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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________ 
FORM 10-Q
_____________________________________  
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2014
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 000-15867
_____________________________________ 
CADENCE DESIGN SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
_____________________________________ 
Delaware
 
00-0000000
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
2655 Seely Avenue, Building 5, San Jose, California
 
95134
(Address of Principal Executive Offices)
 
(Zip Code)
(408) 943-1234
Registrant’s Telephone Number, including Area Code
_____________________________________ 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
x
 
Accelerated filer
 
o
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
On September 27, 2014, approximately 292,720,000 shares of the registrant’s common stock, $0.01 par value, were outstanding.



CADENCE DESIGN SYSTEMS, INC.
INDEX
 
 
 
Page
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 











PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
 
September 27,
2014
 
December 28,
2013
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
500,483

 
$
536,260

Short-term investments
94,970

 
96,788

Receivables, net
107,634

 
107,624

Inventories
61,096

 
50,220

2015 notes hedges
452,498

 
306,817

Prepaid expenses and other
134,929

 
123,382

Total current assets
1,351,610

 
1,221,091

Property, plant and equipment, net of accumulated depreciation of $546,129 and $568,494, respectively
231,337

 
238,715

Goodwill
557,252

 
456,905

Acquired intangibles, net of accumulated amortization of $137,960 and $139,820, respectively
378,827

 
311,693

Long-term receivables
4,957

 
3,672

Other assets
181,958

 
196,525

Total assets
$
2,705,941

 
$
2,428,601

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Convertible notes
$
337,711

 
$
324,826

2015 notes embedded conversion derivative
452,498

 
306,817

Accounts payable and accrued liabilities
205,647

 
216,594

Current portion of deferred revenue
300,188

 
299,973

Total current liabilities
1,296,044

 
1,148,210

Long-term liabilities:
 
 
 
Long-term portion of deferred revenue
42,873

 
52,850

Other long-term liabilities
82,297

 
71,436

Total long-term liabilities
125,170

 
124,286

Commitments and contingencies (Note 13)


 


Stockholders’ equity:
 
 
 
Common stock and capital in excess of par value
1,820,332

 
1,757,242

Treasury stock, at cost
(169,511
)
 
(140,142
)
Accumulated deficit
(391,438
)
 
(485,306
)
Accumulated other comprehensive income
25,344

 
24,311

Total stockholders’ equity
1,284,727

 
1,156,105

Total liabilities and stockholders’ equity
$
2,705,941

 
$
2,428,601


See notes to condensed consolidated financial statements.



CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Revenue:
 
 
 
 
 
 
 
Product and maintenance
$
374,110

 
$
341,601

 
$
1,085,928

 
$
1,007,855

Services
26,386

 
25,046

 
71,906

 
75,539

Total revenue
400,496

 
366,647

 
1,157,834

 
1,083,394

Costs and expenses:
 
 
 
 
 
 
 
Cost of product and maintenance
36,954

 
32,546

 
116,858

 
90,488

Cost of services
17,125

 
17,190

 
48,733

 
50,682

Marketing and sales
100,387

 
98,094

 
297,321

 
283,773

Research and development
148,744

 
138,078

 
447,882

 
398,557

General and administrative
25,894

 
27,582

 
86,680

 
91,833

Amortization of acquired intangibles
6,316

 
5,141

 
17,105

 
14,259

Restructuring and other charges
11,027

 
86

 
11,397

 
2,594

Total costs and expenses
346,447

 
318,717

 
1,025,976

 
932,186

Income from operations
54,049

 
47,930

 
131,858

 
151,208

Interest expense
(7,523
)
 
(9,583
)
 
(22,160
)
 
(28,373
)
Other income (expense), net
(417
)
 
2,535

 
4,600

 
6,728

Income before provision for income taxes
46,109

 
40,882

 
114,298

 
129,563

Provision for income taxes
8,574

 
2,382

 
20,430

 
3,025

Net income
$
37,535

 
$
38,500

 
$
93,868

 
$
126,538

Net income per share – basic
$
0.13

 
$
0.14

 
$
0.33

 
$
0.46

Net income per share – diluted
$
0.12

 
$
0.13

 
$
0.31

 
$
0.43

Weighted average common shares outstanding – basic
284,462

 
278,977

 
283,141

 
277,034

Weighted average common shares outstanding – diluted
309,995

 
296,958

 
305,595

 
294,531











See notes to condensed consolidated financial statements.



CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Net income
$
37,535

 
$
38,500

 
$
93,868

 
$
126,538

Other comprehensive income (loss), net of tax effects:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(6,428
)
 
(5,442
)
 
400

 
(23,308
)
Changes in unrealized holding gains or losses on available-for-sale securities, net of reclassification adjustment for realized gains and losses
(400
)
 
177

 
195

 
(206
)
Changes in defined benefit plan liabilities
51

 
66

 
438

 
448

Total other comprehensive income (loss), net of tax effects
(6,777
)
 
(5,199
)
 
1,033

 
(23,066
)
Comprehensive income
$
30,758

 
$
33,301

 
$
94,901

 
$
103,472





































See notes to condensed consolidated financial statements.



CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
Cash and cash equivalents at beginning of period
$
536,260

 
$
726,357

Cash flows from operating activities:
 
 
 
Net income
93,868

 
126,538

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
84,296

 
72,681

Amortization of debt discount and fees
14,863

 
19,102

Stock-based compensation
60,818

 
47,487

Gain on investments, net
(3,202
)
 
(4,035
)
Deferred income taxes
18,963

 
(6,425
)
Other non-cash items
6,221

 
2,183

Changes in operating assets and liabilities, net of effect of acquired businesses:
 
 
 
Receivables
(1,858
)
 
2,192

Inventories
(15,796
)
 
(10,005
)
Prepaid expenses and other
(8
)
 
26,927

Other assets
(38,241
)
 
(46,651
)
Accounts payable and accrued liabilities
(15,623
)
 
18,277

Deferred revenue
(27,231
)
 
(5,474
)
Other long-term liabilities
7,585

 
5,644

Net cash provided by operating activities
184,655

 
248,441

Cash flows from investing activities:
 
 
 
Purchases of available-for-sale securities
(98,392
)
 
(84,000
)
Proceeds from the sale of available-for-sale securities
69,912

 
59,014

Proceeds from the maturity of available-for-sale securities
32,402

 
30,506

Proceeds from the sale of long-term investments

 
6,200

Purchases of property, plant and equipment
(27,958
)
 
(35,950
)
Cash paid in business combinations and asset acquisitions, net of cash acquired
(167,248
)
 
(392,825
)
Net cash used for investing activities
(191,284
)
 
(417,055
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility
100,000

 
100,000

Payment on revolving credit facility
(100,000
)
 
(50,000
)
Payment of convertible notes
(1
)
 
(78
)
Payment of convertible notes embedded conversion derivative liability
(1
)
 

Proceeds from convertible notes hedges
1

 

Principal payments on receivable financing

 
(2,526
)
Payment of debt issuance costs
(322
)
 

Payment of acquisition-related contingent consideration
(1,835
)
 
(677
)
Tax effect related to employee stock transactions allocated to equity
5,786

 
9,494

Proceeds from issuance of common stock
54,717

 
40,691

Stock received for payment of employee taxes on vesting of restricted stock
(23,648
)
 
(19,461
)
Payments for repurchases of common stock
(62,575
)
 

Net cash provided by (used for) financing activities
(27,878
)
 
77,443

Effect of exchange rate changes on cash and cash equivalents
(1,270
)
 
(14,783
)
Decrease in cash and cash equivalents
(35,777
)
 
(105,954
)
Cash and cash equivalents at end of period
$
500,483

 
$
620,403

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
5,113

 
$
6,538

Cash paid for taxes, net
$
21,410

 
$
5,281

Non-cash investing and financing activities:
 
 
 
Stock options assumed in acquisitions
$

 
$
529

Available-for-sale securities received from customer
$
1,695

 
$
232


See notes to condensed consolidated financial statements.



CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared by Cadence Design Systems, Inc., or Cadence, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission, or the SEC. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, Cadence believes that the disclosures contained in this Quarterly Report on Form 10-Q comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These condensed consolidated financial statements are meant to be, and should be, read in conjunction with the consolidated financial statements and the Notes thereto included in Cadence’s Annual Report on Form 10-K for the fiscal year ended December 28, 2013. Certain prior period balances have been reclassified to conform to current period presentation.
The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q reflect all adjustments (which include only normal, recurring adjustments and those items discussed in these Notes) that are, in the opinion of management, necessary to state fairly the results of operations, cash flows and financial position for the periods and dates presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year. Management has evaluated subsequent events through the issuance date of the unaudited condensed consolidated financial statements.
Preparation of the condensed consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

NOTE 2. DEBT
Cadence’s outstanding debt as of September 27, 2014 and December 28, 2013 was as follows:
 
September 27, 2014
 
December 28, 2013
 
(In thousands)
 
Principal
 
Unamortized Discount
 
Carrying Value
 
Principal
 
Unamortized Discount
 
Carrying Value
2015 Notes
$
349,999

 
$
(12,288
)
 
$
337,711

 
$
350,000

 
$
(25,174
)
 
$
324,826

Revolving credit facility

 

 

 

 

 

Total outstanding debt
$
349,999

 
$
(12,288
)
 
$
337,711

 
$
350,000

 
$
(25,174
)
 
$
324,826

2015 Notes
In June 2010, Cadence issued $350.0 million principal amount of 2.625% Cash Convertible Senior Notes Due 2015, or the 2015 Notes. At maturity, the holders of the 2015 Notes will be entitled to receive the principal amount of the 2015 Notes plus accrued interest. The 2015 Notes are convertible into cash prior to maturity upon the occurrence of certain conditions described in the table below. To the extent that the 2015 Notes are convertible prior to maturity and a holder of the 2015 Notes elects to convert its notes prior to maturity, that note holder will be entitled to receive cash equal to the principal amount of the notes plus any additional conversion value as described in the table below under the heading “Conversion feature.” As of September 27, 2014, a total of one thousand dollars of the 2015 Notes had been tendered for early conversion.
Cadence entered into hedge transactions, or the 2015 Notes Hedges, in connection with the issuance of the 2015 Notes. The purpose of the 2015 Notes Hedges was to limit Cadence’s exposure to the additional cash payments above the principal amount of the 2015 Notes that may be due to the holders. As a result of the 2015 Notes Hedges, Cadence’s maximum expected cash exposure upon conversion of the 2015 Notes is the $350.0 million principal balance of the notes and accrued interest. In June 2010, Cadence also sold warrants in separate transactions, or the 2015 Warrants. As a result of the 2015 Warrants, Cadence will experience dilution to its diluted earnings per share if its average closing stock price exceeds $10.78 for any fiscal quarter. To the extent that Cadence’s stock price exceeds $10.78 at expiration of the 2015 Warrants, Cadence will issue shares to net settle the 2015 Warrants.

5


A summary of key terms of the 2015 Notes is as follows:
 
 
2015 Notes
 
 
(In thousands, except percentages and per share amounts)
 
 
Outstanding principal maturity value – at September 27, 2014
 
$349,999
 
 
Contractual interest rate
 
2.625%
 
 
Contractual maturity date
 
June 1, 2015
 
 
Initial conversion rate
 
132.5205 shares of common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $7.55 per share of Cadence common stock.
 
 
Conversion feature (in addition to principal amount payable in cash)
 
Cash to the extent Cadence’s stock price exceeds approximately $7.55 per share, calculated based on the applicable conversion rate multiplied by the volume weighted average price of Cadence common stock over a specified period.
 
 
Early conversion conditions (or the Early Conversion Conditions)
 
• Closing stock price greater than $9.81 for at least 20 of the last 30 trading days in a fiscal quarter (convertible only for subsequent quarter);
 
• Specified corporate transactions; or
 
• Note trading price falls below a calculated minimum.
 
 
Conversion immediately preceding maturity
 
From March 1, 2015 until the second trading day immediately preceding the maturity date, holders may convert their 2015 Notes at any time into cash as described above under “Conversion feature.”
 
 
Redemption at Cadence’s option prior to maturity
 
None.
 
 
 
Fundamental change put right
 
Upon certain fundamental corporate changes prior to maturity, the 2015 Note holders could require Cadence to repurchase their notes for cash equal to the principal amount of the notes plus accrued interest.
 
 
Make-whole premium
 
Upon certain fundamental changes prior to maturity, if Cadence’s stock price were between $6.16 and $40.00 per share at that time, the holders of the notes would be entitled to an increase to the conversion rate. This is referred to as a “make-whole premium.”
 
 
Financial covenants
 
None.
Impact of Early Conversion Conditions on Financial Statements
The 2015 Notes mature on June 1, 2015 and therefore are classified as a current liability as of September 27, 2014. The 2015 Notes are convertible into cash from September 28, 2014 through January 3, 2015 because Cadence’s closing stock price exceeded $9.81 for at least 20 days in the 30-day period prior to September 27, 2014.
If the note holders elect to convert their 2015 Notes prior to maturity, any unamortized discount and transaction fees will be expensed at the time of conversion. If the entire outstanding principal amount had been converted on September 27, 2014, Cadence would have recorded an expense of $14.0 million associated with the conversion, comprised of $12.3 million of unamortized debt discount and $1.7 million of unamortized transaction fees.
As of September 27, 2014, the if-converted value of the 2015 Notes to the note holders of approximately $801.9 million exceeded the principal amount of $350.0 million. The fair value of the 2015 Notes was $804.3 million as of September 27, 2014 and $654.1 million as of December 28, 2013. The 2015 Notes currently trade at a premium to the if-converted value of the notes.

6


2015 Notes Embedded Conversion Derivative
The conversion feature of the 2015 Notes, or the 2015 Notes Embedded Conversion Derivative, requires bifurcation from the 2015 Notes and is accounted for as a derivative liability. The fair value of the 2015 Notes Embedded Conversion Derivative at the time of issuance of the 2015 Notes was $76.6 million and was recorded as original debt discount for purposes of accounting for the debt component of the 2015 Notes. This discount is amortized as interest expense using the effective interest method over the term of the 2015 Notes. The 2015 Notes Embedded Conversion Derivative is carried on the condensed consolidated balance sheet at its estimated fair value. The fair value was $452.5 million as of September 27, 2014 and $306.8 million as of December 28, 2013.
2015 Notes Hedges
The 2015 Notes Hedges expire on June 1, 2015 and must be settled in cash. The aggregate cost of the 2015 Notes Hedges was $76.6 million. The 2015 Notes Hedges are accounted for as a derivative asset and are carried on the condensed consolidated balance sheet at their estimated fair value. The 2015 Notes Hedges fair value was $452.5 million as of September 27, 2014 and $306.8 million as of December 28, 2013. The 2015 Notes Embedded Conversion Derivative liability and the 2015 Notes Hedges asset are adjusted to fair value each reporting period and unrealized gains and losses are reflected in the condensed consolidated income statements. The 2015 Notes Embedded Conversion Derivative and the 2015 Notes Hedges are designed to have similar fair values. Accordingly, the changes in the fair values of these instruments offset during the three and nine months ended September 27, 2014 and September 28, 2013 and did not have a net impact on the condensed consolidated income statements for the respective periods.
The classification of the 2015 Notes Embedded Conversion Derivative liability and the 2015 Notes Hedges asset as current on the condensed consolidated balance sheet corresponds with the classification of the 2015 Notes.
As of September 27, 2014, and as a result of the one thousand dollars of the 2015 Notes that were tendered for early conversion, Cadence paid approximately one thousand dollars of the embedded conversion derivative liability to the note holder, and Cadence received approximately one thousand dollars from settlement of a proportional amount of the 2015 Notes Hedges.
2015 Warrants
In June 2010, Cadence sold the 2015 Warrants in separate transactions for the purchase of up to approximately 46.4 million shares of Cadence’s common stock at a strike price of $10.78 per share, for total proceeds of $37.5 million, which was recorded as an increase in stockholders’ equity. The 2015 Warrants expire on various dates from September 2015 through December 2015 and must be settled in net shares of Cadence’s common stock. Upon expiration of the 2015 Warrants, Cadence will issue shares of common stock to the purchasers of the 2015 Warrants that represent the value by which the price of the common stock exceeds the strike price stipulated within the particular warrant agreement.
The effective interest rate and components of interest expense of the 2015 Notes for the three and nine months ended September 27, 2014 and September 28, 2013 were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
 
(In thousands, except percentages)
Effective interest rate
8.1
%
 
8.1
%
 
8.1
%
 
8.1
%
Contractual interest expense
$
2,289

 
$
2,289

 
$
6,867

 
$
6,867

Amortization of debt discount
$
4,379

 
$
4,045

 
$
12,886

 
$
11,906

Revolving Credit Facility
In December 2012, Cadence entered into a five-year senior revolving credit facility with a group of lenders led by Bank of America, N.A., as administrative agent. The credit facility was amended on September 19, 2014, on terms substantially similar to the prior credit agreement, except that, as amended, the credit facility (i) is unsecured, (ii) expires on September 19, 2019, (iii) currently has no subsidiary guarantors and (iv) includes certain amendments to the negative and financial covenants.
The credit facility provides for borrowings up to $250.0 million, with the right to request increased capacity up to an additional $150.0 million upon the receipt of lender commitments, for total maximum borrowings of $400.0 million. Any outstanding loans drawn under the credit facility are due at maturity on September 19, 2019. Outstanding amounts may be paid at any time prior to maturity.

7


Interest accrues on borrowings under the credit facility at either LIBOR plus a margin between 1.25% and 2.0% per annum or at a base rate plus a margin between 0.25% and 1.0% per annum. The interest rate applied to borrowings is determined by Cadence’s consolidated leverage ratio as specified by the credit facility agreement. Interest is payable quarterly. A commitment fee ranging from 0.20% to 0.35% is assessed on the daily average undrawn portion of revolving commitments.
The credit facility contains customary negative covenants that, among other things, restrict Cadence’s ability to incur additional indebtedness, grant liens, make certain investments (including acquisitions), dispose of certain assets and make certain payments, including share repurchases and dividends. In addition, the credit facility contains financial covenants that require Cadence to maintain a leverage ratio not to exceed 2.75 to 1, and a minimum interest coverage ratio of 3 to 1.
As of September 27, 2014 and December 28, 2013, Cadence had no outstanding borrowings under the credit facility and was in compliance with all financial covenants.

NOTE 3. ACQUISITIONS AND ACQUISITION-RELATED CONTINGENT CONSIDERATION
Acquisitions
On June 13, 2014, Cadence acquired Jasper Design Automation, Inc., or Jasper, a privately held provider of formal analysis solutions based in Mountain View, California. The acquired technology complements Cadence’s existing system design and verification platforms. Total cash consideration for Jasper, after taking into account adjustments for certain costs, and cash held by Jasper at closing of $28.7 million, was $139.5 million. Cadence will also make payments to certain employees that are conditioned upon continued employment and the achievement of certain performance metrics over a three-year period.
The following table summarizes the fair value of assets acquired and liabilities assumed in the acquisition of Jasper:
 
(In thousands)
Cash and cash equivalents
$
28,678

Property, plant and equipment
520

Other assets
4,362

Acquired intangibles:
 
Existing technology
68,200

Agreements and relationships
13,600

Tradenames and trademarks
900

In-process technology
10,300

Goodwill
79,792

Total assets acquired
$
206,352

Deferred revenue
(11,900
)
Other liabilities
(6,242
)
Long-term deferred tax liabilities
(20,002
)
Net assets acquired
$
168,208

The allocation of purchase consideration to certain assets and liabilities has not been finalized. Cadence will continue to evaluate certain estimates and assumptions, primarily related to taxes and assumed liabilities, during the measurement period (up to one year from the acquisition date).
During the nine months ended September 27, 2014, Cadence also completed two other business combinations for total cash consideration of $27.5 million, after taking into account cash acquired of $2.1 million. The total purchase consideration was preliminarily allocated to the assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition dates. Cadence recorded a total of $20.3 million of goodwill, $16.9 million of other intangible assets and $8.1 million of net liabilities consisting primarily of long-term deferred income taxes and deferred revenue.
Cadence amortizes acquired intangible assets with definite lives on a straight-line basis over the remaining estimated economic life of the underlying products and technologies. The weighted-average amortization period for definite-lived intangible assets acquired during the nine months ended September 27, 2014 is approximately eight years.
The goodwill related to Cadence’s acquisitions during the nine months ended September 27, 2014 is primarily related to expected synergies from combining operations of the acquired companies with Cadence. Cadence expects that approximately $2.8 million of goodwill related to the acquisitions completed during the nine months ended September 27, 2014 will be deductible for tax purposes.

8


Results of operations and the estimated fair value of acquired assets and assumed liabilities are recorded in the condensed consolidated financial statements from the date of acquisition. The fair values of acquired intangible assets, including in-process technology and assumed liabilities, were determined using significant inputs that are not observable in the market. For an additional description of these fair value calculations, see Note 7 in the notes to condensed consolidated financial statements.
During the three months ended September 27, 2014 and September 28, 2013, Cadence did not incur any transaction costs associated with acquisitions. During the nine months ended September 27, 2014 and September 28, 2013, Cadence incurred transaction costs associated with acquisitions of $3.7 million and $8.2 million, respectively. These costs consisted of professional fees and administrative costs and were expensed as incurred in Cadence’s condensed consolidated income statements.
Acquisition-Related Contingent Consideration
Cadence may be obligated to make cash payments in connection with its business combinations and asset acquisitions completed in prior fiscal years, subject to the satisfaction of future financial measures associated with the acquired technology. If performance is such that these payments are fully achieved, Cadence will be obligated to pay up to an aggregate of $10.0 million over the next 19 months. Of the $10.0 million, up to $8.3 million would be recorded as operating expenses in the condensed consolidated income statements.

NOTE 4. GOODWILL AND ACQUIRED INTANGIBLES
Goodwill
The changes in the carrying amount of goodwill during the nine months ended September 27, 2014 were as follows:
 
Gross Carrying
Amount
 
(In thousands)
Balance as of December 28, 2013
$
456,905

Goodwill resulting from acquisitions
102,025

Measurement period adjustments
(1,913
)
Effect of foreign currency translation
235

Balance as of September 27, 2014
$
557,252

Measurement period adjustments to goodwill are applied based on new information obtained about preliminary amounts recognized for a business combination. During the nine months ended September 27, 2014, Cadence recorded measurement period adjustments associated with revisions to initial estimates of certain liabilities assumed with its acquisition of Jasper and certain tax estimates and assumptions made for one of its other fiscal 2014 acquisitions. These adjustments resulted in a decrease to goodwill.
We completed our annual goodwill impairment test during the third quarter of fiscal 2014 and determined that the fair value of our single reporting unit substantially exceeded the carrying amount of our net assets and that no impairment existed.
Acquired Intangibles, Net
Acquired intangibles as of September 27, 2014 were as follows, excluding intangibles that were fully amortized as of December 28, 2013:
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Acquired
Intangibles, Net
 
(In thousands)
Existing technology
$
325,565

 
$
(74,679
)
 
$
250,886

Agreements and relationships
175,388

 
(59,258
)
 
116,130

Tradenames, trademarks and patents
10,618

 
(4,023
)
 
6,595

Total acquired intangibles with definite lives
511,571

 
(137,960
)
 
373,611

In-process technology
5,216

 

 
5,216

Total acquired intangibles
$
516,787

 
$
(137,960
)
 
$
378,827


9


In-process technology as of September 27, 2014 consisted of acquired projects that, if completed, will contribute to Cadence’s ability to offer additional IP and software solutions to its customers. As of September 27, 2014, these projects were expected to be complete in three to fifteen months. During the nine months ended September 27, 2014, Cadence completed certain projects previously included in in-process technology and transferred approximately $8.6 million to existing technology.
Acquired intangibles as of December 28, 2013 were as follows, excluding intangibles that were fully amortized as of December 29, 2012:
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Acquired
Intangibles, Net
 
(In thousands)
Existing technology
$
237,624

 
$
(53,243
)
 
$
184,381

Agreements and relationships
170,760

 
(53,607
)
 
117,153

Distribution rights
30,100

 
(30,100
)
 

Tradenames, trademarks and patents
9,519

 
(2,870
)
 
6,649

Total acquired intangibles with definite lives
448,003

 
(139,820
)
 
308,183

In-process technology
3,510

 

 
3,510

Total acquired intangibles
$
451,513

 
$
(139,820
)
 
$
311,693

Amortization expense from existing technology and maintenance agreements is included in cost of product and maintenance. Amortization of acquired intangibles for the three and nine months ended September 27, 2014 and September 28, 2013 was as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
 
(In thousands)
Cost of product and maintenance
$
10,071

 
$
7,191

 
$
26,260

 
$
16,758

Amortization of acquired intangibles
6,316

 
5,141

 
17,105

 
14,259

Total amortization of acquired intangibles
$
16,387

 
$
12,332

 
$
43,365

 
$
31,017

Estimated amortization expense for intangible assets with definite lives for the following five fiscal years and thereafter is as follows:
 
(In thousands)
2014 – remaining period
$
16,452

2015
64,259

2016
57,383

2017
52,421

2018
48,813

Thereafter
134,283

Total estimated amortization expense
$
373,611



NOTE 5. INCOME TAXES
Cadence’s provision for income taxes of $8.6 million and $20.4 million for the three and nine months ended September 27, 2014 primarily resulted from federal, state and foreign income taxes on its anticipated fiscal 2014 income. Cadence’s foreign earnings are generally subject to lower statutory tax rates than its United States earnings. In addition, Cadence’s provision for income taxes for the nine months ended September 27, 2014 does not include the potential tax benefit of the United States federal research tax credit which expired in December 2013. The expiration of the research tax credit is estimated to increase Cadence’s estimated annual effective tax rate for fiscal 2014 by 3%.

10


Cadence's provision for income taxes of $2.4 million for the three months ended September 28, 2013 was primarily related to federal, state and foreign income taxes on its anticipated fiscal 2013 income. Cadence’s provision for income taxes of $3.0 million for the nine months ended September 28, 2013 was primarily related to federal, state and foreign income taxes on its anticipated fiscal 2013 income partially offset by a tax benefit of $33.7 million from the release of an uncertain tax position, including related interest and penalties, and a $5.9 million tax benefit from the retroactive enactment of the fiscal 2012 United States federal research tax credit during the period.

NOTE 6. RECEIVABLES, NET
Cadence’s current and long-term receivables balances as of September 27, 2014 and December 28, 2013 were as follows:
 
As of
 
September 27,
2014
 
December 28,
2013
 
(In thousands)
Accounts receivable
$
77,311

 
$
76,057

Unbilled accounts receivable
30,323

 
31,567

Long-term receivables
4,957

 
3,672

Total receivables
$
112,591

 
$
111,296

Less allowance for doubtful accounts

 

Total receivables, net
$
112,591

 
$
111,296

Cadence’s customers are primarily concentrated within the semiconductor and electronics systems industries. As of September 27, 2014, one customer accounted for approximately 15% of Cadence’s total receivables and no other single customer accounted for 10% or more of Cadence's total receivables. As of December 28, 2013, no single customer accounted for 10% or more of Cadence’s total receivables. As of September 27, 2014, approximately 48% of Cadence’s total receivables were attributable to the ten customers with the largest balances of total receivables. As of December 28, 2013, approximately 47% of Cadence’s total receivables were attributable to the ten customers with the largest balances of total receivables.

NOTE 7. FAIR VALUE
Inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Cadence’s market assumptions. These two types of inputs have created the following fair value hierarchy:
Level 1 – Quoted prices for identical instruments in active markets;
Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
This hierarchy requires Cadence to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. Cadence recognizes transfers between levels of the hierarchy based on the fair values of the respective financial instruments at the end of the reporting period in which the transfer occurred. There were no transfers between levels of the fair value hierarchy during the three and nine months ended September 27, 2014.

11


On a quarterly basis, Cadence measures at fair value certain financial assets and liabilities. The fair value of financial assets and liabilities was determined using the following levels of inputs as of September 27, 2014 and December 28, 2013:
 
Fair Value Measurements as of September 27, 2014:
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
296,855

 
$
296,855

 
$

 
$

Short-term investments:

 
 
 
 
 
 
Corporate debt securities
36,725

 

 
36,725

 

Bank certificates of deposit
25,906

 

 
25,906

 

United States Treasury securities
19,655

 
19,655

 

 

United States government agency securities
8,357

 
8,357

 

 

Commercial paper
1,995

 

 
1,995

 

Marketable equity securities
2,332

 
2,332

 

 

Trading securities held in Non-Qualified Deferred Compensation, or NQDC, trust
25,425

 
25,425

 

 

2015 Notes Hedges
452,498

 

 
452,498

 

Total Assets
$
869,748

 
$
352,624

 
$
517,124

 
$

 
 
 
 
 
 
 
 
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Liabilities
 
2015 Notes Embedded Conversion Derivative
452,498

 

 
452,498

 

Foreign currency exchange contracts
1,730

 

 
1,730

 

Total Liabilities
$
454,228

 
$

 
$
454,228

 
$

 
 
 
 
 
 
 
 

12


 
Fair Value Measurements as of December 28, 2013:
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets
 
Cash equivalents:


 
 
 
 
 
 
Money market funds
$
345,872

 
$
345,872

 
$

 
$

Bank certificates of deposit
2,300

 

 
2,300

 

Short-term investments:
 
 
 
 
 
 
 
Corporate debt securities
37,441

 

 
37,441

 

Bank certificates of deposit
20,308

 

 
20,308

 

United States Treasury securities
24,246

 
24,246

 

 

United States government agency securities
10,223

 
10,223

 

 

Commercial paper
2,493

 

 
2,493

 

Marketable equity securities
2,077

 
2,077

 

 

Trading securities held in NQDC trust
23,960

 
23,960

 

 

2015 Notes Hedges
306,817

 

 
306,817

 

Foreign currency exchange contracts
262

 

 
262

 

Total Assets
$
775,999

 
$
406,378

 
$
369,621

 
$

 
 
 
 
 
 
 
 
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Liabilities
 
Acquisition-related contingent consideration
$
4,091

 
$

 
$

 
$
4,091

2015 Notes Embedded Conversion Derivative
306,817

 

 
306,817

 

Total Liabilities
$
310,908

 
$

 
$
306,817

 
$
4,091

Level 1 Measurements
Cadence’s cash equivalents held in money market funds, available-for-sale United States Treasury securities, United States government agency securities, marketable equity securities and the trading securities held in Cadence’s NQDC trust are measured at fair value using level 1 inputs.
Level 2 Measurements
The 2015 Notes Hedges and the 2015 Notes Embedded Conversion Derivative are measured at fair value using level 1 and level 2 inputs. These instruments are not actively traded and are valued using an option pricing model that uses observable market data for all inputs, such as implied volatility of Cadence’s common stock, risk-free interest rate and other factors.
Cadence’s available-for-sale corporate debt securities, bank certificates of deposit and commercial paper are measured at fair value using level 2 inputs. Cadence obtains the fair values of its level 2 available-for-sale securities from a professional pricing service and validates the fair values by assessing the pricing methods and inputs and by comparing the fair values to another independent source.
The fair values of Cadence’s 2015 Notes, which differ from their carrying values, are influenced by interest rates and Cadence’s stock price and stock price volatility and are determined by prices for the 2015 Notes observed in market trading, which are level 2 inputs.
Cadence’s foreign currency exchange contracts are measured at fair value using observable foreign currency exchange rates.

13


Level 3 Measurements
The liabilities included in level 3 represent the fair value of contingent consideration associated with certain of Cadence’s acquisitions. Cadence makes estimates regarding the fair value of contingent consideration liabilities on the acquisition date and at the end of each reporting period until the contingency is resolved. The fair value of these arrangements is determined by calculating the net present value of the expected payments using significant inputs that are not observable in the market, including revenue projections and discount rates consistent with the level of risk of achievement. The fair value of these contingent consideration arrangements is affected most significantly by the changes in the revenue projections, but is also impacted by the discount rate used to adjust the outcomes to their present values. If the revenue projections increase or decrease, the fair value of the contingent consideration will increase or decrease accordingly, in amounts that will vary based on the amounts and timing of the projected revenues, the timing of the expected payments and the discount rate used to calculate the present value of the expected payments. Cadence used a discount rate of 11% to value its contingent consideration liabilities as of December 28, 2013. Cadence believes that its estimates and assumptions are reasonable, but significant judgment is involved.
Changes in the fair value of contingent consideration liabilities subsequent to the acquisition are recorded in general and administrative expense in the condensed consolidated income statements.
The following table summarizes the level 3 activity for the nine months ended September 27, 2014:
 
(In thousands)
Balance as of December 28, 2013
$
4,091

Payments
(2,329
)
Adjustments
(1,762
)
Balance as of September 27, 2014
$

Cadence acquired intangible assets, including in-process technology, of $93.0 million in connection with its acquisition of Jasper. The fair value of the intangible assets acquired was determined using the income approach and using level 3 inputs. Key assumptions include the level and timing of expected future cash flows, conditions and demands specific to IP solutions, discount rates consistent with the level of risk and the economy in general. The fair value of these intangible assets was affected most significantly by the projected income associated with the intangible assets and the anticipated timing of the projected income, but was also impacted by the discount rate used to adjust the outcomes to their present values. Cadence used discount rates ranging from 13% to 17% to value the intangible assets acquired.
As part of the Jasper acquisition, Cadence also assumed obligations related to deferred revenue of $11.9 million, which was estimated using the cost build-up approach. The cost build-up approach determines fair value using estimates of the costs required to fulfill the contracted obligations plus an assumed profit of 25%. The total costs including the assumed profit were adjusted to present value using a discount rate of approximately 3.25%. The resulting fair value approximates the amount that Cadence would be required to pay a third party to assume the obligation. The fair value of the deferred revenue obligation was affected most significantly by the estimated costs required to support the obligation, but was also affected by the assumed profit and the discount rate.
Cadence believes that its estimates and assumptions related to the fair value of its acquired intangible assets and deferred revenue obligations are reasonable, but significant judgment is involved.

NOTE 8. CASH, CASH EQUIVALENTS AND INVESTMENTS
Cadence’s cash, cash equivalents and short-term investments at fair value as of September 27, 2014 and December 28, 2013 were as follows:
 
As of
 
September 27,
2014
 
December 28,
2013
 
(In thousands)
Cash and cash equivalents
$
500,483

 
$
536,260

Short-term investments
94,970

 
96,788

Cash, cash equivalents and short-term investments
$
595,453

 
$
633,048


14


Cash and Cash Equivalents
Cadence considers all highly liquid investments with original maturities of three months or less on the date of purchase to be cash equivalents. The amortized cost of Cadence’s cash equivalents approximates fair value. The following table summarizes Cadence’s cash and cash equivalents at fair value as of September 27, 2014 and December 28, 2013:
 
As of
 
September 27,
2014
 
December 28,
2013
 
(In thousands)
Cash and interest bearing deposits
$
203,628

 
$
188,088

Money market funds
296,855

 
345,872

Bank certificates of deposit

 
2,300

Total cash and cash equivalents
$
500,483

 
$
536,260

Short-Term Investments
The following tables summarize Cadence’s short-term investments as of September 27, 2014 and December 28, 2013:
 
As of September 27, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Corporate debt securities
$
36,724

 
$
18

 
$
(17
)
 
$
36,725

Bank certificates of deposit
25,900

 
7

 
(1
)
 
25,906

United States Treasury securities
19,644

 
17

 
(6
)
 
19,655

United States government agency securities
8,349

 
8

 

 
8,357

Commercial paper
1,994

 
1

 

 
1,995

Marketable debt securities
92,611

 
51

 
(24
)
 
92,638

Marketable equity securities
1,817

 
515

 

 
2,332

Total short-term investments
$
94,428

 
$
566

 
$
(24
)
 
$
94,970

 
As of December 28, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Corporate debt securities
$
37,422

 
$
30

 
$
(11
)
 
$
37,441

Bank certificates of deposit
20,300

 
9

 
(1
)
 
20,308

United States Treasury securities
24,219

 
28

 
(1
)
 
24,246

United States government agency securities
10,212

 
11

 

 
10,223

Commercial paper
2,492

 
1

 

 
2,493

Marketable debt securities
94,645

 
79

 
(13
)
 
94,711

Marketable equity securities
1,817

 
260

 

 
2,077

Total short-term investments
$
96,462

 
$
339

 
$
(13
)
 
$
96,788

As of September 27, 2014, no securities held by Cadence had been in an unrealized loss position for greater than five months.

15


The amortized cost and estimated fair value of marketable debt securities included in short-term investments as of September 27, 2014, by contractual maturity, are shown in the table below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.
 
Amortized
Cost
 
Fair
Value
 
(In thousands)
Due in less than one year
$
52,401

 
$
52,423

Due in one to three years
40,210

 
40,215

Total marketable debt securities included in short-term investments
$
92,611

 
$
92,638

Realized gains and losses from the sale of marketable debt and equity securities are recorded in other income (expense), net in the condensed consolidated income statements.
Non-Marketable Investments
Cadence’s non-marketable investments generally consist of voting preferred stock or convertible debt of privately held companies and are included in other assets on Cadence’s condensed consolidated balance sheets. If Cadence determines that it has the ability to exercise significant influence over the issuer, which may include considering whether the investments are in-substance common stock, the investment is accounted for using the equity method.
Cadence records in the condensed consolidated income statements as other income (expense), net, realized gains and losses on non-marketable investments, write downs related to cost method investments due to other-than-temporary declines in value, and the proportional share of issuers’ gains or losses related to equity method investments. The equity method income or loss recorded by Cadence is based on its percentage ownership in the issuer.
Cadence’s non-marketable investments as of September 27, 2014 and December 28, 2013 were as follows:
 
As of
 
September 27,
2014
 
December 28,
2013
 
(In thousands)
Cost method
$
1,081

 
$
3,038

Equity method
5,091

 
3,639

Total non-marketable investments
$
6,172

 
$
6,677



NOTE 9. RESTRUCTURING AND OTHER CHARGES
Cadence has initiated various restructuring plans in an effort to operate more efficiently. These restructuring plans were primarily comprised of severance payments and termination benefits related to headcount reductions and estimated lease losses related to facilities vacated under the restructuring plans. During the three months ended September 27, 2014, Cadence initiated a restructuring plan, or the 2014 Restructuring Plan, and recorded restructuring and other charges of approximately $11.0 million related to severance payments and termination benefits and impairment of certain property, plant and equipment. As of September 27, 2014, total liabilities related to the 2014 Restructuring Plan were $7.4 million. Cash payments for severance and related benefits for the 2014 Restructuring Plan will be made through the first quarter of fiscal 2016.
The remaining accrual for Cadence’s restructuring plans is recorded in the condensed consolidated balance sheet as follows:
 
As of
 
September 27, 2014
 
(In thousands)
Accounts payable and accrued liabilities
$
9,144

Other long-term liabilities
2,523

Total accrued
$
11,667


16


The following table presents activity relating to Cadence’s restructuring plans during the nine months ended September 27, 2014:
 
Severance
and
Benefits
 
Excess
Facilities
 
Impairment of Property plant and equipment
 
Total
 
(In thousands)
Balance, December 28, 2013
$
10,672

 
$
3,552

 
$

 
$
14,224

Restructuring and other charges, net
8,402

 
440

 
2,555

 
11,397

Non-cash charges

 

 
(2,555
)
 
(2,555
)
Cash payments
(10,276
)
 
(828
)
 

 
(11,104
)
Effect of foreign currency translation
(116
)
 
(179
)
 

 
(295
)
Balance, September 27, 2014
$
8,682

 
$
2,985

 
$

 
$
11,667


NOTE 10. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income during the period by the weighted average number of shares of common stock outstanding during that period, less unvested restricted stock awards. Diluted net income per share is impacted by equity instruments considered to be potential common shares, if dilutive, computed using the treasury stock method of accounting.
The calculations for basic and diluted net income per share for the three and nine months ended September 27, 2014 and September 28, 2013 are as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
 
(In thousands, except per share amounts)
Net income
$
37,535

 
$
38,500

 
$
93,868

 
$
126,538

Weighted average common shares used to calculate basic net income per share
284,462

 
278,977

 
283,141

 
277,034

Convertible notes

 
9

 

 
11

2015 Warrants
17,580

 
11,587

 
15,070

 
11,042

Stock-based awards
7,953

 
6,385

 
7,384

 
6,444

Weighted average common shares used to calculate diluted net income per share
309,995

 
296,958

 
305,595

 
294,531

Net income per share - basic
$
0.13

 
$
0.14

 
$
0.33

 
$
0.46

Net income per share - diluted
$
0.12

 
$
0.13

 
$
0.31

 
$
0.43

The following table presents shares of Cadence’s common stock outstanding for the three and nine months ended September 27, 2014 and September 28, 2013 that were excluded from the computation of diluted net income per share because the effect of including these shares in the computation of diluted net income per share would have been anti-dilutive:
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
 
(In thousands)
2013 Warrants

 
6,830

 

 
6,830

Options to purchase shares of common stock
1,403

 
5,639

 
3,479

 
6,048

Non-vested shares of restricted stock
53

 
3,280

 
24

 
1,099

Total potential common shares excluded
1,456

 
15,749

 
3,503

 
13,977



17


NOTE 11. STOCK REPURCHASE PROGRAMS
In February 2008, Cadence's Board of Directors authorized Cadence to repurchase shares of its common stock in the open market with a value of up to $500.0 million in the aggregate. In August 2008, Cadence's Board of Directors authorized Cadence to repurchase shares of its common stock in the open market with a value of up to an additional $500.0 million in the aggregate. As of September 27, 2014, $751.8 million remained under these authorizations.
In January 2014, Cadence's Board of Directors approved a two-year plan to repurchase shares of its common stock of up to an aggregate of $100.0 million under the 2008 authorizations. In July 2014, Cadence's Board of Directors replaced the aggregate $100.0 million stock repurchase plan with a new two-year plan to repurchase shares of Cadence common stock of up to an aggregate of $300.0 million under the 2008 authorizations, beginning with the third quarter of fiscal 2014.
The shares repurchased under Cadence’s 2008 authorizations and the total cost of repurchased shares, including commissions, during the three and nine months ended September 27, 2014 and September 28, 2013 were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Shares repurchased
2,154

 

 
3,748

 

Total cost of repurchased shares
$
37,543

 
$

 
$
62,575

 
$



NOTE 12. OTHER COMPREHENSIVE INCOME
Cadence’s other comprehensive income is comprised of foreign currency translation gains and losses, changes in defined benefit plan liabilities, and changes in unrealized holding gains and losses on available-for-sale securities, net of reclassifications for realized gains and losses, as presented in Cadence’s condensed consolidated statements of comprehensive income.
Accumulated other comprehensive income was comprised of the following as of September 27, 2014, and December 28, 2013:
 
As of
 
September 27,
2014
 
December 28,
2013
 
(In thousands)
Foreign currency translation gain
$
27,583

 
$
27,183

Changes in defined benefit plan liabilities
(2,780
)
 
(3,218
)
Unrealized holding gains on available-for-sale securities
541

 
346

Total accumulated other comprehensive income
$
25,344

 
$
24,311

For the three and nine months ended September 27, 2014 and September 28, 2013 there were no significant amounts reclassified from accumulated other comprehensive income to net income.

NOTE 13. CONTINGENCIES
Legal Proceedings
From time to time, Cadence is involved in various disputes and litigation that arise in the ordinary course of business. These include disputes and lawsuits related to intellectual property, indemnification obligations, mergers and acquisitions, licensing, contracts, distribution arrangements and employee relations matters. At least quarterly, Cadence reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount or the range of loss can be estimated, Cadence accrues a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on Cadence’s judgments using the best information available at the time. As additional information becomes available, Cadence reassesses the potential liability related to pending claims and litigation matters and may revise estimates.

18


Other Contingencies
Cadence provides its customers with a warranty on sales of emulation hardware products, generally for a 90-day period. Cadence did not incur any significant costs related to warranty obligations during the three and nine months ended September 27, 2014 or September 28, 2013.
Cadence’s product license and services agreements typically include a limited indemnification provision for claims from third parties relating to Cadence’s intellectual property. If the potential loss from any indemnification claim is considered probable and the amount or the range of loss can be estimated, Cadence accrues a liability for the estimated loss. The indemnification is generally limited to the amount paid by the customer. Cadence did not incur any significant losses from indemnification claims during the three and nine months ended September 27, 2014 or September 28, 2013.

NOTE 14. OTHER INCOME (EXPENSE), NET
Cadence’s other income (expense), net for the three and nine months ended September 27, 2014 and September 28, 2013 was as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
 
(In thousands)
Interest income
$
507

 
$
366

 
$
1,490

 
$
1,275

Gains on marketable debt and equity securities, net
615

 
1,363

 
682

 
1,339

Gains (losses) on non-marketable investments, net
(479
)
 
(11
)
 
1,473

 
1,102

Gains (losses) on securities in NQDC trust
(104
)
 
206

 
3,005

 
2,057

Gains (losses) on foreign exchange
935

 
489

 
(235
)
 
1,476

Write-down of non-marketable investments
(1,956
)
 

 
(1,956
)
 
(464
)
Other income (expense), net
65

 
122

 
141

 
(57
)
Total other income (expense), net
$
(417
)
 
$
2,535

 
$
4,600

 
$
6,728


NOTE 15. SEGMENT REPORTING
Segment reporting is based on the “management approach,” following the method that management organizes the company’s reportable segments for which separate financial information is made available to, and evaluated regularly by, the chief operating decision maker in allocating resources and in assessing performance. Cadence’s chief operating decision maker is its President and Chief Executive Officer, or CEO, who reviews Cadence’s consolidated results as one reportable segment. In making operating decisions, the CEO primarily considers consolidated financial information, accompanied by disaggregated information about revenues by geographic region.
Outside the United States, Cadence markets and supports its products and services primarily through its subsidiaries. Revenue is attributed to geography based upon the country in which the product is used or services are delivered. Long-lived assets are attributed to geography based on the country where the assets are located.

19


The following table presents a summary of revenue by geography for the three and nine months ended September 27, 2014 and September 28, 2013:
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
 
(In thousands)
Americas:
 
 
 
 
 
 
 
United States
$
179,883

 
$
168,125

 
$
505,084

 
$
476,525

Other Americas
6,065

 
7,212

 
17,900

 
17,393

Total Americas
185,948

 
175,337

 
522,984

 
493,918

Asia
89,644

 
73,081

 
264,946

 
215,629

Europe, Middle East and Africa
81,923

 
72,376

 
241,529

 
229,053

Japan
42,981

 
45,853

 
128,375

 
144,794

Total
$
400,496

 
$
366,647

 
$
1,157,834

 
$
1,083,394

The following table presents a summary of long-lived assets by geography as of September 27, 2014 and December 28, 2013: 
 
As of
 
September 27,
2014
 
December 28,
2013
 
(In thousands)
Americas:
 
 
 
United States
$
201,408

 
$
207,694

Other Americas
560

 
294

Total Americas
201,968

 
207,988

Asia
22,197

 
23,508

Europe, Middle East and Africa
6,361

 
6,326

Japan
811

 
893

Total
$
231,337

 
$
238,715


NOTE 16. SUBSEQUENT EVENT
On October 9, 2014, Cadence issued $350.0 million aggregate principal amount of 4.375% Senior Notes due 2024, or the 2024 Notes, due October 15, 2024. Cadence received estimated net proceeds of $342.4 million million from issuance of the 2024 Notes, net of a discount of $1.4 million and issuance costs of approximately $6.2 million. Both the discount and issuance costs will be amortized to interest expense over the term of the 2024 Notes using the effective interest method. Interest will be payable in cash semi-annually commencing on April 15, 2015. The 2024 Notes are unsecured and rank equal in right of payment to all of Cadence's existing and future senior indebtedness. Cadence may redeem the 2024 Notes, in whole or in part, at any time, subject to a make whole premium. In addition, upon the occurrence of certain change of control triggering events, Cadence may be required to repurchase the 2024 Notes at a price equal to 101% of their principal amount plus accrued and unpaid interest to the date of repurchase. The 2024 Notes contain restrictive covenants that limit Cadence's ability to incur certain liens, to enter into certain sale and leaseback transactions and to consolidate, merge or sell all or substantially all of its assets, subject to a number of qualifications and exceptions.



20




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q, or this Quarterly Report, and in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 28, 2013. This Quarterly Report contains statements that are not historical in nature, are predictive, or that depend upon or refer to future events or conditions or contain forward-looking statements. Statements including, but not limited to, statements regarding the extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of our products, statements regarding our reliance on third parties and other statements using words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “plans,” “projects,” “should,” “will” and “would,” and words of similar import and the negatives thereof, constitute forward-looking statements. These statements are predictions based upon our current expectations about future events. Actual results could vary materially as a result of certain factors, including, but not limited to, those expressed in these statements. We refer you to the “Risk Factors,” “Results of Operations,” “Disclosures About Market Risk,” and “Liquidity and Capital Resources” sections contained in this Quarterly Report, and the risks discussed in our other Securities Exchange Commission, or SEC, filings, which identify important risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements.
We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. We do not intend, and undertake no obligation, to update these forward-looking statements.
Overview
We develop solutions that our customers use to design increasingly small and complex integrated circuits, or ICs, and electronic devices. Our solutions are designed to help our customers reduce the time to bring an IC or electronic device to market and to reduce their design, development and manufacturing costs. Our product offerings include electronic design automation, or EDA, software, emulation hardware, and two categories of intellectual property, or IP, commonly referred to as verification IP, or VIP, and design IP. We provide maintenance for our software, emulation hardware, and IP product offerings. We also provide engineering services related to methodology, education, hosted design solutions and design services for advanced ICs and development of custom IP. These services help our customers manage and accelerate their electronics product development processes.
Our customers include semiconductor and electronics systems companies that deliver a wide range of electronics products in a number of market segments such as mobile devices, communications, cloud and data center infrastructure, personal computers and other devices. The renewal of many of our customer contracts and our customers’ decisions to make new purchases from us are dependent upon our customers’ commencement of new design projects. As a result, our business is significantly influenced by our customers’ business outlook and investment in new designs and products.
The markets our customers serve are sensitive to product price, performance and the time it takes to bring their products to market. In order to be competitive and profitable in these markets, our customers demand high levels of productivity from their design teams, better predictability in shorter development schedules, high performance products and lower development and manufacturing costs. Semiconductor and electronics systems companies are responding to these challenges and users’ demand for increased functionality and smaller devices by combining subsystems - such as radio frequency, or RF, wireless communication, signal processing, microprocessors and memory controllers - onto a single silicon chip, creating a system-on-chip, or SoC, or combining multiple chips into a single chip package in a format referred to as system-in-package, or SiP. The trend toward subsystem integration has required these chip makers to find solutions to challenges previously addressed by system companies, such as verifying system-level functionality and hardware-software interoperability, and has driven the need for incorporation of preverified commercial IP into these systems.
Our strategy is to provide our customers with the ability to address the broad range of issues that arise at the silicon, SoC, and system levels. Our offerings address many of the challenges associated with developing unique silicon circuitry, integrating that circuitry with design IP developed by us or third parties to create SoCs, designing the packaging and board-level interconnect which links ICs and SoCs, and combining the resulting hardware with software to create electronic systems.

21


Significant issues that our customers face in creating their products include reducing power consumption, manufacturing microscopic circuitry, verifying device functionality and achieving technical performance targets, all while meeting aggressive time-to-market and cost requirements. Providers of EDA and IP solutions must deliver products that address these technical challenges while improving the productivity, predictability, reliability and profitability of the design processes and products of their customers.
Our products are engineered to improve our customers’ design productivity and design quality by providing a comprehensive set of EDA solutions, emulation hardware and a differentiated portfolio of design IP and VIP. Product and maintenance revenue includes fees from licenses to use our software and IP, from sales and leases of our emulation hardware products and from royalties generated by our customers’ shipment of their products containing certain types of our IP.
We combine our products and technologies into categories related to major design activities:
Functional Verification, including Emulation Hardware;
Digital IC Design and Signoff;
Custom IC Design;
System Interconnect and Analysis; and
IP.
We have realigned these categories in the current year to better reflect our business objectives. As a result of the realignment, our Design for Manufacturing, or DFM, products are now categorized together with Digital IC Design and Signoff. We have also established a stand-alone category for our IP offerings, which includes design IP and VIP. The product category that was formerly called System Interconnect Design has been renamed System Interconnect and Analysis, to better reflect the growing system analysis component in this category. All prior periods presented have been conformed to the current period presentation.
The products and technologies included in these categories are combined with ready-to-use packages of technologies assembled from our broad portfolio of IP and other associated components that provide comprehensive solutions for low power, mixed signal and designs at smaller geometries referred to as advanced process nodes, as well as popular designs based on design IP owned and licensed by other companies such as ARM Holdings plc. These solutions are marketed to users who specialize in areas such as system design and verification, functional verification, logic design, digital implementation, custom IC design and verification, and printed circuit board, or PCB, IC package and SiP design and analysis.
The major Cadence® design and verification platforms are branded as Incisive® functional verification, Virtuoso® custom IC design, Encounter® digital IC design and Allegro® system interconnect design. For additional information about our products, see the discussion in Item 1, “Business,” under the heading “Products and Product Strategy,” in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013.
During the second quarter of fiscal 2013, we acquired Tensilica, Inc., or Tensilica, a privately held provider of configurable dataplane processing units, and Cosmic Circuits Private Limited, or Cosmic, a privately held provider of intellectual property used in system-on-chip design. These acquisitions, along with other acquired technology and internal development, expanded our design IP offerings, enabling us to offer customized IP as well as broader analog and mixed signal IP solutions to our customers.
During the first quarter of fiscal 2014, we acquired Forte Design Systems, a provider of SystemC-based high-level synthesis, or HLS, and arithmetic IP. During the second quarter of fiscal 2014, we acquired Jasper Design Automation, Inc., a leading provider of high-level formal analysis solutions. These acquisitions expanded the capabilities and differentiation of the Cadence System Development Suite, strengthening our offerings for the fast development and verification of advanced design IP.
We have identified certain items that management uses as performance indicators to manage our business, including revenue, certain elements of operating expenses and cash flow from operations, and we describe these items further below under the heading “Results of Operations” and “Liquidity and Capital Resources.”
Critical Accounting Estimates
In preparing our condensed consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income and net income, as well as on the value of certain assets and liabilities on our condensed consolidated balance sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. At least quarterly, we evaluate our assumptions, judgments and estimates, and make changes as deemed necessary. Historically, our assumptions, judgments and estimates relative to our critical accounting estimates have not differed materially from actual results. For further information about our critical accounting estimates, see the discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Estimates” in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

22


New Accounting Standard
On May 28, 2014, the Financial Accounting Standards Board issued a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under United States generally accepted accounting principles. The updated standard will become effective for us in the first quarter of fiscal 2017 and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
Results of Operations
Financial results for the three and nine months ended September 27, 2014, as compared to the three and nine months ended September 28, 2013, reflect increases in:
our product and maintenance revenue, primarily because of increased business levels and increased revenue recognized from bookings in prior periods and incremental revenue from our acquisitions;
product and maintenance related costs consisting of costs associated with our emulation hardware and amortization of technology-related and maintenance-related acquired intangibles;
employee-related costs, primarily consisting of costs related to hiring additional employees, increased compensation for existing employees and incremental costs related to employees added from our fiscal 2014 and 2013 acquisitions;
stock-based compensation;
severance and other termination costs primarily associated with a voluntary early retirement program we offered to certain of our employees during the nine months ended September 27, 2014;
restructuring charges due to restructuring activities initiated during the three months ended September 27, 2014;
amortization of acquired intangibles resulting from our fiscal 2014 and 2013 acquisitions; and
our quarterly and year to date provisions for income taxes.
Revenue
We primarily generate revenue from licensing our software and IP, selling or leasing our emulation hardware technology, providing maintenance for our software, emulation hardware and IP, providing engineering services and earning royalties generated from the use of our IP. The timing of our revenue is significantly affected by the mix of software, emulation hardware and IP products in the bookings executed in any given period and whether the revenue for such bookings is recognized over multiple periods or up front, upon completion of delivery.
We seek to achieve a consistent revenue mix such that approximately 90% of our revenue is recurring in nature, and the remainder of the resulting revenue is recognized up-front, upon completion of delivery. Our ability to achieve this mix in any single fiscal period may be impacted primarily by hardware sales, because revenue for hardware sales is generally recognized up front in the period in which delivery is completed.
For an additional description of the impact of emulation hardware sales on the timing of revenue recognition, see the discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Estimates – Revenue Recognition” in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013.
Revenue by Period
The following table shows our revenue for the three months ended September 27, 2014 and September 28, 2013 and the change in revenue between periods:
 
Three Months Ended
 
Change
 
September 27,
2014
 
September 28,
2013
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance
$
374.1

 
$
341.6

 
$
32.5

 
10
%
Services
26.4

 
25.0

 
1.4

 
5
%
Total revenue
$
400.5

 
$
366.6

 
$
33.9

 
9
%

23


The following table shows our revenue for the nine months ended September 27, 2014 and September 28, 2013 and the change in revenue between periods:
 
Nine Months Ended
 
Change
 
September 27,
2014
 
September 28,
2013
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance
$
1,085.9

 
$
1,007.9

 
$
78.0

 
8
 %
Services
71.9

 
75.5

 
(3.6
)
 
(5
)%
Total revenue
$
1,157.8

 
$
1,083.4

 
$
74.4

 
7
 %
Product and maintenance revenue increased during the three and nine months ended September 27, 2014, as compared to the three and nine months ended September 28, 2013, primarily because of increased business levels, increased revenue recognized from bookings in prior periods and incremental revenue recognized from our fiscal 2013 acquisitions. Services revenue may fluctuate from period to period based on demand for, and our resources to fulfill, our services and customized IP offerings.
No single customer accounted for 10% or more of total revenue during the three and nine months ended September 27, 2014 or September 28, 2013.
Revenue by Product Group
The following table shows the percentage of revenue contributed by each of our five product groups for the past five consecutive quarters:
 
Three Months Ended
 
September 28,
2013
 
December 28,
2013
 
March 29,
2014
 
June 28,
2014
 
September 27,
2014
Functional Verification, including Emulation Hardware
24
%
 
25
%
 
23
%
 
21
%
 
23
%
Digital IC Design and Signoff
29
%
 
29
%
 
30
%
 
30
%
 
29
%
Custom IC Design
28
%
 
26
%
 
27
%
 
28
%
 
27
%
System Interconnect and Analysis
10
%
 
10
%
 
10
%
 
11
%
 
10
%
IP
9
%
 
10
%
 
10
%
 
10
%
 
11
%
Total
100
%
 
100
%
 
100
%
 
100
%
 
100
%
As described in Note 2 in the notes to consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013, certain of our licensing arrangements allow customers the ability to remix among software products. Additionally, we have arrangements with customers that include a combination of our products, with the actual product selection and number of licensed users to be determined at a later date. For these arrangements, we estimate the allocation of the revenue to product groups based upon the expected usage of our products. The actual usage of our products by these customers may differ and, if that proves to be the case, the revenue allocation in the table above would differ.
Revenue by Geography
 
Three Months Ended
 
Change
 
September 27,
2014
 
September 28,
2013
 
Amount
 
Percentage
 
(In millions, except percentages)
United States
$
179.9

 
$
168.1

 
$
11.8

 
7
 %
Other Americas
6.1

 
7.2

 
(1.1
)
 
(15
)%
Asia
89.6

 
73.1

 
16.5

 
23
 %
Europe, Middle East and Africa
81.9

 
72.4

 
9.5

 
13
 %
Japan
43.0

 
45.8

 
(2.8
)
 
(6
)%
Total revenue
$
400.5

 
$
366.6

 
$
33.9

 
9
 %

24


 
 
Nine Months Ended
 
Change
 
September 27,
2014
 
September 28,
2013
 
Amount
 
Percentage
 
(In millions, except percentages)
United States
$
505.1

 
$
476.5

 
$
28.6

 
6
 %
Other Americas
17.9

 
17.4

 
0.5

 
3
 %
Asia
264.9

 
215.6

 
49.3

 
23
 %
Europe, Middle East and Africa
241.5

 
229.1

 
12.4

 
5
 %
Japan
128.4

 
144.8

 
(16.4
)
 
(11
)%
Total revenue
$
1,157.8

 
$
1,083.4

 
$
74.4

 
7
 %
Most of our revenue is transacted in the United States dollar. However, certain revenue transactions are denominated in foreign currencies, primarily the Japanese yen, and we recognize reduced revenue from those contracts in periods when the Japanese yen weakens in value against the United States dollar and additional revenue from those contracts in periods when the Japanese yen strengthens against the United States dollar. For an additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see the discussion under Item 3, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”
Revenue for Asia increased during the three and nine months ended September 27, 2014, as compared to the three and nine months ended September 28, 2013, primarily due to increases in revenue from our software business and emulation hardware installations.
Revenue for Japan decreased during the three and nine months ended September 27, 2014, as compared to the three and nine months ended September 28, 2013, primarily due to business conditions facing our Japanese customers. Because of these conditions, we expect lower revenue for Japan during fiscal 2014, as compared to fiscal 2013.
For the primary factors contributing to our increase in revenue in other geographies, see the general description under “Revenue by Period,” above.
Revenue by Geography as a Percent of Total Revenue
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
United States
45
%
 
46
%
 
44
%
 
44
%
Other Americas
1
%
 
2
%
 
1
%
 
2
%
Asia
22
%
 
20
%
 
23
%
 
20
%
Europe, Middle East and Africa
21
%
 
20
%
 
21
%