-established suites: Performance Engineering, Manufacturing and Supply Chain, and Asset Performance Management, we have added two additional suites to support the acceleration to sustainable operations: Digital Grid Management and Subsurface Science & Engineering. We now provide a broad portfolio of mission critical software that addresses asset optimization across the asset lifecycle with five suites of best-in-class software. Each business area leverages our AIoT products as the foundation of industrial data, to help us realize our vision for industrial AI at scale.
Performance Engineering. Our performance engineering software applications are used during both the design and the ongoing operation of facilities to model and improve the way engineers develop and operate manufacturing assets. Manufacturers must address a variety of challenges including design, operational improvement, concurrent engineering, and economic evaluation. Performance Engineering helps customers optimize asset design and processes to reduce CAPEX and OPEX, improve safety, reduce emissions, drive sustainability, and maximize overall profitability.
Manufacturing and Supply Chain. Our manufacturing and supply chain software products focus on optimizing both day-to-day operations and strategic supply chain decisions, enabling customers to make better, faster decisions that lead to improved performance and operating results. These solutions include software applications that help customers make real-time decisions, which can reduce fixed and variable costs and improve product yields. Manufacturing and Supply Chain helps manufacturers close the gap between planning and operations to increase profitability in dynamic markets; create an integrated workflow that provides real-time insight across disciplines to maximize throughput, quality and margins; and meet customers’ sustainability goals for reduced emissions, energy efficiencies and waste reduction.
Asset Performance Management. Our asset performance management products are used to understand and predict the reliability of a system - multiple assets, a single asset, or equipment in a facility. Factors that impact reliability include how operating conditions degrade equipment performance over time, or how process conditions can lead to equipment failure. The APM suite is a comprehensive suite of machine learning and analytics technologies which can be used in a standalone or integrated manner with historical and real time asset and equipment data to help our customers ensure high asset availability and get early, accurate warnings of problems to better plan around an event. Asset Performance Management uses analytics to make smarter decisions to lower costs, improve throughput, quality and Health, Safety & Environment (HS&E).
Digital Grid Management (OSI product portfolio). OSI Digital Grid Management offerings include energy management solutions (EMS) that monitor, control, and optimize the increasingly interconnected transmission networks and
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generation fleets to manage grid stability and ensure security and regulatory compliance; and distribution management solutions (ADMS and DERMS and Outage Management). These solutions provide system resiliency, efficiency and safety by monitoring, controlling and modeling the distribution network as utilities seek to increase reliability, predict and react to increasingly dynamic supply and demand patterns, resolve outages faster and in a more automated manner, and manage field service digitally. OSI Digital Grid Management solutions help power and utility customers reduce carbon footprint with the integration of new green energy, improve situational awareness to drive desired outcomes and protect critical assets across the network through enhanced cybersecurity.
Subsurface Science & Engineering (SSE). SSE solutions provide a comprehensive portfolio of end-to-end geoscience and modeling software solutions for optimization across subsurface engineering and operations. SSE solutions provide the ability to characterize, model and monitor the subsurface for the responsible management of resources, while supporting energy transition pathways, such as Carbon Capture Utilization Storage (CCUS); optimize well placement and production using geophysics, petrophysics, and modeling to minimize operational costs and obtain more productive wells with less planning, and; locate and delineate opportunities for new fields, while optimizing and minimizing risk, using seismic imaging and interpretation solutions and connecting subsurface technology to operational activities.
Research and Development
We maintain active research and development organizations directed primarily toward the development of new products, technology and other solutions, as well as the improvement of existing products and services and the design of specialized products to meet specific customer needs.
As of June 30, 2022, new AspenTech had a total of 1,287 employees dedicated to research and development in the following locations: United States of America, China, Mexico, India, Canada, Israel, Russia, France, Norway, United Kingdom, and Australia.
Research and development expenses were $64.3 million in fiscal 2022, $59.6 million in fiscal 2021 and $36.8 million in fiscal 2020.
Sales and Marketing
We employ a value-based sales approach, offering our customers a comprehensive suite of software and services that enhance the efficiency and productivity of their engineering, manufacturing, and supply chain and maintenance operations. We have increasingly focused on positioning our products as a strategic investment and therefore devote an increasing portion of our sales efforts to our customers’ senior management, including senior decision makers in manufacturing, operations, maintenance, and technology. Our aspenONE solution strategy supports this value-based approach by broadening the scope of optimization across the entire enterprise over its lifecycle, expanding the use of process models in the operations environment, and enabling the use of analytics and data science to enhance equipment and process reliability. We offer a variety of training programs focused on illustrating the capabilities of our applications as well as online training built into our applications. We have implemented incentive compensation programs for our sales force to reward efforts that increase customer usage of our products. Furthermore, we believe our aspenONE licensing model enables our sales force to develop consultative sales relationships with our customers.
Historically, most of our license sales have been generated through our direct Field Sales organization. To market the specific functionality and other technical features of our software, our account managers work with specialized teams of technical sales personnel and product specialists organized for each sales and marketing effort. Our technical sales personnel typically have degrees in chemical engineering or related disciplines and actively consult with a customer’s engineers. Product specialists share their detailed knowledge of the specific features of our software solutions as they apply to the unique business processes of different vertical industries. In addition to our direct Field Sales organization, we employ an inside sales team that targets customers in certain market segments.
In fiscal year 2022, we formed the Industry Business Unit (IBU) organization, a significant investment that enables us to approach our customers with industry-specific knowledge while focusing on functional excellence. This structure utilizes the deep industry expertise of our leaders to develop compelling industry solutions with tools and content that resonates with customers in each specific industry, enriching customer engagement and positioning us as a trusted partner.
We have established channel relationships with select companies that we believe can help us pursue opportunities in adjacent target markets. Additionally, the recent Emerson transaction will enhance our existing commercial alliance with Emerson and increase our collaboration with Emerson to drive innovation, develop new products and pursue joint go-to-market opportunities leveraging our comprehensive product portfolio and Emerson’s $120 billion global installed base and its sales force.
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We also license our software products to universities that agree to use our products in teaching and research. We believe that students’ familiarity with our products will stimulate future demand once the students enter the workplace.
We supplement our sales efforts with a variety of marketing initiatives, including industry analyst and public relations activities, campaigns to promote product usage and adoption, digital marketing and advertising, industry conferences, user group meetings and customer relationship programs. Our broad user base spans multiple verticals and geographies and these users possess a variety of skills, experience, and business needs. To reach each of them in an effective, productive, and leveraged manner, we will increasingly capitalize on digital customer engagement solutions. Using webinars, digital communities, social media, videos, email, and other digital means, we seek to engage our extensive user base with targeted messages intended to address the specific needs of each market, customer and user.
Our overall sales force, which consists of sales account managers, technical sales personnel, indirect-channel personnel, inside sales personnel, and marketing personnel, consisted of 730 employees as of June 30, 2022.
Software Maintenance and Support, Professional Services and Training
Software maintenance and support (SMS) consists primarily of providing customer technical support and access to software fixes and upgrades. Customer technical support services are provided throughout the world by our three global call centers as well as via email and through our support website. For license term arrangements entered into subsequent to our transition to a subscription-based licensing model, SMS is included with the license arrangement. For license arrangements that do not include SMS, customers can purchase standalone SMS.
AspenTech provides professional services with applications and domain expertise that help ensure customers realize the full value from our software. Our solutions are designed with the intent of third-party implementation, enabling global, scalable project execution and support. Our professional services team primarily consists of engineers with significant relevant industry experience. Our employees include experts in fields such as thermophysical properties, distillation, adsorption processes, polymer processes, industrial reactor modeling, the identification of empirical models for process control or analysis, large-scale optimization, supply distribution systems modeling and scheduling methods, geoscience, petrophysics, and electric engineering.
We offer a variety of training solutions ranging from standardized training, which can be delivered in a public forum, on-site at a customer’s location or over the Internet, to customized training sessions, which can be tailored to fit customer needs. We have also introduced a wide range of online computer-based training courses offering customers on-demand training in basic and advanced features of our products directly from within the products. As of June 30, 2022, we had a total of 1,155 employees in our customer support, professional services and training groups.
Business Segments
Prior to the Transaction, we had two operating and reportable segments: OSI Inc. and GSS (subsequently renamed Subsurface Science & Engineering Solutions, or “SSE”, after the consummation of the Transaction). The Transaction resulted in the creation of a third operating and reportable segment: Heritage AspenTech. Refer to the section titled “Business Overview” in this Transition Report on Form 10-KT for a description of the product and service offerings by each of the three business segments.
Competition and Our Competitive Strengths
Our markets in general are competitive, and we expect the intensity of competition in our markets to increase as existing competitors enhance and expand their product and service offerings and as new participants enter the market. Increased competition may result in price reductions, reduced profitability, and loss of market share. While we believe we are well-positioned to maintain our leadership, we cannot ensure that we will be able to compete successfully against existing or future competitors. Some of our customers and companies with which we have strategic relationships also are, or may become, competitors.
Many of our current and potential competitors have greater financial, technical, marketing, service, and other resources than we have. As a result, these companies may be able to offer lower prices, additional products or services, or other incentives that we cannot match or offer. These competitors may be in a stronger position to respond more quickly to new technologies and may be able to undertake more extensive marketing campaigns. We believe they also have adopted and may continue to pursue more aggressive pricing policies and make more attractive offers to potential customers, employees, and strategic partners. For example, some competitors may be able to initiate relationships through sales and installations of hardware and then seek to expand their customer relationships by offering asset optimization software at a discount. In addition, competitors with greater financial resources may make strategic acquisitions to increase their ability to gain market share or improve the
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quality or marketability of their products. Furthermore, we face challenges in selling our solutions to some large companies that have internally developed their own proprietary software solutions.
We seek to develop and offer integrated suites of targeted, high-value vertical industry solutions that can be implemented with relatively limited service requirements. We believe this approach provides us with an advantage over many of our competitors that offer software products that are point solutions or are more service-based.
Our key competitive differentiators include:
•Breadth, depth, and integration of our software offerings
•Rapid return on investment and increase in profitability and sustainability
•Deep domain expertise in the industries we serve
•Focus on software for capital-intensive industries
•Embedded AI capabilities that deliver insights, provide guidance, and automate and democratize knowledge
•Flexible licensing model
•Consistent global support
Proprietary Rights
Our software is proprietary and fundamental to our business. To protect our proprietary technology and brand and prevent unauthorized use of our software, AspenTech relies on a combination of copyright, patent, trademark, and trade secret laws in the United States and other jurisdictions, license and confidentiality agreements, and software security measures to further protect our proprietary technology and brand. AspenTech generally seeks to protect our trade secrets by entering into non-disclosure agreements with its employees and customers, and historically has restricted access to software and source code, which we regard as proprietary information.
We have obtained or applied for patent protection with respect to some of our intellectual property and have registered or applied to register some of our trademarks in the United States and in selected other countries. Currently, we have approximately 377 issued patents and pending patent applications worldwide. This number includes patents and patent applications owned by Heritage AspenTech and the OSI and SSE businesses. In addition, we consider our OSI business’ code base of over 15 million lines of internally developed code to produce a formidable control platform and provide a significant barrier to entry for competitors. We will continue to develop or acquire new intellectual property and file new applications to protect our ongoing research and development activities and brands. In addition, Emerson provides to us a non-exclusive, perpetual, irrevocable, worldwide, royalty-free license to use certain intellectual property rights owned by Emerson and its subsidiaries and used in the operation of the OSI and SSE businesses.
We actively monitor use of our intellectual property and enforce, and will continue to enforce, our intellectual property rights against infringement, misappropriation, or other violations worldwide as deemed appropriate to protect our businesses. In the United States, we generally are able to maintain our patents for up to 20 years from the earliest effective filing date and maintain our trademark registrations for as long as the trademarks are in use. Additionally, we consider the quality and timely delivery of our products, the services we provide to our customers, and the technical knowledge and skills of our personnel to be important components of our overall portfolio and assets.
The laws of many countries in which our products are licensed may not protect our intellectual property rights to the same extent as the laws of the United States. While we consider our intellectual property rights to be valuable, we do not believe that our competitive position in the industry depends solely on obtaining legal protection for our software products and technology. Instead, we believe that the success of our business also depends on our ability to maintain a leadership position by continuing to develop innovative software products and technology.
Our proprietary rights are subject to risks and uncertainties described under Item 1A. “Risk Factors” below, which are incorporated herein by reference.
Licenses
In connection with Heritage AspenTech's acquisition of Hyprotech Ltd. and related subsidiaries of AEA Technology plc in May 2002 and the consent decree Heritage AspenTech entered into with the Federal Trade Commission in December 2004 to resolve allegations that the acquisition was improperly anticompetitive, Heritage AspenTech and certain of our subsidiaries entered into a purchase and sale agreement with Honeywell International Inc. and certain of its subsidiaries, pursuant to which Heritage AspenTech sold intellectual property and other assets to Honeywell relating to our operator training business and Heritage AspenTech Hyprotech engineering software products. Under the terms of the transactions, Heritage AspenTech retained a perpetual, irrevocable, worldwide, royalty-free non-exclusive license to the Hyprotech engineering software and have the right to continue to develop, license and sell the Hyprotech engineering products.
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In March 1982, Heritage AspenTech entered into a System License Agreement with the Massachusetts Institute of Technology, or MIT, granting Heritage AspenTech a worldwide, perpetual non-exclusive license (with the right to sublicense) to use, reproduce, distribute and create derivative works of the computer program known as “ASPEN” which provides a framework for simulating the steady-state behavior of chemical processes that Heritage AspenTech utilize in the simulation engine for Heritage AspenTech Aspen Plus product. MIT agreed that Heritage AspenTech would own any derivative works and enhancements. MIT has the right to terminate the agreement if: Heritage AspenTech breach it and do not cure the breach within 90 days after receiving a written notice from MIT; Heritage AspenTech ceases to carry on its business; or certain bankruptcy or insolvency proceedings are commenced and not dismissed. In the event of such termination, sublicenses granted to Heritage AspenTech customers prior to termination will remain in effect.
Employees
As of June 30, 2022, we had a total of approximately 3,574 full-time employees, of whom 1,758 were located in the United States. None of our employees in the United States is represented by a labor union; however, in certain foreign subsidiaries labor unions or workers’ councils may represent some of our employees. We have experienced no work stoppages and believe that our employee relations are satisfactory.
Corporate Information
Aspen Technology, Inc. was formed in Delaware in 2021. Our principal executive offices are at 20 Crosby Drive, Bedford, Massachusetts 01730, and our telephone number at that address is (781) 221-6400. Our website address is http://www.aspentech.com. The information on our website is not part of this Transition Report on Form 10-KT, unless expressly noted.
Available Information
We file reports with the Securities and Exchange Commission, or the SEC, which we make available on our website free of charge. These reports include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports, each of which is provided on our website as soon as reasonably practicable after we electronically file such materials with or furnish them to the SEC. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.
Item 1A. Risk Factors.
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below before purchasing our common stock. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties may also impair our business operations. If any of the following risks actually occurs, our business, financial condition, results of operations or cash flows would likely suffer. In that case, the trading price of our common stock could fall, and you may lose all or part of your investment in our common stock.
Risks Related to Our Transaction with Emerson
The integration of Heritage AspenTech, the OSI business and the SSE business may present challenges that may not result in the anticipated benefits of the transactions with Emerson.
We are in the process of integrating a combination of businesses that were operated as independent businesses. Potential difficulties in the integration process include the following:
| • | the inability to successfully integrate the businesses, including operations, technologies, products and services, in a manner that permits AspenTech to achieve the cost savings and revenue synergies anticipated to result from the transactions with Emerson, which could result in the anticipated benefits of the transactions not being realized partly or wholly in the time frame currently anticipated or at all; | ||||
| • | lost sales and customers as a result of certain customers of any of the businesses deciding not to do business with AspenTech, or deciding to decrease their amount of business in order to reduce their reliance on a single company; | ||||
| • | the necessity of coordinating geographically separated organizations, systems and facilities; | ||||
| • | potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the transactions; | ||||
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| • | integrating personnel with diverse business backgrounds and business cultures, while maintaining focus on providing consistent, high-quality products and services; | ||||
| • | consolidating and rationalizing information technology platforms, cybersecurity routines and protocols and administrative infrastructures as well as accounting systems and related financial reporting activities and difficulty implementing effective internal controls over financial reporting and disclosure controls and procedures in particular; and | ||||
| • | preserving important relationships of the combined businesses and resolving potential conflicts that may arise. | ||||
Furthermore, it is possible that the integration process could result in the loss of key employees or skilled workers. The loss of key employees and skilled workers could adversely affect our ability to successfully conduct our business because of their experience and knowledge of AspenTech’s and the OSI and SSE businesses. In addition, AspenTech could be adversely affected by the diversion of management’s attention and any delays or difficulties encountered in connection with the integration. The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more business segments. If AspenTech experiences difficulties with the integration process, the anticipated benefits of the transactions may not be realized fully or at all, or may take longer to realize than expected. These integration matters could have an adverse effect on the business, results of operations, financial condition or prospects of AspenTech.
AspenTech has incurred and will incur transaction-related costs in connection with the transactions with Emerson and the integration of the OSI and SSE businesses.
AspenTech has incurred transaction-related costs in connection with the Emerson transactions and both will incur costs in connection with the integration of the OSI and SSE businesses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. These expenses could, particularly in the near term, reduce the cost synergies that AspenTech expects to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost synergies related to the integration of the businesses, and accordingly, any net synergies may not be achieved in the near term or at all. These integration expenses may result in AspenTech taking significant charges against earnings.
Emerson could engage in business and other activities that compete with us.
Emerson has agreed that until 45 days after the occurrence of one of the specified trigger events based on Emerson ceasing to beneficially own more than 50% of our outstanding common stock specified in the Stockholders Agreement entered into as part of the transactions with Emerson, and subject to certain exceptions, Emerson will not compete in the business of developing, marketing and selling certain industrial software, subject to certain exceptions.
Subject to the terms of such Stockholders Agreement, Emerson or any of its subsidiaries may engage in certain activities notwithstanding that they may fall within the scope of the competing business. In addition, if we engage in activities outside the scope of the non-competition obligation under the Stockholders Agreement, Emerson will not be restricted from engaging in such activities in competition with us. To the extent that Emerson engages in the same or similar business activities or lines of business as us, or engages in business with any of our partners, customers or vendors, our ability to successfully operate and expand our business may be hampered.
After the second anniversary of the closing of the Emerson transactions, subject to restrictions, Emerson will be permitted to transfer its shares of our common stock and acquire more shares of our common stock, which could have a negative impact on AspenTech’s stock price or ability to maintain NASDAQ continued listing requirements.
For two years following the completion of the Emerson transactions unless Emerson ceases to beneficially own a least 20% of our outstanding common stock, the Emerson Group will be prohibited from transferring any of its shares of our common stock other than to a controlled affiliate of Emerson, unless approved by a special committee of the Board. Following such two-year lock-up period, the Emerson Group will be permitted, subject to restrictions to transfer shares of our common stock, including in public offerings pursuant to registration rights granted by AspenTech. Any such transfer could significantly increase the number of shares of our common stock available in the market, which could cause a decrease in the price of shares of our common stock. In addition, even if Emerson does not transfer a large number of its shares of our common stock into the market, the existence of Emerson’s right to transfer a large number of shares into the market may depress the price of shares of our common stock.
For two years following the completion of the Emerson transactions, the Emerson Group is prohibited from acquiring or seeking to acquire, directly or indirectly, additional shares of our common stock that would result in the Emerson Group having an ownership percentage of our outstanding common stock greater than the percentage of outstanding common stock the
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Emerson Group owned as of the closing of the Emerson transactions, subject to certain exceptions. Following such two-year standstill period, the Emerson Group will be permitted, subject to certain restrictions, to acquire or seek to acquire, directly or indirectly, additional shares of our common stock which may have an adverse effect on our ability to maintain NASDAQ continued listing requirements, including requirements with respect to a minimum number of holders of the common stock.
Emerson has the right to purchase additional securities of AspenTech pursuant to certain pre-agreed prices and procedures, which could have a negative impact on AspenTech’s stock price.
Emerson has the option (but not the obligation) to, among other things, (i) purchase additional securities of AspenTech in connection with securities being issued as consideration in a merger and acquisition transaction, or purchase securities of AspenTech in a public offering of securities of AspenTech securities, or other circumstances where AspenTech securities are not being offered for cash by AspenTech, in each case at pre-agreed prices without the need for the approval of a special Committee of the Board, (ii) purchase additional shares of our common stock up to its percentage maintenance share in connection with the issuance of equity awards or securities of AspenTech pursuant to any “at the market” program, on a quarterly basis and in accordance with the pre-agreed prices and (iii) purchase additional equity securities of AspenTech at pre-agreed prices to maintain Emerson’s ownership of certain percentages of our outstanding common stock during certain cure periods after Emerson’s ownership of our common stock falls below certain thresholds. Any such purchase could significantly increase the number of shares of our common stock outstanding, which could cause a decrease in the price of shares of our common stock. In addition, even if Emerson does not exercise its right to purchase, the existence of such right may depress the price of shares of our common stock.
Following the completion of the Transaction, New AspenTech is controlled by Emerson. The interests of Emerson may differ from the interests of other stockholders of New AspenTech.
Following the closing of the Transaction, Emerson beneficially owns 55% of the fully diluted shares of Common Stock of the Company. Under the Stockholders Agreement, Emerson will have the right to acquire additional equity securities of New AspenTech pursuant to pre-agreed procedures, preemptive rights and percentage maintenance.
Emerson has the ability to designate and elect a majority of the directors of the New AspenTech Board. The Stockholders Agreement provides that, for so long as Emerson beneficially owns more than 50% of the outstanding shares of Common Stock, to the extent permitted by applicable law, if so requested by Emerson Sub, New AspenTech will avail itself of available “Controlled Company” exemptions to the corporate governance listing standards of NASDAQ (in whole or in part, as requested by Emerson Sub) that would otherwise require New AspenTech to have (i) a majority of the board of directors consist of independent directors, (ii) a nominating/corporate governance committee that is composed solely of independent directors and (iii) a compensation committee that is composed solely of independent directors. Emerson Sub will request that New AspenTech avail itself of the exemptions from the requirements that (i) the nominating/corporate governance committee be composed solely of independent directors and (ii) the compensation committee be composed solely of independent directors.
Under the Stockholders Agreement, the New AspenTech Board initially has four directors not designated by Emerson and five directors designated by Emerson.
Pursuant to the terms of the Stockholders Agreement, Emerson will have the right to consent to certain material actions of New AspenTech and its subsidiaries for so long as it maintains certain ownership percentages, including over certain mergers and acquisitions, sales of assets, incurrences of indebtedness, issuances of securities and the appointment and removal of the Chief Executive Officer of New AspenTech. For as long as Emerson beneficially owns a majority of the outstanding shares of Common Stock, Emerson will also have control over all other matters submitted to stockholders for approval, including changes in capital structure, transactions requiring stockholder approval under Delaware law and corporate governance, subject to the terms of the Stockholders Agreement relating to Emerson’s agreement to vote in favor of director nominees not designated by Emerson and to proposals by Emerson to acquire all of the shares of Common Stock held by non-Emerson stockholders. Emerson and its subsidiaries may have different interests than other holders of Common Stock and may make decisions adverse to the interests of other holders of Common Stock.
Among other things, Emerson’s control could delay, defer, or prevent a sale of New AspenTech that New AspenTech’s other stockholders support, or, conversely, this control could result in the consummation of such a transaction that other stockholders do not support. This concentrated control could discourage a potential investor from seeking to acquire Common Stock and, as a result, might impact the market price of Common Stock.
The corporate opportunity provisions in the Stockholders Agreement could enable Emerson to benefit from corporate opportunities that might otherwise be available to us.
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The Stockholders Agreement contains provisions related to corporate opportunities that may be of interest to both New AspenTech and Emerson. These provisions provide in general that (i) a corporate opportunity offered to any individual who is a director, but not an officer or employee of New AspenTech and who is also a director, officer or employee of Emerson will belong to New AspenTech only if such opportunity is expressly offered to such person solely in his or her capacity as a director of New AspenTech and otherwise will belong to Emerson and (ii) a corporate opportunity offered to any individual who is an officer or employee of New AspenTech and also is a director, officer or employee of Emerson will belong to New AspenTech unless such opportunity is expressly offered to such person in his or her capacity as a director, officer or employee of Emerson, in which case it will belong to Emerson. The absence of a duty on the part of Emerson or its affiliates to present corporate opportunities to New AspenTech could have a material adverse effect on our business, financial condition, results of operations or prospects if attractive corporate opportunities are allocated by Emerson to itself or its affiliates (not including New AspenTech).
The historical financial information of the OSI business and SSE Business may not be representative of its results or financial condition if it had been operated separately from Emerson and, as a result, may not be a reliable indicator of future results.
The financial information of the OSI business and SSE business included in this document has been derived from the consolidated financial statements and accounting records of Emerson and reflects all direct costs as well as an allocation of indirect costs based on assumptions and allocations made by Emerson management. The financial position, results of operations and cash flows of the OSI business and SSE business presented may be different from those that would have resulted had the OSI business and SSE business been operated separately from Emerson during the applicable periods or at the applicable dates. For example, in preparing the financial statements of the OSI business and SSE business, Emerson made allocations of costs and Emerson corporate expenses deemed to be attributable to the OSI business and SSE business. However, these costs and expenses reflect the costs and expenses attributable to the OSI business and SSE business operated as part of a larger organization and do not necessarily reflect costs and expenses that would be incurred by the OSI business and SSE business had they been operated independently. As a result, the historical financial information of the OSI business and SSE business contained in this document may not be a reliable indicator of their future results.
Risks Related to Our Business
Our customers’ business operations have been, and continue to be, subject to business interruptions arising from the COVID‑19 pandemic. We continue to monitor the situation, but there can be no assurance that the pandemic will not result in delays or possibly reductions in demand for our solutions that could have a serious adverse effect on our business.
The ongoing COVID-19 pandemic and the various responses to it globally have created significant volatility, uncertainty and economic disruption. Authorities across the U.S. and the globe have implemented and continue to implement varying degrees of restriction on social and commercial activity in an effort to slow the spread of the virus, some of which have been subsequently rescinded or modified, such as travel bans, stay-at-home orders and shutdowns of certain businesses. These measures have impacted and may continue to impact all or portions of our workforce, operations, suppliers and customers and demand for our products and services. While the measures instituted in response to COVID‑19 are expected to be temporary, the duration of the business disruptions and related operational and financial impact on our customers and us cannot be estimated with certainty at this time. The adverse effects on the economies and financial markets of many countries and markets may result in an economic downturn and changes in global economic policy that could reduce demand for our products and have a material adverse impact on our business, operating results and financial condition, including on our ability to collect accounts receivable. Our business may also be impacted if our employees are not able to perform services for customers on-site due to travel restrictions or facility closings.
Additionally, to the extent the COVID-19 pandemic adversely affects our business, results of operations or financial condition, it may heighten other risks described in this “Risk Factors” section below.
We may be unable to hire or retain personnel with the necessary skills to operate and grow our business, which could adversely affect our ability to compete.
Our future success also depends upon our ability to attract, develop, motivate and retain highly skilled managerial, sales and marketing, technical, financial and administrative personnel necessary to guide our operations and support and grow our business. The market for this talent is highly competitive.
In addition, because of the highly technical nature of our products and services, we must attract and retain highly skilled engineering and development personnel. The technical personnel that we require to develop our products and solutions are in high demand, particularly technical personnel with a combination of AI, domain and real-time application expertise as there are
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comparatively fewer persons with those skills. If we are unable to attract and retain technical personnel with the requisite skills, our product and solution development efforts could be delayed, which could adversely affect our ability to compete and thereby adversely affect our revenues and profitability.
Furthermore, our ability to attract and retain employees may be affected by the COVID-19 pandemic and its effects on global workforce patterns and employee expectations regarding returning to offices, and may result in a more geographically distributed workforce and higher employee turnover than we anticipate.
In addition, recent inflationary pressure may impact our ability to attract and retain personnel potentially because of a need to increase compensation in certain areas.
All of our officers and other U.S. employees are at-will employees, meaning that they may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business, financial condition and operating results may be materially adversely affected.
If we are unable to attract, develop, motivate and retain the personnel we need to develop compelling products and solutions, and guide, operate and support our business, we may be unable to successfully compete in the marketplace, which would adversely affect our revenues and profitability.
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.
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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 the region 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 Ukraine. We have net sales of approximately $9.9 million for the fiscal year ended June 30, 2022, and total assets of approximately $23.4 million as of June 30, 2022, related to operations in Russia. While the conflict has not had a material impact on our financial results, we continue to evaluate the impact, if any, of the various sanctions and export control measures imposed by the United States and other governments on our ability to do business in Russia, maintain contracts with vendors and pay employees in Russia, receive payment from customers in Russia and Ukraine, and assess our operations for potential asset impairment. The outcome of these assessments will depend on how the conflict evolves and any further actions that may be taken by the United States, Russia, and other governments around the world. As a software company, there is no material impact to supply chain operations expected due to the conflict in Ukraine.
We assess our operations for potential asset impairment in accordance with our accounting practices, and are evaluating the impact, if any, of the various sanctions and export controls measures imposed by the United States and other governments 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 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.
If the sanctions and other retaliatory measures imposed by the global community change we may be required to cease or suspend operations in the region or, should the conflict 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.
A continued conflict between Ukraine and Russia, 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, and the above-mentioned adverse effect 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.
If we fail to increase usage and product adoption by customers of our aspenONE engineering and manufacturing and supply chain offerings, our OSI business’s advanced transmission and distribution (T&D) software and our SSE business’s Paradigm and Roxar software offerings, and grow our aspenONE APM business, fail to provide innovative, market-leading solutions, or fail to retain our current customers, we may be unable to implement our growth strategy successfully, and our business could be seriously impacted.
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Our market leadership and our future growth is largely dependent upon our ability to increase usage and product adoption by customers of our aspenONE engineering and manufacturing and supply chain offerings, our OSI business’s advanced transmission and distribution (T&D) software and our SSE business’s Paradigm and Roxar software offerings, to grow our aspenONE APM business, and to develop new software products that achieve market acceptance with acceptable operating margins. Enterprises are requiring their application software vendors to provide greater levels of functionality and broader product offerings. We must continue to enhance our current product line and develop and introduce new products and services that keep pace with increasingly sophisticated customer requirements and the technological developments of our competitors. If we fail to do so, customers may choose not to renew their contracts with us. Our business and operating results could suffer if we cannot successfully execute our strategy and drive usage and product adoption.
We are implementing an integrated software product strategy across our businesses with differentiated vertical solutions targeted at specific capital-intensive industries. We cannot ensure that our product strategy will result in new and existing products that will meet market needs and achieve significant usage and product adoption. If we fail to increase usage and product adoption or fail to develop or acquire new software products that meet the demands of our customers or our target markets, our operating results and cash flows from operations will grow at a slower rate than we anticipate and our financial condition could suffer.
In addition, we are transitioning our OSI and SSE businesses to token and/or subscription-based business models to provide enhanced flexibility and broader access to our software suite for customers and improve long-term revenue and profitability. Although our management has significant experience in such business model transitions, we may not be successful in such a transition and there is no guarantee that we will achieve the expected results; for example, if our planned model transition is not acceptable to current customers of our OSI and SSE businesses, they may choose not to continue their relationships with us. Further, we may encounter unforeseen expenses, complications and delays in the process of the transition.
Our business could suffer if demand for, or usage of, our software declines for any reason, including declines due to adverse changes in the process and other capital-intensive industries.
If demand for, or usage of, our software solutions declines for any reason, our operating results, cash flows from operations and financial position would suffer. Our business could be adversely affected by:
| • | any decline in demand for or usage of our software solutions, including those related to the COVID-19 pandemic and resulting global supply chain disruptions; | ||||
| • | the introduction of products and technologies that serve as a replacement or substitute for, or represent an improvement over, our software solutions; | ||||
| • | technological innovations that our software solutions do not address; | ||||
| • | our inability to release enhanced versions of our software on a timely basis; and | ||||
| • | adverse changes in capital intensive industries or otherwise that lead to reductions, postponements or cancellations of customer purchases of our products and services, or delays in the execution of license agreement renewals in the same quarter in which the original agreements expire. | ||||
Because of the nature of their products and manufacturing processes and their global operations, companies in the process and other capital-intensive industries are subject to risk of adverse or even catastrophic environmental, safety and health accidents or incidents and are often subject to changing standards and regulations worldwide. In addition, worldwide economic downturns and pricing pressures experienced by energy, chemical, engineering and construction, and other capital-intensive industries have led to consolidations and reorganizations. In particular, a significant percentage of our revenue is derived from companies in the oil and gas sector. We believe that reduced demand for oil due to the COVID-19 pandemic, impacted and may continue to impact the operating levels and capital spending of certain of our customers. This has resulted in, and could continue to result in, less predictable and lower demand for our products and services. Additionally, the COVID-19 pandemic has disrupted global supply chains in many industries, and such disruptions could also impact the operating levels and capital spending of certain of our customers and result in less predictable and lower demand for our products and services. Any such adverse environmental, safety or health incident, change in regulatory standards, or economic downturn that affects the capital-intensive industries, including continued challenges and uncertainty among customers whose business is adversely affected by a shift to a greater percentage of renewable energy sources such as wind and solar, as well as general domestic and foreign economic conditions and other factors that reduce spending by companies in these industries, could impact our operating results in the future.
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Unfavorable economic and market conditions or a lessening demand in the market for asset optimization software could adversely affect our operating results.
Our business is influenced by a range of factors that are beyond our control and difficult or impossible to predict. If the market for asset optimization software grows more slowly than we anticipate, demand for our products and services could decline and our operating results could be impaired.
Our overall performance depends, in part, on worldwide economic conditions. In recent months, we have observed increased economic uncertainty in the United States and abroad. Impacts of such economic weakness include:
•falling overall demand for goods and services, leading to reduced profitability;
•reduced credit availability;
•higher borrowing costs;
•reduced liquidity;
•volatility in credit, equity and foreign exchange markets; and
•bankruptcies.
Further, the state of the global economy may deteriorate in the future. Customer demand for our products is linked to the strength of the global economy. If weakness in the global economy persists, many customers may amend their procurement strategies to delay or reduce their technology purchases. Capital expenditure and operating expense budgetary cycles are inherent in our customers’ procurement strategies. These cycles are often informed by oil prices and environmental factors such as the COVID-19 pandemic. Delay or reduction in our customers’ technology purchases could result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies, increased price competition or reduced use of our products by our customers. We will lose revenue if demand for our products is reduced because potential customers experience weak or deteriorating economic conditions, catastrophic environmental or other events, and our business, results of operations, financial condition and cash flow from operations would likely be adversely affected.
Climate change, and the regulatory and legislative developments related to climate change, may materially adversely affect our business and financial condition.
We must anticipate and respond to market and technological changes driven by broader trends such as decarbonization and electrification efforts in response to climate change. Market growth from the use of cleaner energy sources, as well as emissions management, energy efficiency, lower greenhouse gas refrigerant usage, and decarbonization efforts are likely to depend in part on technologies not yet deployed or widely adopted today. We may not adequately innovate or position our businesses for the adoption of technologies such as battery storage solutions, hydrogen use cases in industry, mobility, and power generation, enhanced power grid demand management, carbon capture and sequestration or advanced nuclear power.
These trends and the relative competitiveness of our product and service offerings will continue to be impacted by uncertain factors such as the pace of technological developments and related cost considerations, the levels of economic growth in different markets around the world and the adoption of climate change-related policies such as carbon taxes, greenhouse gas emission reductions, incentives or mandates for particular types of energy, or policies that impact the availability of financing for certain types of projects.
Fluctuations in foreign currency exchange rates could result in declines in our reported revenue and operating results.
Some of our revenue is denominated in a currency other than the U.S. dollar, and certain of our operating expenses that are incurred outside the United States are denominated in currencies other than the U.S. dollar. Our reported revenue and operating results are subject to fluctuations in foreign exchange rates. Foreign currency risk arises primarily from the net difference between non-U.S. dollar receipts from customers outside the United States and non-U.S. dollar operating expenses for subsidiaries in foreign countries. Currently, we anticipate that our largest exposures to foreign exchange rates exist primarily with the Euro, Pound Sterling, Canadian Dollar, Norwegian Krone, Japanese Yen, Australian Dollar, New Israeli Shekel, Indonesian Rupiah, Argentine Peso, Mexican Peso, Chinese Yuan, and Russian Ruble against the U.S. dollar. We cannot predict the impact of foreign currency fluctuations, and foreign currency fluctuations in the future may adversely affect our revenue and operating results. Any hedging policies we may implement in the future may not be successful, and the cost of those hedging techniques may have a significant negative impact on our operating results.
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Competition from software offered by current competitors and new market entrants, as well as from internally developed solutions by our customers, could adversely affect our ability to sell our software products and related services and could result in pressure to price our products in a manner that reduces our margins.
Our markets in general are competitive and differ among our principal product areas: engineering, manufacturing, and supply chain, modeling and design, asset performance management, asset optimization and maintenance, and artificial intelligence of things (AIoT). We face challenges in selling our solutions to large companies that have internally developed their own proprietary software solutions, and we face competition from well-established vendors as well as new entrants in our markets. Many of our current and potential competitors have greater financial, technical, marketing, service and other resources than we have. As a result, these companies may be able to offer lower prices, additional products or services, or other incentives that we cannot match or offer. These competitors may be in a stronger position to respond more quickly to new technologies and may be able to undertake more extensive marketing campaigns. We believe they also have adopted and may continue to pursue more aggressive pricing policies and make more attractive offers to potential customers, employees and strategic partners. For example, some competitors may be able to initiate relationships through sales and installations of hardware and then seek to expand their customer relationships by offering asset optimization software at a discount. In addition, many of our competitors have established, and may in the future continue to establish, cooperative relationships with third parties to improve their product offerings and to increase the availability of their products in the marketplace. Competitors with greater financial resources may make strategic acquisitions to increase their ability to gain market share or improve the quality or marketability of their products.
Competition could seriously impede our ability to sell additional software products and related services on terms favorable to us. Businesses may continue to enhance their internally developed solutions, rather than investing in commercial software such as ours. Our current and potential commercial competitors may develop and market new technologies that render our existing or future products obsolete, unmarketable or less competitive. In addition, if these competitors develop products with similar or superior functionality to our products, we may need to decrease the prices for our products in order to remain competitive. If we are unable to maintain attractive pricing due to competitive pressures, our margins will be reduced and our operating results will be negatively affected. We cannot ensure that we will be able to compete successfully against current or future competitors or that competitive pressures will not materially adversely affect our business, financial condition and operating results.
Defects or errors in our software products could impact our reputation, impair our ability to sell our products and result in significant costs to us.
Our software products are complex and may contain undetected defects or errors. We may from time to time find defects in our products and we may discover additional defects in the future. We may not be able to detect and correct defects or errors before releasing products. Consequently, we or our customers may discover defects or errors after our products have been implemented. We have in the past issues, and may in the future need to issue, corrective releases of our products to remedy defects or errors. The occurrence of any defects or errors could result in:
•lost or delayed market acceptance and sales of our products;
•delays in payment to us by customers;
•product returns;
•injury to our reputation;
•diversion of our resources;
•increased service and warranty expenses or financial concessions;
•increased insurance costs; and
•legal claims, including product liability claims.
Defects and errors in our software products could result in claims for substantial damages against us.
Potential strategic transactions could be difficult to consummate and integrate into our operations, and these potential strategic transactions could disrupt our business, dilute stockholder value or impair our financial results.
As part of our business strategy, we from time to time seek to grow our business through acquisitions of, investments in, or partnerships with new or complementary businesses, technologies or products that we believe can improve our ability to compete in our existing customer markets or allow us to enter new markets. For example, on July 27, 2022, the Company announced that it entered into a definitive agreement to acquire Micromine, a global leader in design and operational management solutions for the mining industry. Refer to Footnote 22, "Subsequent Events" for further discussion. The potential risks associated with acquisitions and investment transactions and partnerships include, but are not limited to:
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• failure to realize anticipated returns on investment, cost savings and synergies;
• difficulty in assimilating the operations, policies and personnel of the acquired company;
• unanticipated costs or liabilities associated with or arising from acquisitions;
• challenges in combining product offerings and entering into new markets in which we may not have experience;
• distraction of management’s attention from normal business operations;
• potential loss of key employees of the acquired company;
• difficulty implementing effective internal controls over financial reporting and disclosure controls and procedures;
• impairment of relationships with customers or suppliers;
• possibility of incurring impairment losses related to goodwill and intangible assets; and
• other issues not discovered in due diligence, which may include product quality issues or legal or other contingencies.
Acquisitions and/or investments may also result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, the expenditure of available cash, and amortization expenses or write-downs related to intangible assets such as goodwill, any of which could have a material adverse effect on our operating results or financial condition. Investments in, or partnerships with, immature businesses with unproven track records and technologies have an especially high degree of risk, with the possibility that we may lose our entire investment or incur unexpected liabilities. We may experience risks relating to the challenges and costs of closing a business combination or investment transaction and the risk that an announced business combination or investment transaction may not close. There can be no assurance that we will be successful in making additional acquisitions in the future or in integrating or executing on our business plan for existing or future acquisitions.
We may be subject to significant expenses and damages because of product-related claims and other litigation.
We may be, from time to time, involved in lawsuits, claims, investigations, proceedings and threats of litigation ("Claims"). The amount of damages cannot be predicted with certainty, and a successful Claim brought against us could materially impact our business and financial condition. Such Claims, including product-related and shareholder claims, even if not successful, could damage our reputation, cause us to lose existing clients, limit our ability to obtain new clients, divert management’s attention from operations, result in significant revenue loss, create potential liabilities for our clients and us, and increase insurance and other operational costs.
Claims that we infringe the intellectual property rights of others may be costly to defend or settle and could damage our business.
We cannot be certain that our software and services do not infringe patents, copyrights, trademarks or other intellectual property rights, so infringement claims might be asserted against us. In addition, we have agreed, and may agree in the future, to indemnify certain of our customers against infringement claims that third parties may assert against our customers based on use of our software or services. Such claims may have a material adverse effect on our business, may be time-consuming and may result in substantial costs and diversion of resources, including our management’s attention to our business. Furthermore, a party making an infringement claim could secure a judgment that requires us to pay substantial damages and could also include an injunction or other court order that could prevent us from selling our software or require that we re-engineer some or all of our products. Claims of intellectual property infringement also might require us to enter costly royalty or license agreements. We may be unable to obtain royalty or license agreements on terms acceptable to us or at all. Our business, operating results and financial condition could be impacted significantly if any of these events were to occur, and the price of our common stock could be adversely affected.
We may not be able to protect our intellectual property rights, which could make us less competitive and cause us to lose market share.
Our software is proprietary. Our strategy is to rely on a combination of copyright, patent, trademark and trade secret laws in the United States and other jurisdictions, and to rely on license and confidentiality agreements and software security measures to further protect our proprietary technology and brand. We obtain or apply for patent protection with respect to some of our intellectual property, but generally do not rely on patents as a principal means of protecting our intellectual property. We register or apply to register some of our trademarks in the United States and in selected other countries. We generally enter into non-disclosure agreements with our employees and customers, and restrict third-party access to our software and source code, which we regard as proprietary information. In certain cases, we may provide copies of source code to customers for the purpose of special product customization or may deposit copies of the source code with a third-party escrow agent as security for ongoing service and license obligations. In these cases, we rely on non-disclosure and other contractual provisions to protect our proprietary rights.
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The steps we have taken to protect our proprietary rights may not be adequate to deter misappropriation of our technology or independent development by others of technologies that are substantially equivalent or superior to our technology. Our intellectual property rights may expire or be challenged, invalidated or infringed upon by third parties or we may be unable to maintain, renew or enter into new licenses on commercially reasonable terms. Any misappropriation of our technology or development of competitive technologies could impact our business and could diminish or cause us to lose the competitive advantages associated with our proprietary technology, and could subject us to substantial costs in protecting and enforcing our intellectual property rights, and/or temporarily or permanently disrupt our sales and marketing of the affected products or services. The laws of some countries in which our products are licensed do not protect our intellectual property rights to the same extent as the laws of the United States. Moreover, in some non-U.S. countries, laws affecting intellectual property rights are uncertain in their application, which can affect the scope of enforceability of our intellectual property rights.
Our software research and development initiatives, our customer relationships, and our customers’ operations could be compromised if the security of our information technology is breached as a result of a cyberattack. This could have a material adverse effect on our business, operating results and financial condition, and could impact our competitive position.
We have devoted and will continue to devote significant resources to updating our software and developing new products, and our financial performance is dependent in part upon our ability to bring new products and services to market. Our customers use our software to optimize their manufacturing processes and manage asset performance, and they rely on us to provide updates and releases as part of our software maintenance and support services, and to provide remote on-line troubleshooting support. The security of our information technology environment is therefore important to our research and development initiatives, and an important consideration in our customers’ purchasing decisions. We maintain cybersecurity policies and procedures, including employee training, to manage risk to our information systems, and we continually evaluate and adapt our systems and processes to mitigate evolving cybersecurity threats, including the increase in ransomware attacks. Our policy is to follow the appropriate cybersecurity frameworks to manage and reduce cybersecurity risk. We may incur additional costs to maintain appropriate cybersecurity protections in response to evolving cybersecurity threats, and we may not be able to safeguard against all data security breaches or misuses of data. If the security of our systems is impaired, or if our systems are infiltrated by unauthorized persons, our development initiatives might be disrupted, we might be unable to provide service, and our customers and their operations may be subject to cyberattacks and resulting business disruptions and financial losses. Our customer relationships might deteriorate, our reputation in the industry could be impacted, and we could be subject to liability claims. This could reduce our revenues, and expose us to significant costs to detect, correct and avoid recurrences of any breach of security and to defend any claims against us. In addition, our insurance coverage may not be adequate to cover all costs related to cybersecurity incidents and the disruptions resulting from such events.
In addition, there may be an increased risk of cyberattacks by state actors due to the current conflict between Russia and Ukraine. Any increase in such attacks on us or our systems could adversely affect our network systems or other operations. Although we maintain cybersecurity policies and procedures to manage risk to our information systems, adapt our systems and processes to mitigate such threats, and plan to enhance our protections against such attacks, we may not be able to address these cybersecurity threats proactively or implement adequate preventative measures and there can be no assurance that we will promptly detect and address any such disruption or security breach, if at all.
Security and/or data privacy breaches, or disruptions of our information technology systems could adversely affect our business.
We rely on information technology networks and systems, including the internet, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities. These technology networks and systems may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components; power outages; telecommunications or system failures; terrorist attacks; natural disasters; employee error or malfeasance; server or cloud provider breaches; and computer viruses or cyberattacks. Cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to information technology networks and systems to more sophisticated and targeted measures, known as advanced persistent threats, directed at our products, customers and/or third-party service providers. In addition, it is possible a security breach could result in theft of trade secrets or other intellectual property or disclosure of or access to confidential customer, supplier or employee information, including personal information.
Despite the implementation of cybersecurity measures (including government security clearances, access controls, data encryption, vulnerability assessments, continuous monitoring, and maintenance of backup and protective systems), our
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information technology systems may still be vulnerable to cybersecurity threats and other electronic security breaches. We cannot provide assurance that our services and databases will not be compromised or disrupted, whether as a result of criminal conduct, DDoS attacks, or other advanced persistent attacks by malicious actors, including hackers, state-backed hackers and cybercriminals, breaches due to employee negligence, error and/or malfeasance, or other disruptions during the process of upgrading or replacing computer software or hardware, power outages, computer viruses, hardware and software errors, including so-called supply chain attacks involving the vendors we rely upon, telecommunication or utility failures or natural disasters or other catastrophic events. Moreover, the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently or may be designed to remain dormant until a predetermined event and often are not recognized until launched against a target. As a result, it is possible for such vulnerabilities to remain undetected for an extended period.
Should we be unable to prevent security breaches or other damage to our information technology systems, disruptions could have an adverse effect on our operations, as well as expose us to material loss of business and revenue, litigation, liability or penalties under privacy laws, increased cybersecurity protection costs, reputational damage and product failure, and additional costs associated with responding to the service interruption or security breach, such as investigative and remediation costs, the costs of providing individuals and/or data owners with notice of the breach, legal fees, the costs of any additional fraud detection activities, or the costs of prolonged system disruptions or shutdowns. Any of these events could materially adversely impact our business and results of operations. We seek to cap the liability to which we are exposed in the event of losses or harm to our customers, including those resulting from security incidents, but we cannot be certain that we will obtain these caps or that these caps, if obtained, will be enforced in all instances. Furthermore, the cybersecurity insurance we maintain may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our policy may not cover our remediation expenses or any claim against us for loss of data or other indirect or consequential damages. Defending any suit based on or related to any data loss or system disruption, regardless of its merit and available insurance coverage, could be costly and divert management’s attention. In addition, we must comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal data in the U.S. and elsewhere. Compliance with privacy and localization laws and regulations increases operational complexity. Failure to comply with these regulatory standards could subject us to fines and penalties, as well as legal and reputational risks, including investigations and proceedings brought against us by governmental entities or others.
Our inability to maintain or develop our strategic and technology relationships could adversely affect our business.
We have strategic and technology relationships with other companies with which we work to offer complementary solutions and services, that market and sell our solutions, and that provide technologies that we embed in our solutions. We may not realize the expected benefits from these relationships and such relationships may be terminated by the other party. If these companies fail to perform or if a company terminates or substantially alters the terms of the relationship, we could suffer delays in product development, reduced sales or other operational difficulties and our business, results of operations and financial condition could be materially adversely affected.
Risks Related to Our Common Stock
Emerson is our controlling owner, which could discourage takeover attempts. If Emerson ceases to be our controlling owner, anti-takeover provisions contained in our charter and bylaws could impair attempts by a party other than Emerson to acquire a significant number of shares of our common stock.
Emerson and its subsidiaries beneficially own a majority of the shares of our common stock, which could discourage takeover attempts by a third party. Further, our charter and bylaws also contain provisions that may delay, defer or discourage another party from acquiring a significant number of shares of our common stock or, in the event that Emerson and its subsidiaries no longer beneficially own a majority of the shares of our common stock, control of us. Among other things, our charter and bylaws include provisions regarding:
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| • | the ability of our Board of Directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of an unsolicited acquirer; | ||||
| • | the prohibition on us to engage in any business combination with any person who owns 15% or more of our outstanding voting stock (excluding Emerson) (an “interested stockholder”) for a period of three years following the time that such stockholder became an interested stockholder unless certain conditions are met; and | ||||
| • | the ability of our Board of Directors to amend our bylaws, which may allow our Board of Directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend our bylaws to facilitate an unsolicited takeover attempt. | ||||
These provisions may discourage, in the event that Emerson and its subsidiaries no longer beneficially own a majority of the shares of our common stock, unsolicited takeover proposals that stockholders may consider to be in their best interests. Together these provisions may make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities, especially in the event that Emerson and its subsidiaries no longer beneficially own a majority of the shares of our common stock.
Our charter designates specific courts as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Pursuant to our charter, unless our Board of Directors consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for state law claims for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any current or former director, officer, employee or stockholder of us to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of Delaware General Corporation Law (the “DGCL”), or our charter or bylaws, (iv) any action asserting a claim related to, involving or against us governed by the internal affairs doctrine or (v) any action asserting an “internal corporate claim” as that term is defined in Section 115 of the DGCL. The foregoing does not apply to claims arising under the Exchange Act or the rules and regulations promulgated thereunder. Our charter further provides that unless the our Board of Directors consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall, to the fullest extent permitted by law, be the sole and exclusive forum for any complaint asserting a cause of action arising under the Securities Act or the rules and regulations promulgated thereunder (the “Federal Forum Provision”, and together with the provision in the first sentence of this paragraph, the “Forum Selection Provisions”).
The Forum Selection Provisions in our charter may impose additional litigation costs on stockholders in pursuing any such claims. Additionally, the Forum Selection Provisions may limit our stockholders’ ability to bring a claim in a judicial forum that they find favorable for disputes with us or our directors, officers or employees, which may discourage the filing of such lawsuits against us and our directors, officers and employees even though an action, if successful, might benefit our stockholders. The Court of Chancery of the State of Delaware and the federal district courts of the United States may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments may be more or less favorable to us than our stockholders.
Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. While the Delaware Supreme Court ruled in March 2020 that federal forum selection provisions purporting to require claims under the Securities Act be brought in federal court are “facially valid” under Delaware law, there is uncertainty as to whether other courts will enforce the Federal Forum Provision in or charter. If the Federal Forum Provision is found to be unenforceable, we may incur additional costs associated with resolving claims under the Securities Act. The Federal Forum Provision may also impose additional litigation costs on stockholders who assert that the provision is not enforceable or invalid.
Our common stock may experience substantial price and volume fluctuations.
The equity markets have from time to time experienced extreme price and volume fluctuations, particularly in the high technology sector, and those fluctuations often have been unrelated to the operating performance of particular companies. In addition, the market price of our common stock may be affected by other factors, such as: (i) our financial performance; (ii) announcements of technological innovations or new products by us or our competitors; and (iii) market conditions in the computer software or hardware industries.
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In the past, following periods of volatility in the market price of a public company’s securities, securities class action litigation has often been instituted against that company. This type of litigation against us could result in substantial liability and costs and divert management’s attention and resources.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our principal executive offices are located in leased facilities in Bedford, Massachusetts, to accommodate product development, sales, marketing, operations, finance and administrative functions. The lease for our Bedford executive offices commenced in November 2014 and is scheduled to expire in March 2025. Subject to the terms and conditions of the lease, we may extend the term of the lease for two successive terms of five years each.
We also lease office space in Medina, Minnesota and in Houston, Texas to accommodate sales, services, product development functions, marketing, operations, finance and administrative functions. Additionally, we lease office space in the United Kingdom, Shanghai, Mexico City, Canada, Australia, Singapore, Beijing, India, Moscow, Tokyo, Oslo, and Bahrain, to accommodate sales, services and product development functions.
In the remainder of our other locations, the majority of our leases have lease terms of four years or less that are generally based on the number of workstations required. We believe this facilities strategy provides us with significant flexibility to adjust to changes in our business environment. We do not own any real property. We believe that our leased facilities are adequate for our anticipated future needs.
Item 3. Legal Proceedings.
None.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock currently trades on The NASDAQ Global Select Market under the symbol “AZPN.”
Holders
On August 11, 2022, there were 290 holders of record of our common stock. The number of record holders does not include persons who held common stock in nominee or “street name” accounts through brokers.
Dividends
We have never declared or paid cash dividends on our common stock. We do not anticipate paying cash dividends on our common stock in the foreseeable future.
On May 16, 2022, New AspenTech and certain of its subsidiaries entered into a Borrower Assignment and Accession Agreement (the "Borrower Assignment and Accession Agreement") relating to the Amended and Restated Credit Agreement dated December 23, 2019, as amended from time to time, among Heritage AspenTech, the other loan parties from time to time party thereto, the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent (as previously amended, the “Credit Agreement”).
The 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 (including dividends) and transactions with affiliates.
The Borrower Assignment and Accession Agreement was entered into in connection with the Transactions. Pursuant to the Borrower Assignment and Accession Agreement, among other things, Heritage AspenTech assigned all of its obligations under the Credit Agreement and related documents to New AspenTech and New AspenTech became the borrower and a loan party under the Credit Agreement. In connection with the Borrower Assignment and Accession Agreement certain subsidiaries acquired in connection with the Transactions also were joined as guarantors and loan parties under the Credit Agreement.
Any future determination relating to our dividend policy will be made at the discretion of the Board of Directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition and future prospects and such other factors as the Board of Directors may deem relevant.
Purchases of Equity Securities by the Issuer
There have been no repurchases of common stock for the period from May 16, 2022 to June 30, 2022.
Item 6. Selected Financial Data.
Reserved.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion in conjunction with our consolidated and combined financial statements and related notes beginning on page 56. In addition to historical information, this discussion contains forward-looking statements that involve risks and uncertainties. You should read “Item 1A. Risk Factors” for a discussion of important factors that could cause our actual results to differ materially from our expectations.
In connection with the Transaction, we approved a change to our fiscal year end from September 30 to June 30. References to a specific fiscal year are the nine-month period ended June 30, 2022, and our fiscal years 2021 and 2020 are for the twelve months ended September 30, 2021 and September 30, 2020 unless otherwise noted. (for example, “fiscal 2022” refers to the nine-month period ended June 30, 2022). Refer to Note 1, "Operations" for additional information.
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The Transaction has been accounted for as a business combination in accordance with U.S. GAAP, with the OSI business and the SSE business treated as the “acquirer” and Heritage AspenTech treated as the “acquired” company for financial reporting purposes. Accordingly, the historical financial statements of the OSI business and the SSE business are the historical financial statements of New AspenTech following the completion of the Transaction. As such, the financial statements of New AspenTech are not indicative of future financial results.
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 more degradable and recyclable plastics, 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 May 16, 2022, 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).
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.
Relationship with Emerson
At the closing of the Transaction, we entered into a Stockholders Agreement with Emerson. In addition to that agreement, we also entered into a Commercial Agreement and a Transition Services Agreement related to certain operations going forward.
Pursuant to the Commercial Agreement, New AspenTech granted a subsidiary of Emerson the right to distribute, on a non-exclusive basis, certain (i) existing Heritage AspenTech products, (ii) existing Emerson products transferred to New AspenTech pursuant to the Transaction and (iii) future New AspenTech products as mutually agreed upon by the parties during the term of the Commercial Agreement, in each case, to end-users through such subsidiary of Emerson acting as an agent, reseller or original equipment manufacturer.
Pursuant to the Transition Services Agreement, Emerson provides New 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, for a limited time.
Heritage AspenTech
Heritage AspenTech was founded over 40 years ago with a focus on industrial process efficiency and optimization. As a global leader in asset optimization software, Heritage AspenTech combines decades of modeling and operations expertise with big data, artificial intelligence, and advanced analytics. Heritage AspenTech’s unique asset lifecycle approach and market-leading solutions help customers achieve new levels of efficiency, accelerate innovation and reduce emissions and waste, without compromising safety.
Heritage AspenTech has developed its applications to design and optimize industrial operations across three principal business areas: engineering, manufacturing and supply chain, and asset performance management. Heritage AspenTech is the recognized technology leader in providing process optimization and asset performance management software for each of these business areas. With its mission to digitally transform the industries we serve by optimizing their assets to run safer, greener, longer and faster, Heritage AspenTech is also a global leader in helping companies achieve their sustainability goals while achieving operational excellence.
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Customers use our solutions to help advance sustainability technology pathways in improving resource efficiencies, such as energy, water or feedstock; supporting energy transition and decarbonization initiatives, including integrating renewable and alternative energy sources, such as biofuels; innovating new approaches for the hydrogen economy and carbon capture; and, enabling recycling efficiencies for waste reduction throughout operations with advanced simulation and scale-up solutions.
OSI Business (Digital Grid Management)
Our OSI business offers operational technology (OT) solutions that enable electric, gas, and water utilities and asset operators to manage and optimize the digital grid, incorporating all types of generation, industrial cogeneration, transmission, distribution, and microgrids. Our OSI business’ systems are also crucial in electrification as the world’s power demand is anticipated to double by 2050 under International Energy Agency (IEA) and U.S. Energy Information Administration (EIA) scenarios. Utilities, industry, and institutions use OSI solutions to transform and digitize the grid to seamlessly incorporate renewable energy and storage, to achieve reliability, maximize cybersecurity, and minimize peak loading.
Our OSI business' energy management solution (EMS) monitors, controls, and optimizes the increasingly interconnected transmission networks and generation fleets to manage grid stability and ensure security and regulatory compliance. Our advanced distribution management solution (ADMS), distributed energy resource management solution (DERMS) and Outage Management offerings provide system resiliency, efficiency, and safety by monitoring, controlling and modeling the distribution network as utilities seek to increase reliability, predict and react to increasingly dynamics supply and demand patterns, resolve outages faster and in a more automated manner, and manage field service digitally.
SSE Business (Subsurface Science & Engineering)
Our SSE business is a leading provider of geoscience and modeling software for optimization across subsurface engineering and operations. With over 30 years of technology leadership in geophysics, petrophysics, geological and reservoir modeling, SSE software empowers decision makers to reduce uncertainty, improve confidence, minimize risk, and support responsible asset management. Used extensively by the global energy industry, SSE solutions also have applications that extend into geothermal energy, and carbon capture and storage.
Our SSE business provides end-to-end workflows from seismic analysis and interpretation to reservoir and production simulation and from asset appraisal to operational planning and execution, to optimize production and utilization and minimize energy use, water use, and fugitive emissions. SSE software is also employed to screen and assess oil and saline aquifer reservoirs for CO2 sequestration and to monitor CO2 storage.
Business Segments
Prior to the Transactions and Merger, we had two operating and reportable segments: OSI Inc. and GSS (subsequently renamed Subsurface Science & Engineering Solutions, or “SSE”, after the Closing Date). The Transaction and Merger resulted in the creation of a third operating and reportable segment: Heritage AspenTech. Refer to “Business Overview” above for a description of the product and service offerings by each of the three business segments.
Recent Events
Over the course of fiscal year 2022, there was a normalization of transaction closing cycles and customer payment timing issues previously associated with the COVID 19 pandemic. However, there have been some immaterial unanticipated impacts from COVID-19 related lockdowns in China which began in late February 2022 and ended early August 2022, as well as continued volatility in oil price. We are continuing to assess the impact of these items, and the extent of their impact on our operational and financial performance going forward will depend on customer capital expenditure and operational expenditure budgetary cycles, which are informed by oil prices and environmental factors such as COVID-19, each of which are uncertain and cannot be predicted.
Russia’s invasion of Ukraine on February 24, 2022 and the ongoing military conflict between Ukraine and Russia have resulted in sanctions and other regulatory measures. While the conflict has not had a material impact on our financial results, we continue to evaluate the impact, of the various sanctions and export control measures imposed by the United States and other governments on our ability to do business in Russia, maintain contracts with vendors and pay employees in Russia, receive payment from customers in Russia and Ukraine, and assess our operations for potential asset impairment.
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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 mining industry, from private equity firm Potentia Capital and other sellers for AUD$900 million in cash (approximately $623 million USD). We currently intend to finance the transaction through a combination of cash on hand and an unsecured bridge term loan in the amount of US$475 million, subject to customary limited conditions. The acquisition is expected to close in the fiscal second quarter of 2023, subject to receipt of regulatory approvals. 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 Components of Operations
Revenue
We generate revenue primarily from the following sources:
License and Solutions Revenue. We sell our software products to end users primarily under fixed term licenses, through a subscription offering by Heritage AspenTech and SSE. We also sell integrated solutions to our end users under perpetual software licenses along with professional services and hardware by OSI.
Maintenance Revenue. We provide customers technical support, software assurance patch management services and the right to receive any when-and-if available updates to software. Our technical support services are provided from our customer support centers throughout the world, as well as via email and through our support website.
Services and Other Revenue. We provide training and professional services to our customers. Our professional services are focused on implementing our technology in order to improve customers’ plant performance and gain better operational data. Customers who use our professional services typically engage us to provide those services over periods of up to 24 months. We charge customers for professional services on a time-and-materials or fixed-price basis. We provide training services to our customers, including on-site, Internet-based and customized training.
Cost of Revenue
Cost of License and Solutions. Our cost of license revenue consists of (i) royalties, (ii) amortization of capitalized software and intangible assets associated with developed technology, and (iii) distribution fees.
Cost of Maintenance. Our cost of maintenance revenue consists primarily of personnel-related costs of providing our customers technical support, software assurance patch management services and the right to receive any when-and-if available updates to software.
Cost of Services and Other. Our cost of services and other revenue consists primarily of personnel-related and external consultant costs associated with providing our customers professional services and training.
Operating Expenses
Selling and Marketing Expenses. Selling expenses consist primarily of the personnel and travel expenses related to the effort expended to license our products and services to current and potential customers, as well as for overall management of customer relationships. Marketing expenses include expenses needed to promote our company and our products and to conduct market research to help us better understand our customers and their business needs, and expenses resulted from amortization of intangible assets associated with customer relationships and backlog.
Research and Development Expenses. Research and development expenses consist primarily of personnel expenses related to the creation of new software products, enhancements and engineering changes to existing products.
General and Administrative Expenses. General and administrative expenses include the personnel expenses of corporate and support functions, such as executive leadership and administration groups, finance, legal, human resources and corporate communications, and other costs, such as outside professional and consultant fees, amortization of intangible assets associated with certain purchased software, and the provision for bad debt on accounts receivable.
Restructuring Costs. Restructuring costs were related to the undertaking of certain restructuring transactions in accordance with the restructuring plan attached to the Transaction Agreement to separate the OSI business and the SSE
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business from Emerson’s other business activities and consolidate such separated business under a holding company to be contributed to New AspenTech as part of the Contribution.
Other Income and Expenses
Interest Income (Expense). Interest income is recorded for financing components under Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) or Topic 606. When a contract includes a significant financing component, we generally receive the majority of the customer consideration after the recognition of a substantial portion of the arrangement fee as license revenue. As a result, we decrease the amount of revenue recognized and increase interest income by a corresponding amount. Interest income also includes interest earned on the Company’s receivable balances under the cash pooling arrangements and debt agreements with Emerson and on the interest-bearing cash balances held at the Company's designated financial institutions worldwide. Interest expense is primarily related to outstanding borrowings under our Amended and Restated Credit Agreement and the Company's payable balances under the cash pooling arrangements and debt agreements with Emerson.
Other (Expense) Income, Net. Other (expense) income, net is comprised primarily of foreign currency exchange gains (losses) generated from the settlement and remeasurement of transactions denominated in currencies other than the functional currency of our entities.
Provision for Income Taxes. Provision for income taxes is comprised of domestic and foreign taxes. We record interest and penalties related to income tax matters as a component of income tax expense. Our effective income tax rate may fluctuate between fiscal years and from quarter to quarter due to items arising from discrete events, such as tax benefits from the disposition of employee equity awards, settlements of tax audits and assessments and tax law changes. Our effective income tax rate is also impacted by, and may fluctuate in any given period because of, the composition of income in foreign jurisdictions where tax rates differ.
Change in Fiscal Year
On the Closing Date, the Company changed its fiscal year end from September 30 to June 30. As a result, the Company’s results of operations, cash flows, and all transactions impacting stockholders' equity presented in this Transition Report on Form 10-KT are for the nine months ended June 30, 2022 whereas its fiscal years 2021 and 2020 are for the twelve months ended September 30, 2021 and 2020 unless otherwise noted. As such, the Company’s fiscal year 2022, or fiscal 2022, refers to the period from October 1, 2021 to June 30, 2022. This Transition Report on Form 10-KT also includes unaudited consolidated and combined statements of operations and cash flows for the comparable stub period of October 1, 2020 to June 30, 2021; see Note 21, “Transition Period Comparative Data (unaudited)” for further information. The discussion below provides a comparison for (1) the nine-month transition period ended June 30, 2022 to the nine-month stub period ended June 30, 2021 and (2) our fiscal year ended September 30, 2021 to our fiscal year ended September 30, 2020. All information for the nine-month period ended June 30, 2021 is unaudited.
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 also use Annual Spend as a business metric when referring to Heritage AspenTech.
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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 June 30, 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 June 30, 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 Heritage AspenTech, the OSI business and the SSE business grew by approximately 7.8% during 2022, from $733.8 million as of June 30, 2021 to $791.2 million as of June 30, 2022. We estimate that pro forma ACV grew by approximately 2.5% during 2021, from $716.2 million as of June 30, 2020 to $733.8 million as of June 30, 2021.
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. The pro forma TCV of Heritage AspenTech, the OSI business and the SSE business was $3.2 billion and $3.0 billion as of June 30, 2022 and June 30, 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.
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The pro forma bookings of Heritage AspenTech, the OSI business and the SSE business was $937.9 million during the twelve-month period ended June 30, 2022, compared to $906.7 million and $748.0 million during the twelve-month period ended June 30, 2021 and 2020, respectively. The change in bookings during the twelve-month periods ended June 30, 2022, 2021, and 2020 is related to the timing of renewals.
Free Cash Flow
We use a non-GAAP measure of free cash flow to analyze cash flows generated from our operations. Management believes that this financial measure is useful to investors because it permits investors to view our performance using the same tools that management uses to gauge progress in achieving our goals. We believe this measure is also useful to investors because it is an indication of cash flow that may be available to fund investments in future growth initiatives or to repay borrowings under the Amended and Restated Credit Agreement, and it is a basis for comparing our performance with that of our competitors. The presentation of free cash flow is not meant to be considered in isolation or as an alternative to cash flows from operating activities as a measure of liquidity.
Free cash flow is calculated as net cash provided by operating activities adjusted for the net impact of (a) purchases of property, equipment and leasehold improvements, (b) payments for capitalized computer software costs, and (c) other nonrecurring items, such as acquisition related payments.
The following table provides a reconciliation of GAAP cash flow from operating activities to free cash flow for the indicated periods:
| Nine-Month Period June 30, | Year Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2021 | 2020 | ||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||
| Net cash provided by operating activities (GAAP) | $ | 28,962 | $ | 63,987 | $ | 54,800 | $ | 15,205 | |||||||||||||||
| Purchase of property, equipment, and leasehold improvements | (2,263) | (3,165) | (6,185) | (2,459) | |||||||||||||||||||
| Payments for capitalized computer software development costs | (508) | — | — | — | |||||||||||||||||||
| Acquisition and integration planning related fee payments | 6,738 | 6,048 | 6,102 | 3,329 | |||||||||||||||||||
| Free cash flow (non-GAAP) | $ | 32,929 | $ | 66,870 | $ | 54,717 | $ | 16,075 | |||||||||||||||
Nine-Month Period Ended June 30, 2022 Compared to Nine-Month Period Ended June 30, 2021
Total free cash flow decreased $33.9 million during the nine-month period ended June 30, 2022 as compared to the same period in prior fiscal year, primarily due to the Transaction. The Company recorded a discrete tax payment subsequent to the closing of the Transaction which resulted in nearly break-even free cash flow contributed from Heritage AspenTech during the nine-month period ended June 30, 2022 and unfavorable working capital from the OSI business and SSE business. For a more detailed description of these changes refer to “Liquidity and Capital Resources.”
Fiscal 2021 Compared to Fiscal 2020
Total free cash flow increased $38.6 million during fiscal 2021 as compared to the prior fiscal year primarily due to the OSI Inc. acquisition by Emerson. For a more detailed description of these changes refer to “Liquidity and Capital Resources.”
Non-GAAP Income from Operations
Non-GAAP income from operations excludes certain non-cash and non-recurring expenses, and is used as a supplement to income from operations presented on a GAAP basis. We believe that non-GAAP income from operations is a useful financial measure because removing certain non-cash and other items provides additional insight into recurring profitability and cash flow from operations.
The following table presents our income 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:
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| Nine-Month Period Ended June 30, | Year Ended September 30, | Nine-Month Period 2022 Compared to Nine-Month Period 2021 | 2021 Compared to 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2021 | 2020 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
| GAAP income (loss) from operations | $ | 36,157 | $ | (46,555) | $ | (60,439) | $ | (18,060) | $ | 82,712 | (177.7) | % | $ | (42,379) | 234.7 | % | |||||||||||||||||||||||||||||||
| Plus: | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 15,763 | 1,377 | 1,744 | 606 | 14,386 | 1,044.7 | % | $ | 1,138 | 187.8 | % | ||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 116,743 | 91,047 | 120,330 | 24,636 | 25,696 | 28.2 | % | $ | 95,694 | 388.4 | % | ||||||||||||||||||||||||||||||||||||
| Acquisition and integration planning related fees | 3,749 | 6,048 | 6,102 | 3,329 | (2,299) | (38.0) | % | $ | 2,773 | 83.3 | % | ||||||||||||||||||||||||||||||||||||
| Non-GAAP income from operations | $ | 172,412 | $ | 51,917 | $ | 67,737 | $ | 10,511 | $ | 120,495 | 232.1 | % | $ | 57,226 | 544.4 | % | |||||||||||||||||||||||||||||||
Annual Spend - Heritage AspenTech Only
Annual spend is an estimate of the annualized value of our portfolio of term license agreements, as of a specific date. Annual spend is calculated by summing the most recent annual invoice value of each of our active term license agreements. Annual spend also includes the annualized value of standalone SMS agreements purchased with certain legacy term license agreements, which have become an immaterial part of our business.
Comparing annual spend for different dates can provide insight into the growth and retention rates of our business, because annual spend represents the estimated annualized billings associated with our active term license agreements. Management utilizes the annual spend business metric to evaluate the growth and performance of our business as well as for planning and forecasting. In addition, our corporate and executive bonus programs are based in part on our success in meeting targets for growth in annual spend that are approved by our Board of Directors. We believe that annual spend is a useful business metric to investors as it provides insight into the growth component of our term licenses and to how management evaluates and forecasts the results of the business.
Annual spend increases as a result of new term license 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, and escalation of annual payments in our active term license agreements.
Annual spend is adversely affected by term license and standalone SMS agreements that are renewed at a lower entitlement level or not renewed 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. Because the annual spend calculation includes all of our active term license agreements, the reported balance may include agreements with customers that are delinquent in paying invoices, that are in bankruptcy proceedings, or where payment is otherwise in doubt.
As of June 30, 2022, approximately 85% of our term license agreements (by value) from Heritage AspenTech are denominated in U.S. dollars. For agreements denominated in other currencies, we use a fixed historical exchange rate to calculate annual spend in dollars rather than using current exchange rates, so that our calculation of growth in annual spend is not affected by fluctuations in foreign currencies.
For term license agreements that contain professional services or other products and services, we have included in the annual spend calculation 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 have not applied this methodology retroactively for agreements entered into in prior fiscal years.
We estimate that annual spend of Heritage AspenTech grew by approximately 8.5% during fiscal 2022, from $621.3 million as of June 30, 2021 to $673.9 million as of June 30, 2022. We estimated that annual spend of Heritage AspenTech grew by approximately 4.8% during fiscal 2021, from $593.1 million as of June 30, 2020 to $621.3 million as of June 30, 2021.
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Results of Operations
The following table sets forth the results of operations, percentage of total revenue and the period-over-period percentage change in certain financial data for the nine-month period ended June 30, 2022 and 2021, and the twelve months ended September 30, 2021 and 2020.
| Nine-Month Period Ended June 30, | Year Ended September 30, | Nine-Month Period 2022 Compared to Nine-Month Period 2021 % | 2021 Compared to 2020 % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| License and solutions | $ | 278,589 | 68.7 | % | $ | 136,699 | 61.1 | % | $ | 180,914 | 60.2 | % | $ | 42,038 | 32.2 | % | 103.8 | % | 330.4 | % | |||||||||||||||||||||||||||||||||||||||
| Maintenance | 103,786 | 25.6 | 68,027 | 30.4 | 92,562 | 30.8 | 65,591 | 50.3 | 52.6 | 41.1 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Services and other | 22,921 | 5.7 | 18,899 | 8.5 | 27,164 | 9.0 | 22,866 | 17.5 | 21.3 | 18.8 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total revenue | 405,296 | 100.0 | 223,625 | 100.0 | 300,640 | 100.0 | 130,495 | 100.0 | 81.2 | 130.4 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| License and solutions | 125,258 | 30.9 | 90,793 | 40.6 | 125,181 | 41.6 | 17,462 | 13.4 | 38.0 | 616.9 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Maintenance | 15,030 | 3.7 | 14,376 | 6.4 | 18,610 | 6.2 | 16,092 | 12.3 | 4.5 | 15.6 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Services and other | 16,108 | 4.0 | 14,321 | 6.4 | 19,219 | 6.4 | 17,336 | 13.3 | 12.5 | 10.9 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total cost of revenue | 156,396 | 38.6 | 119,490 | 53.4 | 163,010 | 54.2 | 50,890 | 39.0 | 30.9 | 220.3 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit | 248,900 | 61.4 | 104,135 | 46.6 | 137,630 | 45.8 | 79,605 | 61.0 | 139.0 | 72.9 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Selling and marketing | 108,463 | 26.8 | 78,311 | 35.0 | 103,311 | 34.4 | 32,876 | 25.2 | 38.5 | 214.2 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Research and development | 64,285 | 15.9 | 44,091 | 19.7 | 59,646 | 19.8 | 36,842 | 28.2 | 45.8 | 61.9 | |||||||||||||||||||||||||||||||||||||||||||||||||
| General and administrative | 39,878 | 9.8 | 26,021 | 11.6 | 32,638 | 10.9 | 21,717 | 16.6 | 53.3 | 50.3 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Restructuring costs | 117 | — | 2,267 | 1.0 | 2,474 | 0.8 | 6,230 | 4.8 | (94.8) | (60.3) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total operating expenses | 212,743 | 52.5 | 150,690 | 67.3 | 198,069 | 65.9 | 97,665 | 74.8 | 41.2 | 102.8 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Income (loss) from operations | 36,157 | 8.9 | (46,555) | (20.8) | (60,439) | (20.1) | (18,060) | (13.8) | (177.7) | 234.7 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other income (expense), net | 310 | 0.1 | (4,000) | (1.8) | (5,359) | (1.8) | (4,335) | (3.3) | (107.8) | 23.6 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Interest income (expense), net | 3,494 | 0.9 | 157 | 0.1 | (115) | — | (50) | — | 2,125.5 | 130.0 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Income (loss) before provision for income taxes | 39,961 | 9.9 | (50,398) | (19.1) | (65,913) | (21.9) | (22,445) | (17.1) | (179.3) | 193.7 | |||||||||||||||||||||||||||||||||||||||||||||||||
| (Benefit) for income taxes | (13,185) | (3.3) | (40,992) | (18.3) | (45,305) | (15.1) | (2,128) | (1.6) | (67.8) | 2,029.0 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 53,146 | 13.2 | % | $ | (9,406) | (0.8) | % | $ | (20,608) | (6.8) | % | $ | (20,317) | (15.5) | % | (665.0) | % | 1.4 | % | |||||||||||||||||||||||||||||||||||||||
Revenue
Nine-Month Period Ended June 30, 2022 Compared to Nine-Month Period Ended June 30, 2021
36
Total revenue for the nine-month period ended June 30, 2022 was $405.3 million, an increase of $181.7 million, or 81.2% compared with the nine-month period ended June 30, 2021. The increase reflected the Transaction which contributed $173.8 million of revenue during the nine-month period ended June 30, 2022.
Fiscal 2021 Compared to Fiscal 2020
Total revenue for fiscal 2021 was $300.6 million, an increase of $170.1 million, or 130% compared with fiscal 2020. The increase was due to the OSI Inc. acquisition by Emerson, which contributed $173.3 million of revenue during fiscal 2021.
License and Solutions Revenue
License and solutions revenue includes primarily term software licenses sold by Heritage AspenTech and SSE and integrated solutions sold by OSI Inc. License and solutions revenue changes are due to sales to new customers or the loss of existing customers, the timing of multi-year term license renewals, new offerings to existing customers, and the timing of progress on integrated solutions.
| Nine-Month Period Ended June 30, | Year Ended September 30, | Nine-Month Period 2022 Compared to Nine-Month Period 2021 | 2021 Compared to 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2021 | 2020 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| License and solutions revenue | $ | 278,589 | $ | 136,699 | $ | 180,914 | $ | 42,038 | $ | 141,890 | 103.8 | % | $ | 138,876 | 330.4 | % | |||||||||||||||||||||||||||||||
| As a percent of total revenue | 68.7 | % | 61.1 | % | 60.2 | % | 32.2 | % | |||||||||||||||||||||||||||||||||||||||
Nine-Month Period Ended June 30, 2022 Compared to Nine-Month Period Ended June 30, 2021
The increase in license and solutions revenue of $141.9 million, during nine-month period ended June 30, 2022 as compared to the same period in prior fiscal year, was largely due to the Heritage AspenTech acquisition, which contributed $144.7 million of revenue. Software license and solutions revenue from OSI increased by $8.0 million, which was primarily driven by an increase in sales of perpetual licenses during the nine-month period ended June 30, 2022, while software license revenue from SSE decreased by $10.8 million due to lower bookings for both perpetual and term licenses during the same period.
Fiscal 2021 Compared to Fiscal 2020
The increase in license and solutions revenue of $138.9 million during fiscal 2021 as compared to the prior fiscal year was largely due to the OSI Inc. acquisition, which contributed $134.8 million, while software license and solutions revenue from SSE increased by $4.1 million due to the timing of multi-year contract renewals.
Maintenance Revenue
Maintenance revenue includes technical support, software assurance patch management services and the right to receive any when-and-if available updates to software. Maintenance revenue changes as a result of adding new term or perpetual software license customers, the timing of maintenance renewals for existing perpetual software license customers, the scope of maintenance offerings customers subscribe to, and the escalation of annual payments.
| Nine-Month Period Ended June 30, | Year Ended September 30, | Nine-Month Period 2022 Compared to Nine-Month Period 2021 | 2021 Compared to 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2021 | 2020 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Maintenance revenue | $ | 103,786 | $ | 68,027 | $ | 92,562 | $ | 65,591 | $ | 35,759 | 52.6 | % | $ | 26,971 | 41.1 | % | |||||||||||||||||||||||||||||||
| As a percent of total revenue | 25.6 | % | 30.4 | % | 30.8 | % | 50.3 | % | |||||||||||||||||||||||||||||||||||||||
Nine-Month Period Ended June 30, 2022 Compared to Nine-Month Period Ended June 30, 2021
37
The increase in maintenance revenue of $35.8 million, during nine-month period ended June 30, 2022 as compared to the same period in the prior fiscal year, was largely due to the Heritage AspenTech acquisition, which contributed $25.3 million. Maintenance revenue from OSI increased by $8.4 million due to the completion and timing of certain integrated solution projects and the timing of annual payments escalation, while maintenance revenue from SSE increased by $2.1 million primarily attributable to the timing of existing customers’ maintenance renewals.
Fiscal 2021 Compared to Fiscal 2020
The increase in maintenance revenue of $27.0 million, during fiscal 2021 as compared to the prior fiscal year, was primarily due to the OSI Inc. acquisition, which contributed $31.8 million, partially offset by a $4.8 million decrease by SSE due to certain customers not renewing maintenance or renewing with a lower scope.
Services and Other Revenue
Services and other revenue includes professional services that are not considered part of an integrated software, in addition to training services. Time-and-materials contracts are based upon hours worked and contractually agreed-upon hourly rates. Fixed-price engagements recognize revenue using the proportional performance method by comparing the costs incurred to the total estimated project cost.
| Nine-Month Period Ended June 30, | Year Ended September 30, | Nine-Month Period 2022 Compared to Nine-Month Period 2021 | 2021 Compared to 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2021 | 2020 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Services and other revenue | $ | 22,921 | $ | 18,899 | $ | 27,164 | $ | 22,866 | $ | 4,022 | 21.3 | % | $ | 4,298 | 18.8 | % | |||||||||||||||||||||||||||||||
| As a percent of total revenue | 5.7 | % | 8.5 | % | 9.0 | % | 17.5 | % | |||||||||||||||||||||||||||||||||||||||
Nine-Month Period Ended June 30, 2022 Compared to Nine-Month Period Ended June 30, 2021
Services and other revenue increased by $4.0 million, during the nine-month period ended June 30, 2022 as compared to the same period in the prior fiscal year, primarily due to the Transaction, which contributed $3.8 million. Services and other revenue from OSI increased by $1.5 million reflecting an increase in training and staff augmentation services, partially offset by a decrease of $1.3 million in services and other revenue reflected a reduction in revenue from geoscience services including customers in Russia.
Fiscal 2021 Compared to Fiscal 2020
Services and other revenue increased by $4.3 million, during fiscal 2021 as compared to the prior fiscal year, primarily due to the OSI Inc. acquisition, which contributed $6.7 million. This was, partially offset by a $2.4 million decrease from SSE, primarily due to the termination of a relationship with a major customer in fiscal 2020 reflecting a $3.9 million reduction.
Cost of Revenue
Cost of License and Solutions Revenue
| Nine-Month Period Ended June 30, | Year Ended September 30, | Nine-Month Period 2022 Compared to Nine-Month Period 2021 | 2021 Compared to 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2021 | 2020 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Cost of license revenue | $ | 125,258 | $ | 90,793 | $ | 125,181 | $ | 17,462 | $ | 34,465 | 38.0 | % | $ | 107,719 | 616.9 | % | |||||||||||||||||||||||||||||||
| As a percent of license revenue | 45.0 | % | 66.4 | % | 69.2 | % | 41.5 | % | |||||||||||||||||||||||||||||||||||||||
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Nine-Month Period Ended June 30, 2022 Compared to Nine-Month Period Ended June 30, 2021
Cost of license revenue increased by $34.5 million, during the nine-month period ended June 30, 2022 as compared to the same period in the prior fiscal year. The Transaction contributed $17.2 million to the increase. OSI had an increase of $16.4 million in cost of license revenue due to increased compensation expenses, completion and timing of certain integrated solution projects, and higher facility costs. License gross profit margin was 55.0% for the nine-month period ended June 30, 2022, compared to 33.6% for the same period in fiscal 2021. The improvement on gross profit margin in fiscal 2022 was attributable to the Heritage AspenTech acquisition, which contributed a higher gross profit margin on a weighted average basis as compared to the prior fiscal year.
Fiscal 2021 Compared to Fiscal 2020
Cost of license and solutions revenue increased by $107.7 million, during fiscal 2021 as compared to the prior fiscal year. The increase was due to the OSI Inc. acquisition, which contributed $108.0 million and included $38.6 million of amortization of intangible assets. License and solutions gross profit margin was 30.8% in fiscal 2021, a decrease of 27.7 percentage points compared to 58.5% in the prior year, primarily due to the increase in amortization of intangible assets related to the OSI Inc. acquisition.
Cost of Maintenance Revenue
| Nine-Month Period Ended June 30, | Year Ended September 30, | Nine-Month Period 2022 Compared to Nine-Month Period 2021 | 2021 Compared to 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2021 | 2020 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Cost of maintenance revenue | $ | 15,030 | $ | 14,376 | $ | 18,610 | $ | 16,092 | $ | 654 | 4.5 | % | $ | 2,518 | 15.6 | % | |||||||||||||||||||||||||||||||
| As a percent of maintenance revenue | 14.5 | % | 21.1 | % | 20.1 | % | 24.5 | % | |||||||||||||||||||||||||||||||||||||||
Nine-Month Period Ended June 30, 2022 Compared to Nine-Month Period Ended June 30, 2021
Cost of maintenance revenue remained relatively consistent, during the nine-month period ended June 30, 2022 as compared to the same period in the prior fiscal year, which was primarily due to the Heritage AspenTech acquisition which contributed $2.7 million. This was offset by a $1.4 million decrease in cost of maintenance revenue from SSE due to reduced compensation expenses resulting from prior restructuring and a $0.6 million decrease in cost of maintenance revenue from OSI due to attrition. Maintenance gross profit margin was 85.5% during the nine-month period ended June 30, 2022, compared to 78.9% for the same period in fiscal 2021.
Fiscal 2021 Compared to Fiscal 2020
Cost of maintenance revenue increased by $2.5 million for fiscal 2021 compared to the prior year. The increase was due to the OSI Inc. acquisition which contributed $3.6 million, while cost of maintenance revenue from SSE decreased by $1.1 million. Maintenance gross profit margin was 79.9% in fiscal 2021 and was relatively consistent with 2020.
Cost of Services and Other Revenue
| Nine-Month Period Ended June 30, | Year Ended September 30, | Nine-Month Period 2022 Compared to Nine-Month Period 2021 | 2021 Compared to 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2021 | 2020 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Cost of services and other revenue | $ | 16,108 | $ | 14,321 | $ | 19,219 | $ | 17,336 | $ | 1,787 | 12.5 | % | $ | 1,883 | 10.9 | % | |||||||||||||||||||||||||||||||
| As a percent of services and other revenue | 70.3 | % | 75.8 | % | 70.8 | % | 75.8 | % | |||||||||||||||||||||||||||||||||||||||
The timing of revenue and expense recognition on professional service arrangements can impact the comparability of cost and gross profit margin of professional services revenue from year to year. For example, revenue from fixed-price
39
engagements is recognized using the proportional performance method based on the ratio of costs incurred to the total estimated project costs.
Nine-Month Period Ended June 30, 2022 Compared to Nine-Month Period Ended June 30, 2021
Cost of services and other revenue remained relatively consistent and only increased by $1.8 million, during the nine-month period ended June 30, 2022 as compared to the same period in the prior fiscal year which is primarily due to the Transaction which contributed $3.8 million. This was partially offset by a decrease of $1.0 million in cost of services and other from SSE and a decrease of $0.9 million from OSI. Service and other revenue gross profit margin was 70.3% for the nine-month period ended June 30, 2022 and 75.8% for the same period in fiscal 2021.
Fiscal 2021 Compared to Fiscal 2020
Cost of services and other revenue increased by $1.9 million during fiscal 2021 as compared to the prior fiscal year, primarily due to an increase of $3.8 million contributed from the OSI Inc. acquisition. Services and other gross profit margin was 29.2% in fiscal 2021, an increase of 5.0 percentage points compared to the prior year, reflecting the impact of the OSI Inc. acquisition.
Gross Profit
| Nine-Month Period Ended June 30, | Year Ended September 30, | Nine-Month Period 2022 Compared to Nine-Month Period 2021 | 2021 Compared to 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2021 | 2020 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit | $ | 248,900 | $ | 104,135 | $ | 137,630 | $ | 79,605 | $ | 144,765 | 139.0 | % | $ | 58,025 | 72.9 | % | |||||||||||||||||||||||||||||||
| As a percent of total revenue | 61.4 | % | 46.6 | % | 45.8 | % | 61.0 | % | |||||||||||||||||||||||||||||||||||||||
For further discussion of subscription and software gross profit and services and other gross profit, please refer to the “Cost of License and Solutions Revenue,” “Cost of Maintenance Revenue,” and “Cost of Services and Other Revenue” sections above.
Nine-Month Period Ended June 30, 2022 Compared to Nine-Month Period Ended June 30, 2021
Gross profit increased by $144.8 million during the nine-month period ended June 30, 2022 as compared to the same period in the prior fiscal year. Gross profit margin increased to 61.4% during the nine-month period ended June 30, 2022 compared to 46.6% in the same period in fiscal 2021 primarily due to the Transaction.
Fiscal 2021 Compared to Fiscal 2020
Gross profit was $137.6 million in fiscal 2021, an increase of $58.0 million, while gross profit margin decreased 15.2 percentage points to 45.8%. These changes largely related to the OSI Inc. acquisition, which resulted in $38.6 million of amortization of intangible assets.
Operating Expenses
Selling and Marketing Expense
| Nine-Month Period Ended June 30, | Year Ended September 30, | Nine-Month Period 2022 Compared to Nine-Month Period 2021 | 2021 Compared to 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2021 | 2020 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Selling and marketing expense | $ | 108,463 | $ | 78,311 | $ | 103,311 | $ | 32,876 | $ | 30,152 | 38.5 | % | $ | 70,435 | 214.2 | % | |||||||||||||||||||||||||||||||
| As a percent of total revenue | 26.8 | % | 35.0 | % | 34.4 | % | 25.2 | % | |||||||||||||||||||||||||||||||||||||||
40
Nine-Month Period Ended June 30, 2022 Compared to Nine-Month Period Ended June 30, 2021
Selling and marketing expenses were $108.5 million for the nine-month period ended June 30, 2022, an increase of $30.2 million as compared to the same period in the prior fiscal year. The increase was largely attributable to the Heritage AspenTech acquisition, which contributed $52.6 million of expenses primarily related to amortization of intangible assets of $49.0 million. This was partially offset by a decrease of $22.9 million in selling and marketing expenses from OSI due to certain intangible assets that were fully amortized in fiscal 2021.
Fiscal 2021 Compared to Fiscal 2020
Selling and marketing expenses were $103.3 million in fiscal 2021, an increase of $70.4 million compared with 2020. The OSI Inc. acquisition resulted in $74.0 million of additional selling and marketing expenses primarily related to the amortization of intangible assets of $58.3 million, while SSE expenses declined by $3.6 million due to headcount reductions that were initiated in the second half of fiscal 2020 in response to COVID-19, as well as lower travel-related costs.
Research and Development Expense
| Nine-Month Period Ended June 30, | Year Ended September 30, | Nine-Month Period 2022 Compared to Nine-Month Period 2021 | 2021 Compared to 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2021 | 2020 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Research and development expense | $ | 64,285 | $ | 44,091 | $ | 59,646 | $ | 36,842 | $ | 20,194 | 45.8 | % | $ | 22,804 | 61.9 | % | |||||||||||||||||||||||||||||||
| As a percent of total revenue | 15.9 | % | 19.7 | % | 19.8 | % | 28.2 | % | |||||||||||||||||||||||||||||||||||||||
Nine-Month Period Ended June 30, 2022 Compared to Nine-Month Period Ended June 30, 2021
Research and development expenses were $64.3 million for the nine months ended June 30, 2022, an increase of $20.2 million as compared to the same period in the prior fiscal year. The increase was largely due to the Heritage AspenTech acquisition, which contributed $16.0 million, and an increase of $4.7 million in research and development expenses from OSI as a result of higher headcount.
Fiscal 2021 Compared to Fiscal 2020
Research and development expenses were $59.6 million in fiscal 2021, an increase of $22.8 million compared with 2020. The OSI Inc. acquisition resulted in $29.2 million of additional research and development expense, while SSE expense declined by $6.4 million, reflecting headcount reductions which were initiated in 2020 due to the negative impacts from COVID-19.
General and Administrative Expense
| Nine-Month Period Ended June 30, | Year Ended September 30, | Nine-Month Period 2022 Compared to Nine-Month Period 2021 | 2021 Compared to 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2021 | 2020 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| General and administrative expense | $ | 39,878 | $ | 26,021 | $ | 32,638 | $ | 21,717 | $ | 13,857 | 53.3 | % | $ | 10,921 | 50.3 | % | |||||||||||||||||||||||||||||||
| As a percent of total revenue | 9.8 | % | 11.6 | % | 10.9 | % | 16.6 | % | |||||||||||||||||||||||||||||||||||||||
Nine-Month Period Ended June 30, 2022 Compared to Nine-Month Period Ended June 30, 2021
The increase of $13.9 million in general and administrative expenses, during the nine-month period ended June 30, 2022 as compared to the same period in the prior fiscal year was primarily related to the Heritage AspenTech acquisition, which contributed $18.0 million, partially offset by a $5.8 million decrease in SSE general and administrative expenses due to reduced acquisition costs associated with OSI Inc. acquisition.
41
Fiscal 2021 Compared to Fiscal 2020
General and administrative expenses were $32.6 million during fiscal 2021, an increase of $10.9 million compared with 2020. The OSI Inc. acquisition resulted in $11.8 million of additional general and administrative expenses. SSE expenses decreased by $0.9 million, reflecting headcount reductions, which began in the second half of fiscal 2020 in response to COVID-19, and lower travel-related costs, partially offset by higher transaction costs which increased $2.8 million.
Restructuring Costs
| Nine-Month Period Ended June 30, | Year Ended September 30, | Nine-Month Period 2022 Compared to Nine-Month Period 2021 | 2021 Compared to 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2021 | 2020 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Restructuring costs | $ | 117 | $ | 2,267 | $ | 2,474 | $ | 6,230 | $ | (2,150) | (94.8) | % | $ | (3,756) | (60.3) | % | |||||||||||||||||||||||||||||||
| As a percent of total revenue | — | % | 1.0 | % | 0.8 | % | 4.8 | % | |||||||||||||||||||||||||||||||||||||||
Nine-Month Period Ended June 30, 2022 Compared to Nine-Month Period Ended June 30, 2021
Restructuring costs were $0.1 million during the nine-month period ended June 30, 2022, a decrease of $2.2 million compared with the same period in fiscal 2021, which was primarily attributable to higher severance costs in the nine-month period ended June 30, 2021 related to SSE headcount reductions initiated in response to the negative effects of COVID-19.
Fiscal 2021 Compared to Fiscal 2020
Restructuring costs were $2.5 million in 2021, a decrease of $3.8 million compared with 2020. The OSI Inc. acquisition resulted in $0.7 million of additional restructuring costs, while SSE expenses declined by $4.4 million, as actions were implemented in fiscal 2020 in response to COVID-19.
Non-Operating Income (Expense)
Other Income (Expense), Net
| Nine-Month Period Ended June 30, | Year Ended September 30, | Nine-Month Period 2022 Compared to Nine-Month Period 2021 | 2021 Compared to 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2021 | 2020 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other income (expense), net | $ | 310 | $ | (4,000) | $ | (5,359) | $ | (4,335) | $ | 4,310 | (107.8) | % | $ | (1,024) | 23.6 | % | |||||||||||||||||||||||||||||||
| As a percent of total revenue | 0.1 | % | (1.8) | % | (1.8) | % | (3.3) | % | |||||||||||||||||||||||||||||||||||||||
Nine-Month Period Ended June 30, 2022 Compared to Nine-Month Period Ended June 30, 2021
Other income (expense), net was $0.3 million for the nine-month period ended June 30, 2022, an increase of $4.3 million compared to the same period in fiscal 2021. This increase was primarily related to higher foreign currency transaction gains from SSE of $3.6 million, higher foreign currency transaction gains of $1.5 million resulting from the Heritage AspenTech acquisition, partially offset by the lower foreign currency transaction gains of $1.1 million from OSI.
Fiscal 2021 Compared to Fiscal 2020
Other income (expense), net was $5.4 million in 2021, an increase of $1.0 million compared with 2020, reflecting higher foreign currency transaction losses of $0.3 million related to OSI Inc. and $0.3 million related to SSE.
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Interest Income (Expense), Net
| Nine-Month Period Ended June 30, | Year Ended September 30, | Nine-Month Period 2022 Compared to Nine-Month Period 2021 | 2021 Compared to 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2021 | 2020 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest income (expense), net | $ | 3,494 | $ | 157 | $ | (115) | $ | (50) | $ | 3,337 | 2,125.5 | % | $ | (65) | 130.0 | % | |||||||||||||||||||||||||||||||
| As a percent of total revenue | 0.9 | % | 0.1 | % | — | % | — | % | |||||||||||||||||||||||||||||||||||||||
Nine-Month Period Ended June 30, 2022 Compared to Nine-Month Period Ended June 30, 2021
Interest income (expense), net was $3.5 million for the nine-month period ended June 30, 2022, an increase of $3.3 million as compared to the same period in fiscal 2021. The increase was largely attributable to the Heritage AspenTech acquisition, which contributed $3.5 million resulting from interest income earned on the company’s long-term term revenue contracts.
Fiscal 2021 Compared to Fiscal 2020
Interest income remained consistent during fiscal 2021 as compared to the prior fiscal year.
Provision (Benefit) for Income Taxes
For the periods prior to the Transaction, our consolidated and combined financial statements reflect income tax expense (benefit) computed on a separate company basis, as if operating as a standalone entity or a separate consolidated group in each material jurisdiction in which we operate. Our consolidated and combined financial statements for the periods prior to the Transaction also reflect certain deferred tax assets and liabilities and income taxes payable based on this approach that did not transfer to us upon the separation, as the underlying tax attributes were used by Emerson or retained by Emerson. As a result of potential changes to our business model and the fact that certain deferred tax assets and liabilities and income taxes payable did not transfer to us, income tax expense (benefit) included in the consolidated and combined financial statements may not be indicative of our future expected tax rate.
| Nine-Month Period Ended June 30, | Year Ended September 30, | Nine-Month Period 2022 Compared to Nine-Month Period 2021 | 2021 Compared to 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2021 | 2020 | $ | % | $ | % | ||||||||||||||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| (Benefit) for income taxes | $ | (13,185) | $ | (40,992) | $ | (45,305) | $ | (2,128) | $ | 27,807 | (67.8) | % | $ | (43,177) | 2,029.0 | % | |||||||||||||||||||||||||||||||
| Effective tax rate | (33.0) | % | (81.3) | % | (68.7) | % | (9.5) | % | |||||||||||||||||||||||||||||||||||||||
Nine-Month Period Ended June 30, 2022 Compared to Nine-Month Period Ended June 30, 2021
The effective tax rate for the periods presented is primarily the result of income earned in the U.S. taxed at U.S. federal and state statutory income tax rates, income earned in foreign tax jurisdictions taxed at the applicable rates, as well as the impact of permanent differences between book and tax income.
Our effective tax rate was (33.0)% and (81.3)% for the nine-month period ended June 30, 2022 and June 30, 2021, respectively.
We recognized income tax benefits of $(13.2) million for the nine-month period ended June 30, 2022 compared to $(41.0) million for the nine-month period ended June 30, 2021. Our tax benefits for the nine-month period ended June 30, 2022 was favorably impacted primarily by the Foreign-Derived Intangible Income (“FDII”) deduction, the benefit from the remeasurement of state deferred taxes related to the Transaction, tax credits, and the release of the uncertain tax position due to the statute expiration, offset by the valuation allowance on certain jurisdictions. The tax benefits for the nine-month period ended June 30, 2021 was favorably impacted primarily by the change in valuation allowance and the resolution of uncertain tax
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benefits in the period. The acquisition of OSI Inc. during the nine-month period ended June 30, 2021 changed the assessment as to the recoverability of certain U.S. deferred tax assets such that they became realizable, and, accordingly, associated valuation allowance was reversed.
As of June 30, 2022, we maintained a valuation allowance in the U.S primarily for certain deferred tax assets related to the investment in a joint venture and on state research and development (R&D) credits. We also maintain a valuation allowance on certain foreign subsidiary tax attributes, primarily net operating loss carryforwards and other deferred tax assets because it is more likely than not that a benefit will not be realized. As of June 30, 2022 our total valuation allowance was $24.1 million.
Fiscal 2021 Compared to Fiscal 2020
The effective tax rate for the periods presented is primarily the result of income earned in the U.S. taxed at U.S. federal and state statutory income tax rates, income earned in foreign tax jurisdictions taxed at the applicable rates, as well as the impact of permanent differences between book and tax income.
Our effective tax rate was (68.7)% and (9.5)% during fiscal 2021 and 2020, respectively.
We recognized income tax benefits of $(45.3) million during fiscal 2021 compared to $(2.1) million during fiscal 2020. The increased income tax benefit in fiscal 2021 was due to the OSI Inc. acquisition, which allowed for the reversal of the valuation allowance for certain U.S. deferred tax assets of almost $28 million, and also due to the resolution of uncertain tax benefits which increased the income tax benefit in both fiscal 2021 and 2020.
As of September 30, 2021, we maintained a valuation allowance in the U.S. primarily for federal foreign tax credits. We also maintain a valuation allowance on certain foreign subsidiary tax attributes, primarily net operating loss carryforwards because it is more likely than not that a benefit will not be realized. As of September 2021 our total valuation allowance was $14.6 million.
Liquidity and Capital Resources
Resources
As of June 30, 2022 and September 30, 2021, our principal sources of liquidity consisted of $449.7 million and $25.7 million in cash and cash equivalents, respectively.
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 effect a receivable, equity or debt financing on terms acceptable to us or at all.
Credit Agreement
On May 16, 2022, New AspenTech and certain of its subsidiaries entered into a Borrower Assignment and Accession Agreement (the "Borrower Assignment and Accession Agreement") relating to the Amended and Restated Credit Agreement dated December 23, 2019, as amended from time to time, among Heritage AspenTech, the other loan parties from time to time party thereto, the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent (as previously amended, the “Credit Agreement”).
The Borrower Assignment and Accession Agreement was entered into in connection with the Transactions. Pursuant to the Borrower Assignment and Accession Agreement, among other things, Heritage AspenTech assigned all of its obligations under the Credit Agreement and related documents to New AspenTech and New AspenTech became the borrower and a loan party under the Credit Agreement. In connection with the Borrower Assignment and Accession Agreement certain subsidiaries acquired in connection with the Transactions also were joined as guarantors and loan parties under the 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 indebtedness under the revolving credit facility matures on December 23, 2024. Prior to the maturity of the revolving credit facility under the Credit Agreement, any amounts borrowed under the facility may be repaid and, subject to the terms and conditions of the Credit Agreement, borrowed again in whole or in part without penalty.
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As of June 30, 2022, our current borrowings of $28.0 million consist of the term loan facility. Our non-current borrowings of $245.6 million consist of $248.0 million of our term loan facility, net of $2.4 million in debt issuance costs.
For a more detailed description of the Amended and Restated Credit Agreement, refer to Note 13, “Credit Agreement,” to our audited consolidated and combined financial statements.
Cash Flows
The following table summarizes our cash flow activities for the periods indicated:
| Nine-Month Period Ended June 30, | Year Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2021 | 2020 | ||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||||||
| Cash flow provided by (used in): | |||||||||||||||||||||||
| Operating activities | $ | 28,962 | $ | 63,987 | $ | 54,800 | $ | 15,205 | |||||||||||||||
| Investing activities | (5,575,188) | (1,591,025) | (1,594,982) | (2,456) | |||||||||||||||||||
| Financing activities | 5,968,821 | 1,536,341 | 1,551,537 | (17,874) | |||||||||||||||||||
| Effect of exchange rates on cash and cash equivalents | 1,417 | (143) | (141) | (551) | |||||||||||||||||||
| Increase (decrease) in cash and cash equivalents | $ | 424,012 | $ | 9,160 | $ | 11,214 | $ | (5,676) | |||||||||||||||
Operating Activities
Our primary source of cash is from term and perpetual software license sales, maintenance renewals, and to a lesser extent from professional services and training.
Operating cash flow for the nine-month period ended June 30, 2022 was $29.0 million, a $35.0 million or 54.7% decrease compared to the same period in 2021, and was primarily due to the Heritage AspenTech acquisition, which contributed a negative $7.0 million as the result of recording a discrete tax payment subsequent to the closing of the Transaction. Operating cash flow for 2021 was $54.8 million, a $40.2 million or 275% increase compared with 2020, and was primarily due to the OSI Inc. acquisition in fiscal 2021.
Investing Activities
Cash outflows from investing activities were $5,576.4 million, $1,595.0 million, and $2.5 million for the years ended June 30, 2022, September 30, 2021, and September 30, 2020, respectively. The significant outflows in 2022 were due to the payments made to acquire Heritage AspenTech offset by acquired cash and cash equivalents. The significant outflows in 2021 were due to payments made to acquire OSI Inc. offset by acquired cash and cash equivalents.
Financing Activities
Cash flows provided by (used in) financing activities were $5,970.0 million, $1,551.5 million, and $(17.3) million for the nine-month period ended June 30, 2022, and twelve-month period ended September 30, 2021, and September 30, 2020, respectively. As stated previously, these primarily represent changes in the cash pool balance accounts in the OSI’s business and the SSE's business cash pooling arrangement with Emerson. The significant cash inflows in fiscal 2022 and 2021, respectively, were primarily due to the cash fundings from Emerson to the OSI business and the SSE business in order to close the Heritage AspenTech acquisition and the OSI Inc. acquisition.
Contractual Obligations and Requirements
Our contractual obligations, which consisted of borrowings, interest, and fees under our Amended and Restated Credit Agreement, operating lease commitments for our headquarters and other facilities, royalty obligations, equity method investments, deferred acquisition payments, and standby letters of credit and other obligations, were as follows as of June 30, 2022:
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| Payments due by Period | |||||||||||||||||||||||||||||
| Total | Less than 1 Year | 1 to 3 Years | 3 to 5 Years | More than 5 Years | |||||||||||||||||||||||||
| Contractual Cash Obligations: | |||||||||||||||||||||||||||||
Credit agreement (1) | $ | 293,045 | $ | 35,391 | $ | 257,654 | $ | — | $ | — | |||||||||||||||||||
Operating leases (2) | 92,169 | 16,560 | 25,063 | 13,012 | 37,534 | ||||||||||||||||||||||||
| Royalty obligations | 7,076 | 3,114 | 3,065 | 723 | 174 | ||||||||||||||||||||||||
| Equity method investments | 1,388 | 1,388 | — | — | — | ||||||||||||||||||||||||
| Deferred acquisition payments | 3,852 | 3,852 | — | — | — | ||||||||||||||||||||||||
| Other purchase obligations | 32,569 | 29,129 | 3,440 | — | — | ||||||||||||||||||||||||
| Total contractual cash obligations | $ | 430,099 | $ | 89,434 | $ | 289,222 | $ | 13,735 | $ | 37,708 | |||||||||||||||||||
| Other Commercial Commitments: | |||||||||||||||||||||||||||||
| Standby letters of credit | $ | 2,542 | $ | 922 | $ | 343 | $ | 1,277 | $ | — | |||||||||||||||||||
| Total commercial commitments | $ | 432,641 | $ | 90,356 | $ | 289,565 | $ | 15,012 | $ | 37,708 | |||||||||||||||||||
(1)The $293.0 million of contractual obligations related to our Amended and Restated Credit Agreement includes $276.0 million in outstanding borrowings under our term loan facility, and $17.0 million of interest expense and commitment fees as of June 30, 2022.
(2)The $92.2 million of contractual obligations includes rent and fixed fees for all of our operating leases, including those not recognized on the balance sheet.
We are not currently a party to any other material purchase contracts related to future capital expenditures. We do expect our investment in capital expenditures to increase in the next 12 months as a result of the Heritage AspenTech acquisition and associated integration activities.
The standby letters of credit were issued by Silicon Valley Bank in the United States and secure our performance on professional services contracts and certain facility leases.
The above table does not reflect a liability for uncertain tax positions of $6.7 million as of June 30, 2022. We estimate that none of this amount will be paid within the next year and we are currently unable to reasonably estimate the timing of payments for the remainder of the liability.
Off-Balance Sheet Arrangements
As of June 30, 2022, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Critical Accounting Estimates and Judgments
Our consolidated and combined financial statements are prepared in accordance with GAAP. The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. The most significant areas where management judgments and estimates impact the primary consolidated and combined financial statements are described below. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
For further information on our significant accounting policies, refer to Note 2, “Significant Accounting Policies,” to our Consolidated and Combined Financial Statements.
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Revenue Recognition
In accordance with ASC 606, Revenue from Contracts with Customers, we account for a customer contract when both parties have approved the contract and are committed to perform their respective obligations, each party’s rights can be identified, payment terms can be identified, the contract has commercial substance, and it is probable that we will collect substantially all of the consideration to which we are entitled to. We evaluate our contracts with customers to identify the promised goods or services and recognizes revenue for the identified performance obligations at the amount we expect to be entitled to in exchange for those goods or services. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. Revenue is recognized when, or as, performance obligations are satisfied, and control has transferred to the customer.
We disaggregate our revenue into three categories: (i) license and solutions, (ii) maintenance and (iii) services and other.
License and solutions
License and solutions revenue is primarily derived from term software licenses sold by the Heritage AspenTech and SSE segments, and perpetual software licenses, along with professional services, sold by the OSI segment. See Note 20, "Segment and Geographic Information," for additional information about our revenues disaggregated by region, type of performance obligation, and segment.
Term software license revenue is recognized at a point in time when control transfers to the customer, which generally aligns with the first day of the contractual term.
OSI perpetual software licenses are primarily sold with professional services and hardware to form an integrated solution for the customer. Maintenance is also sold with the integrated solution but is accounted for as a separate performance obligation (see below). The professional services and hardware sold with the perpetual license significantly customize the underlying functionality and usability of the software. As such, neither the license, hardware, nor professional services are considered distinct within the context of the contract and are therefore considered a single performance obligation. Because the integrated solution has no alternative use to us and we have an enforceable right to payment, revenue is recognized over time (typically one to two years) using an input measure of progress based on the ratio of actual costs incurred to date to the total estimated cost to complete. Revenue recognition related to the integrated solution ends once implementation is complete. In limited circumstances, OSI sells perpetual software licenses on a stand-alone basis and recognizes revenue on those sales on a point in time basis.
Maintenance