SecProbe.io

CORRESP
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filename1.htm

July 27, 2005

Stephen Krikorian

Accounting Branch Chief

Securities and Exchange
Commission

Division of Corporation Finance

100 F Street, N.E.

Washington, D.C. 20549

  Re:

  Synopsys, Inc.

  Form 10-K: For the Year ended October 30,
  2004

  Filed January 12, 2005

  Form 10-Q: For the Quarterly Period ended
  January 31, 2005

  Filed March 10, 2005

  Form 10-Q: For the Quarterly Period ended
  April 30, 2005

  Filed June 2, 2005

  File No. 000-19807

Gentlemen:

We are responding to comments received from the
staff (the “Staff”)
of the Securities and Exchange Commission (the “Commission”) by letter dated July 13,
2005, with respect to the periodic reports referenced above (the “Comments”).  The numbering of the paragraphs below
corresponds to the numbering of the Comments, which for the Staff’s
convenience, have been incorporated into this response letter.

Form 10-K for the Year Ended October 30,
2004

Item 9A. Controls and Procedures, page 100

1.                                       We note in your statements that “There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures.  Accordingly, even effective disclosure
controls and procedures can only provide reasonable, not absolute, assurance of
achieving their control objectives.”
Please revise to state clearly, if true, that your disclosure controls
and procedures are designed to provide reasonable
assurance of achieving their objectives and that your principal executive
officer and principal financial officer concluded that your disclosure controls
and procedures are effective at that reasonable assurance level.  In the alternative, remove the reference to
the level of assurance of your disclosure controls and procedures.  Please refer to Section II.F.4 of
Management’s Reports on Internal Control Over Financial Reporting and
Certification

of Disclosure in Exchange Act Periodic
Reports, SEC Release No. 33-8238, available on our website at
http://www.sec.gov./rules/final/33-8238.htm.

Concurrently herewith, Synopsys is filing an
Amendment No. 1 to its Form 10-K revising Item 9A in response to the
Staff’s comment.

2.                                      We
note in your disclosure that your management, including the Chief Executive
Officer and Chief Financial Officer, concluded that the Company’s disclosure
controls and procedures are effective to provide reasonable assurance that the
information required to be disclosed by the Company in reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the SEC.  Revise to clarify, if true, that your
officers concluded that your disclosure controls and procedures are also
effective to ensure that information required to be disclosed in the reports
that you file or submit under the Exchange Act is accumulated and communicated
to your management, including your chief executive officer and chief financial
officer, to allow timely decisions regarding required disclosure.  See Exchange Act Rule 13a-15(e).

Concurrently herewith, Synopsys is filing an
Amendment No. 1 to its Form 10-K revising Item 9A in response to the
Staff’s comment.

Form 10-Q for the Period Ended January 31,
2005

Note 11. Other Income (Expense), Page 9

3.                                      We
note that you corrected an error in accounting for a hedging transaction and
that you reported this correction in the current period.  Tell us why you believe that the error was
not material to prior periods, and include your analysis under SAB 99.  Furthermore, indicate whether the error is
material to the current period.  Your
response should address SAB Topic 5(F).
If material to the estimated annual amounts for the current period, the
error should be corrected retroactively.

Background

In Q1 FY05,
management determined that the Company had not been strictly following the
requirements of FASB Statement No. 133 – Accounting for Derivative Instruments and Hedging Activities.  Paragraph 40B
of the Statement requires that in order for derivatives to be properly
documented as hedges, there must be no netting of derivatives not designated as
hedging instruments (“balance sheet” hedges) against those designated as hedges
(“cash flow” hedges).  Synopsys’ process
had been to aggregate balance sheet exposures with cash flow exposures and
enter into one forward contract.    In
many cases, and in particular with Synopsys’ Japanese yen exposure, the balance
sheet exposures and the cash flow exposures partially offset each other,
resulting in a net position.

2

In order to
correct the error, the Company reclassified the remaining $3.0
million related to the disallowed hedges from accumulated other comprehensive
loss to other income in the three months ended January 31, 2005.

Applicability of SAB Topic 5(F)

SAB Topic 5(F) requires
restatement of prior periods in the event the impact of a change in accounting
principle is material in a given fiscal period.
The Company notes that the increase in other income (expense), net
resulted from an error in the application of an existing accounting principle,
not a change in any of its accounting principles. As a result, SAB Topic

5(F) is not applicable.  The Company
did consider the guidance in paragraph 29 of APB Opinion No. 28, Interim Financial Reporting.

Restatement Analysis

Management
determined that the error in the application of paragraph 40B of
SFAS 133 was not quantitatively or qualitatively material to the financial
statements.  In reaching this conclusion,
management considered the guidance in SAB 99, Materiality,
and evaluated (1) quantitative materiality as it relates the cumulative
impact of the error on both pre-tax earnings and revenue for fiscal years 2002
through 2005 (estimated) and fiscal quarters Q1 FY02 through Q1 FY05 and (2) qualitative
factors. In addition, management notes that the Company fully disclosed the
cumulative effect the error described above in Note 11 to its Unaudited
Condensed Consolidated Financial Statements and in Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations – Other Income (Expense), Net contained in its
Quarterly Report on Form 10-Q for the fiscal quarter ended January 31,
2005 and that therefore adequate disclosure has been made to investors
regarding the error and subsequent correction.

Quantitative
Materiality on an Annual Basis

The table below illustrates the quantitative
impact of the correction of the error on revenue and pre-tax earnings for full
fiscal years 2002, 2003 and 2004.

  (in thousands)

  FY 2002

  FY 2003

  FY 2004

  Revenue, as reported

  906,534

  1,176,983

  1,092,104

  Impact of error

  —

  1,378

  (3,220

  )

  Revenue, as corrected

  906,534

  1,178,361

  1,088,884

  % difference

  0.00

  %

  0.12

  %

  -0.29

  %

  Pre-Tax Earnings, as reported

  (288,940

  )

  218,989

  91,592

  Impact of error

  (660

  )

  6,302

  (2,687

  )

  Pre-Tax Earnings, as corrected

  (289,600

  )

  225,291

  88,905

  % difference

  0.23

  %

  2.88

  %

  -2.93

  %

3

On an annual basis, the error is
quantitatively immaterial to fiscal years 2002 through 2004, both in terms of
revenue and pre-tax earnings.

During the fourth quarter of fiscal 2004, the
Company adopted a strategy of moving 90% of its sales into ratable licenses
(previously between 65% and 75% of licenses had been ratable), significantly
reducing both Q4 2004 actual and forecasted fiscal 2005 revenues and
earnings.   This is because the model
change caused upfront revenue to fall significantly and, given our relatively
fixed cost of revenue, decreased pre-tax earnings on an almost
dollar-for-dollar basis. For the first six months of fiscal 2005, upfront
license revenue was approximately $28 million versus upfront license revenue of
$135 million in the same period of fiscal 2004. The Company is currently
estimating approximately breakeven fiscal 2005 pre-tax earnings compared to
pre-tax earnings of $225 million in fiscal 2003 and $89 million in fiscal 2004
(the business model change in Q4 2004 also depressed 2004 pre-tax results).

Because of the effect of the model change on projected
pre-tax earnings for fiscal 2005, management determined that Q1 and full-year
fiscal 2005 pre-tax earnings do not represent appropriate benchmarks against
which to measure quantitative materiality. Instead, management considered “normalized”
pre-tax earnings and revenues during fiscal 2003 and 2004 in determining
materiality as management believes these periods were most representative of
normal earnings.  The Company incurred a
fiscal 2002 loss of $289 million but this included the impact of the mid-year
acquisition of Avant! Corporation and a large litigation settlement. The Avant!
acquisition significantly increased the size of the Company mid-way through
fiscal 2002.

The Company’s average pre-tax earnings during
fiscal 2003 and fiscal 2004, the first full fiscal years following the Avant! acquisition,
were $157 million [($225 million in fiscal 2003 + $89 million in fiscal
2004)/2]; based on such amount, the Company concluded that at $3.0 million or
1.9% of normalized pre-tax earnings, the error was not quantitatively
material.  In addition, the error is only
approximately 0.3% of projected fiscal 2005 revenue, which was estimated to be
between $960 to $990 million as of May 18, 2005.

Based on the above, management concluded that
the error was immaterial to all fiscal years affected by the error.

Qualitative
Metrics

Management also considered whether the error
would result in a potential negative or positive reaction by stockholders,
noting the following:

•                  Other income (expense) has fluctuated
widely over the past three years and is naturally volatile because this line
item includes non-operating items such as periodic investment gains, foreign
exchange gains (losses) and litigation settlement gains.  As such, management believes there are no
definable trends in this line item that were affected by this error and that investors
do not consider other income (expense) a key indicator of the Company’s
performance.

•                  In Q3 of fiscal 2005, the Company expects
to recognize an approximately $33 million gain in other income (expense) due to
a litigation settlement.  As such, the
error will be immaterial to the other income (expense) line item for the nine
months ending July 31, 2005.

•                  The Company’s stock price changed
less than 2% after the earnings call on February 16, 2005 when the error
was originally disclosed, suggesting that investors do not view the error as
material.

Based on the above, we concluded that the
error would not result in a negative or positive reaction from stockholders.  This conclusion was supported by the fact
there was limited interest from analysts and stockholders
following the disclosure of the error.

In addition, management considered the
following in its qualitative analysis of the impact of the error:

  Did the error:

  Management’s
  Response

  . . . arise from an item that can be
  precisely measured or is an estimate?

  Yes, error arose from an item which can be
  precisely measured. The error occurred in fiscal years 2002 through 2004,
  applying to specific hedge transactions.

  . . . result in a change of earnings trend
  or other trends?

  The error had an insignificant impact on
  the Company’s trend in earnings. As noted earlier, Q4 2004 and Q1 2005 were
  atypical quarters due to the change in business model towards more ratable
  licenses.

  . . . result in a failure to meet analysts’
  consensus expectations?

  No, the error would not have resulted in a
  failure to meet the consensus targets, other than in Q1 2002, for which
  quarter the error would have resulted in earnings approximately 8% below
  analyst expectations for such quarter, although there was no such impact for
  the full fiscal year.

  . . . change income to a loss or a loss
  into income?

  The error does not result in a change from
  income to loss or vice versa.

  . . . have an impact on segment information
  and related trends?

  The Company has only one segment.

  . . . affect compliance with regulatory
  requirements?

  Not applicable.

  . . . affect compliance with loan covenants
  or other contractual requirements?

  Not applicable for the periods in question
  (no debt in place and/or outstanding).

  . . . have the effect of increasing
  management’s compensation?

  The error did not impact management
  compensation. Variable compensation is based on the achievement of specified
  plan objectives. In each year the plan objectives are:

  •    Accepted orders – Error has no impact

  •    Revenue – Error has a minor impact on
  revenue in the years affected

  •    Expenses (excludes other income
  (expense)) – Error has no impact

  . . . conceal an unlawful act?

  No.

4

Quantitative Materiality on a Quarterly Basis

The table below illustrates the quantitative
impact of the correction of the error on a quarterly basis for Q1 FY02 through
Q1 FY05.

  ($000’s)

  Q102

  Q202

  Q302

  Q402

  Q103

  Q203

  Q303

  Q403

  Q104

  Q204

  Q304

  Q404

  Q105

  Revenue, as reported

  175,545

  185,638

  236,095

  309,256

  268,136

  292,028

  300,366

  316,453

  285,264

  294,604

  281,681

  230,555

  241,304

  Impact of error

  —

  —

  —

  —

  229

  445

  259

  445

  (929

  )

  (987

  )

  (422

  )

  (882

  )

  (359

  )

  Revenue, as corrected

  175,545

  185,638

  236,095

  309,256

  268,365

  292,473

  300,625

  316,898

  284,335

  293,617

  281,259

  229,673

  240,945

  % difference

  0.00

  %

  0.00

  %

  0.00

  %

  0.00

  %

  0.09

  %

  0.15

  %

  0.09

  %

  0.14

  %

  -0.33

  %

  -0.34

  %

  -0.15

  %

  -0.38

  %

  -0.15

  %

  Pre-Tax Earnings, as reported

  20,179

  30,716

  (161,380

  )

  (178,455

  )

  48,946

  38,926

  68,026

  63,091

  43,609

  38,500

  43,050

  (33,567

  )

  (24,353

  )

  Impact of error

  (3,085

  )

  1,847

  847

  (268

  )

  530

  (932

  )

  635

  6,069

  (158

  )

  (1,872

  )

  (1,215

  )

  558

  2,950

  Pre-Tax Earnings, as corrected

  17,094

  32,563

  (160,533

  )

  (178,723

  )

  49,476

  37,994

  68,661

  69,160

  43,451

  36,628

  41,835

  (33,009

  )

  (21,403

  )

  % difference

  -15.29

  %

  6.01

  %

  -0.52

  %

  0.15

  %

  1.08

  %

  -2.39

  %

  0.93

  %

  9.62

  %

  -0.36

  %

  -4.86

  %

  -2.82

  %

  -1.66

  %

  -12.11

  %

  Quarter to Quarter Change in Pre-Tax Earnings before adjustment

  52.22

  %

  -625.39

  %

  10.58

  %

  -127.43

  %

  -20.47

  %

  74.76

  %

  -7.25

  %

  -30.88

  %

  -11.72

  %

  11.82

  %

  -177.97

  %

  -27.45

  %

  Quarter to Quarter Change in Pre-Tax Earnings after adjustment

  90.49

  %

  -592.99

  %

  11.33

  %

  -127.68

  %

  -23.21

  %

  80.72

  %

  0.73

  %

  -37.17

  %

  -15.70

  %

  14.22

  %

  -178.90

  %

  -35.16

  %

On a quarterly basis, as a percentage of
revenue, the error does not exceed 1% of revenue in any one quarter and is
therefore considered immaterial to revenue in all quarters.  As a
percentage of pre-tax earnings, the error does not exceed 5% in any quarter
impacted except for the first quarter of fiscal 2005, the first and second
quarters of fiscal 2002, and the fourth quarter of fiscal 2003, as more fully
explained below.

•                Q1 2005
was an atypical quarter from a revenue and earnings perspective due to the
Company’s adoption of a strategy of moving 90% of its sales into ratable
licenses beginning in Q4 2004 (previously between 65% and 75% of licenses had
been ratable), significantly reducing both Q4 2004 and Q1 2005 revenue and
e