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EX-32.01 - EXHIBIT-32.01 - CADENCE DESIGN SYSTEMS INCex3201cdns10032015.htm
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EX-31.01 - EXHIBIT-31.01 - CADENCE DESIGN SYSTEMS INCex3101cdns10032015.htm
EX-31.02 - EXHIBIT-31.02 - CADENCE DESIGN SYSTEMS INCex3102cdns10032015.htm
 
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 October 3, 2015
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 October 3, 2015, approximately 297,496,000 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)
 
 
As of
 
October 3,
2015
 
January 3,
2015
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
616,091

 
$
932,161

Short-term investments
95,104

 
90,445

Receivables, net
133,665

 
122,492

Inventories
57,690

 
56,394

2015 notes hedges

 
523,930

Prepaid expenses and other
139,534

 
126,313

Total current assets
1,042,084

 
1,851,735

Property, plant and equipment, net of accumulated depreciation of $577,254 and $552,551, respectively
227,689

 
230,112

Goodwill
552,411

 
553,767

Acquired intangibles, net of accumulated amortization of $200,954 and $154,814, respectively
312,405

 
360,932

Long-term receivables
1,568

 
3,644

Other assets
194,983

 
209,366

Total assets
$
2,331,140

 
$
3,209,556

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Convertible notes
$

 
$
342,499

2015 notes embedded conversion derivative

 
523,930

Accounts payable and accrued liabilities
194,427

 
225,375

Current portion of deferred revenue
315,220

 
301,287

Total current liabilities
509,647

 
1,393,091

Long-term liabilities:
 
 
 
Long-term portion of deferred revenue
31,234

 
54,726

Long-term debt
348,760

 
348,676

Other long-term liabilities
56,937

 
79,489

Total long-term liabilities
436,931

 
482,891

Commitments and contingencies (Note 12)


 


Stockholders’ equity:
 
 
 
Common stock and capital in excess of par value
1,853,284

 
1,851,427

Treasury stock, at cost
(307,408
)
 
(203,792
)
Accumulated deficit
(154,365
)
 
(326,408
)
Accumulated other comprehensive income (loss)
(6,949
)
 
12,347

Total stockholders’ equity
1,384,562

 
1,333,574

Total liabilities and stockholders’ equity
$
2,331,140

 
$
3,209,556


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
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
Revenue:
 
 
 
 
 
 
 
Product and maintenance
$
396,867

 
$
374,110

 
$
1,165,455

 
$
1,085,928

Services
36,896

 
26,386

 
95,557

 
71,906

Total revenue
433,763

 
400,496

 
1,261,012

 
1,157,834

Costs and expenses:
 
 
 
 
 
 
 
Cost of product and maintenance
41,206

 
36,954

 
114,980

 
116,858

Cost of services
24,005

 
17,125

 
62,571

 
48,733

Marketing and sales
101,950

 
100,387

 
298,880

 
297,321

Research and development
154,627

 
148,744

 
475,597

 
447,882

General and administrative
28,084

 
25,894

 
83,193

 
86,680

Amortization of acquired intangibles
5,687

 
6,316

 
18,037

 
17,105

Restructuring and other charges
303

 
11,027

 
4,164

 
11,397

Total costs and expenses
355,862

 
346,447

 
1,057,422

 
1,025,976

Income from operations
77,901

 
54,049

 
203,590

 
131,858

Interest expense
(4,177
)
 
(7,523
)
 
(24,111
)
 
(22,160
)
Other income (expense), net
1,839

 
(417
)
 
7,967

 
4,600

Income before provision (benefit) for income taxes
75,563

 
46,109

 
187,446

 
114,298

Provision (benefit) for income taxes
(2,061
)
 
8,574

 
15,403

 
20,430

Net income
$
77,624

 
$
37,535

 
$
172,043

 
$
93,868

Net income per share – basic
$
0.27

 
$
0.13

 
$
0.60

 
$
0.33

Net income per share – diluted
$
0.25

 
$
0.12

 
$
0.55

 
$
0.31

Weighted average common shares outstanding – basic
284,818

 
284,462

 
284,880

 
283,141

Weighted average common shares outstanding – diluted
313,186

 
309,995

 
312,899

 
305,595











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
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
Net income
$
77,624

 
$
37,535

 
$
172,043

 
$
93,868

Other comprehensive income (loss), net of tax effects:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(6,449
)
 
(6,428
)
 
(19,867
)
 
400

Changes in unrealized holding gains or losses on available-for-sale securities, net of reclassification adjustment for realized gains and losses
1

 
(400
)
 
13

 
195

Changes in defined benefit plan liabilities
240

 
51

 
558

 
438

Total other comprehensive income (loss), net of tax effects
(6,208
)
 
(6,777
)
 
(19,296
)
 
1,033

Comprehensive income
$
71,416

 
$
30,758

 
$
152,747

 
$
94,901





































See notes to condensed consolidated financial statements.



CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
 
October 3,
2015
 
September 27,
2014
Cash and cash equivalents at beginning of period
$
932,161

 
$
536,260

Cash flows from operating activities:
 
 
 
Net income
172,043

 
93,868

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
88,006

 
84,296

Amortization of debt discount and fees
9,185

 
14,863

Stock-based compensation
67,681

 
60,818

Gain on investments, net
(1,434
)
 
(3,202
)
Deferred income taxes
1,713

 
18,963

Other non-cash items
(69
)
 
6,221

Changes in operating assets and liabilities, net of effect of acquired businesses:
 
 
 
Receivables
(10,100
)
 
(1,858
)
Inventories
(1,861
)
 
(15,796
)
Prepaid expenses and other
(12,451
)
 
(8
)
Other assets
300

 
(38,241
)
Accounts payable and accrued liabilities
(28,154
)
 
(15,623
)
Deferred revenue
(9,207
)
 
(27,231
)
Other long-term liabilities
(20,303
)
 
7,585

Net cash provided by operating activities
255,349

 
184,655

Cash flows from investing activities:
 
 
 
Purchases of available-for-sale securities
(81,300
)
 
(98,392
)
Proceeds from the sale of available-for-sale securities
50,806

 
69,912

Proceeds from the maturity of available-for-sale securities
25,550

 
32,402

Proceeds from the sale of long-term investments
4,510

 

Purchases of property, plant and equipment
(34,093
)
 
(27,958
)
Cash paid in business combinations and asset acquisitions, net of cash acquired

 
(167,248
)
Net cash used for investing activities
(34,527
)
 
(191,284
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility

 
100,000

Payment on revolving credit facility

 
(100,000
)
Payment of convertible notes
(349,999
)
 
(1
)
Payment of convertible notes embedded conversion derivative liability
(530,643
)
 
(1
)
Proceeds from convertible notes hedges
530,643

 
1

Payment of debt issuance costs

 
(322
)
Payment of acquisition-related contingent consideration

 
(1,835
)
Excess tax benefits from stock-based compensation
16,940

 
5,786

Proceeds from issuance of common stock
59,448

 
54,717

Stock received for payment of employee taxes on vesting of restricted stock
(31,795
)
 
(23,648
)
Payments for repurchases of common stock
(213,135
)
 
(62,575
)
Net cash used for financing activities
(518,541
)
 
(27,878
)
Effect of exchange rate changes on cash and cash equivalents
(18,351
)
 
(1,270
)
Decrease in cash and cash equivalents
(316,070
)
 
(35,777
)
Cash and cash equivalents at end of period
$
616,091

 
$
500,483

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
12,134

 
$
5,113

Cash paid for taxes, net
$
23,930

 
$
21,410

Non-cash investing and financing activities:
 
 
 
Available-for-sale securities received from customer
$

 
$
1,695




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 January 3, 2015. 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 October 3, 2015 and January 3, 2015 was as follows:
 
October 3, 2015
 
January 3, 2015
 
(In thousands)
 
Principal
 
Unamortized Discount
 
Carrying Value
 
Principal
 
Unamortized Discount
 
Carrying Value
2015 Notes
$

 
$

 
$

 
$
349,999

 
$
(7,500
)
 
$
342,499

2024 Notes
350,000

 
(1,240
)
 
348,760

 
350,000

 
(1,324
)
 
348,676

Revolving credit facility

 

 

 

 

 

Total outstanding debt
$
350,000

 
$
(1,240
)
 
$
348,760

 
$
699,999

 
$
(8,824
)
 
$
691,175

2015 Notes
In June 2010, Cadence issued $350.0 million principal amount of 2.625% Cash Convertible Senior Notes due June 1, 2015, or the 2015 Notes. During the nine months ended October 3, 2015, Cadence settled the outstanding principal amount of $350.0 million and paid note holders accrued interest of $3.8 million. The 2015 Notes contained a conversion feature, or the 2015 Notes Embedded Conversion Derivative, that entitled the holders of the notes to receive additional cash payments if the notes were converted prior to maturity. During the nine months ended October 3, 2015, Cadence paid $530.6 million to holders of the 2015 notes that converted prior to maturity. Cadence received proceeds of $530.6 million from the 2015 Notes Hedges, which fully offset the additional cash payments associated with the 2015 Notes Embedded Conversion Derivative.
2015 Notes Hedges
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 was due to the holders who elected to convert their notes prior to maturity. As a result of the 2015 Notes Hedges, Cadence’s maximum cash exposure upon conversion or maturity of the 2015 Notes was the remaining principal balance of the notes and accrued interest. The 2015 Notes Hedges expired on June 1, 2015, and were settled in cash.

5


2015 Warrants
At the time of issuance of the 2015 Notes, Cadence entered into separate warrant transactions, or the 2015 Warrants, 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. As a result of the 2015 Warrants, Cadence experiences dilution to its diluted earnings per share when its average closing stock price exceeds $10.78 for any fiscal quarter until all of the warrants have expired. The 2015 Warrants expire daily over a 70-day period between September and December 2015. As they expire, Cadence issues shares of common stock to the purchasers of the 2015 Warrants that represent the value by which the specified daily volume weighted average price of Cadence’s common stock exceeds the strike price of $10.78 stipulated in the warrant agreements. During the three months ended October 3, 2015, approximately 15.2 million of the 2015 warrants expired, requiring Cadence to issue, on a net settlement basis, approximately 7.3 million shares of common stock to the 2015 Warrant counterparties.
2024 Notes
In October 2014, Cadence issued $350.0 million aggregate principal amount of 4.375% Senior Notes due October 15, 2024, or the 2024 Notes. Cadence received net proceeds of $342.4 million from the issuance of the 2024 Notes, net of a discount of $1.4 million and issuance costs of $6.2 million. Both the discount and issuance costs are being amortized to interest expense over the term of the 2024 Notes using the effective interest method. Interest is payable in cash semi-annually in April and October. 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 a redemption price equal to the greater of (a) 100% of the principal amount of the notes to be redeemed and (b) the sum of the present values of the remaining scheduled payments of principal and interest, plus any accrued and unpaid interest, as more particularly described in the indenture governing the 2024 Notes.
The indenture governing the 2024 Notes includes customary representations, warranties and restrictive covenants, including, but not limited to, restrictions on Cadence’s ability to grant liens on assets, enter into sale and lease-back transactions, or merge, consolidate or sell assets, and also includes customary events of default.
Revolving Credit Facility
Cadence maintains a senior unsecured revolving credit facility with a group of lenders led by Bank of America, N.A., as administrative agent. 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. The credit facility, as amended, expires on September 19, 2019 and has no subsidiary guarantors. Any outstanding loans drawn under the credit facility are due at maturity on September 19, 2019. Outstanding borrowings may be paid at any time prior to maturity.
Interest accrues on borrowings under the credit facility at either LIBOR plus a margin between 1.25% and 2.0% per annum or at the 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 October 3, 2015 and January 3, 2015, Cadence had no outstanding balance under the revolving credit facility and was in compliance with all financial covenants.


6


NOTE 3. CASH, CASH EQUIVALENTS AND INVESTMENTS
Cadence’s cash, cash equivalents and short-term investments at fair value as of October 3, 2015 and January 3, 2015 were as follows:
 
As of
 
October 3,
2015
 
January 3,
2015
 
(In thousands)
Cash and cash equivalents
$
616,091

 
$
932,161

Short-term investments
95,104

 
90,445

Cash, cash equivalents and short-term investments
$
711,195

 
$
1,022,606

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 October 3, 2015 and January 3, 2015:
 
As of
 
October 3,
2015
 
January 3,
2015
 
(In thousands)
Cash and interest bearing deposits
$
214,788

 
$
203,665

Money market funds
401,303

 
728,496

Total cash and cash equivalents
$
616,091

 
$
932,161

Short-Term Investments
The following tables summarize Cadence’s short-term investments as of October 3, 2015 and January 3, 2015:
 
As of October 3, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Corporate debt securities
$
34,504

 
$
14

 
$
(16
)
 
$
34,502

Bank certificates of deposit
12,500

 
7

 

 
12,507

United States Treasury securities
36,880

 
100

 

 
36,980

United States government agency securities
6,154

 
2

 

 
6,156

Commercial paper
3,194

 
4

 

 
3,198

Marketable debt securities
93,232

 
127

 
(16
)
 
93,343

Marketable equity securities
1,817

 

 
(56
)
 
1,761

Total short-term investments
$
95,049

 
$
127

 
$
(72
)
 
$
95,104


7


 
As of January 3, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Corporate debt securities
$
34,919

 
$
6

 
$
(31
)
 
$
34,894

Bank certificates of deposit
21,900

 
10

 

 
21,910

United States Treasury securities
19,375

 
12

 
(13
)
 
19,374

United States government agency securities
9,209

 
3

 
(4
)
 
9,208

Commercial paper
3,184

 
4

 
(2
)
 
3,186

Marketable debt securities
88,587

 
35

 
(50
)
 
88,572

Marketable equity securities
1,817

 
56

 

 
1,873

Total short-term investments
$
90,404

 
$
91

 
$
(50
)
 
$
90,445

As of October 3, 2015, no securities held by Cadence had been in an unrealized loss position for more than six months.
The amortized cost and estimated fair value of marketable debt securities included in short-term investments as of October 3, 2015, 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
$
47,058

 
$
47,091

Due in one to three years
46,174

 
46,252

Total marketable debt securities included in short-term investments
$
93,232

 
$
93,343

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.

NOTE 4. 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 nine months ended October 3, 2015.

8



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 October 3, 2015 and January 3, 2015:
 
Fair Value Measurements as of October 3, 2015
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
401,303

 
$
401,303

 
$

 
$

Short-term investments:

 
 
 
 
 
 
Corporate debt securities
34,502

 

 
34,502

 

Bank certificates of deposit
12,507

 

 
12,507

 

United States Treasury securities
36,980

 
36,980

 

 

United States government agency securities
6,156

 
6,156

 

 

Commercial paper
3,198

 

 
3,198

 

Marketable equity securities
1,761

 
1,761

 

 

Trading securities held in Non-Qualified Deferred Compensation, or NQDC, trust
23,605

 
23,605

 

 

Total Assets
$
520,012

 
$
469,805

 
$
50,207

 
$

 
 
 
 
 
 
 
 
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Liabilities
 
Foreign currency exchange contracts
768

 

 
768

 

Total Liabilities
$
768

 
$

 
$
768

 
$

 
 
 
 
 
 
 
 

9


 
 
 
 
 
 
 
 
 
Fair Value Measurements as of January 3, 2015
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets
 
Cash equivalents:


 
 
 
 
 
 
Money market funds
$
728,496

 
$
728,496

 
$

 
$

Short-term investments:
 
 
 
 
 
 
 
Corporate debt securities
34,894

 

 
34,894

 

Bank certificates of deposit
21,910

 

 
21,910

 

United States Treasury securities
19,374

 
19,374

 

 

United States government agency securities
9,208

 
9,208

 

 

Commercial paper
3,186

 

 
3,186

 

Marketable equity securities
1,873

 
1,873

 

 

Trading securities held in NQDC trust
27,034

 
27,034

 

 

2015 Notes Hedges
523,930

 

 
523,930

 

Total Assets
$
1,369,905

 
$
785,985

 
$
583,920

 
$

 
 
 
 
 
 
 
 
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Liabilities
 
2015 Notes Embedded Conversion Derivative
523,930

 

 
523,930

 

Foreign currency exchange contracts
3,163

 

 
3,163

 

Total Liabilities
$
527,093

 
$

 
$
527,093

 
$


NOTE 5. RECEIVABLES, NET
Cadence’s current and long-term receivables balances as of October 3, 2015 and January 3, 2015 were as follows:
 
As of
 
October 3,
2015
 
January 3,
2015
 
(In thousands)
Accounts receivable
$
79,873

 
$
79,410

Unbilled accounts receivable
53,792

 
43,082

Long-term receivables
1,568

 
3,644

Total receivables
$
135,233

 
$
126,136

Less allowance for doubtful accounts

 

Total receivables, net
$
135,233

 
$
126,136

Cadence’s customers are primarily concentrated within the semiconductor and electronics systems industries. As of October 3, 2015, one customer accounted for approximately 13% of Cadence’s total receivables and no other customer accounted for 10% or more of Cadence’s receivables. As of January 3, 2015, no one customer accounted for 10% or more of Cadence’s total receivables. As of October 3, 2015 and January 3, 2015, Cadence’s receivables attributable to the ten customers with the largest balances were approximately 43% of Cadence’s total receivables.


10


NOTE 6. GOODWILL AND ACQUIRED INTANGIBLES
Goodwill
The changes in the carrying amount of goodwill during the nine months ended October 3, 2015 were as follows:
 
Gross Carrying
Amount
 
(In thousands)
Balance as of January 3, 2015
$
553,767

Effect of foreign currency translation
(1,356
)
Balance as of October 3, 2015
$
552,411

Acquired Intangibles, Net
Acquired intangibles as of October 3, 2015 were as follows, excluding intangibles that were fully amortized as of January 3, 2015:
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Acquired
Intangibles, Net
 
(In thousands)
Existing technology
$
328,253

 
$
(114,359
)
 
$
213,894

Agreements and relationships
173,387

 
(81,333
)
 
92,054

Tradenames, trademarks and patents
10,119

 
(5,262
)
 
4,857

Total acquired intangibles with definite lives
511,759

 
(200,954
)
 
310,805

In-process technology
1,600

 

 
1,600

Total acquired intangibles
$
513,359

 
$
(200,954
)
 
$
312,405

In-process technology as of October 3, 2015 consisted of acquired projects that, if completed, will contribute to Cadence’s ability to offer additional software solutions to its customers. As of October 3, 2015, these projects were expected to be complete in three to six months. During the nine months ended October 3, 2015, there were no transfers from in-process technology to existing technology.
Acquired intangibles as of January 3, 2015 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
$
328,325

 
$
(84,822
)
 
$
243,503

Agreements and relationships
175,202

 
(65,512
)
 
109,690

Tradenames, trademarks and patents
10,619

 
(4,480
)
 
6,139

Total acquired intangibles with definite lives
514,146

 
(154,814
)
 
359,332

In-process technology
1,600

 

 
1,600

Total acquired intangibles
$
515,746

 
$
(154,814
)
 
$
360,932

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 October 3, 2015 and September 27, 2014 was as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
 
(In thousands)
Cost of product and maintenance
$
10,107

 
$
10,071

 
$
30,385

 
$
26,260

Amortization of acquired intangibles
5,687

 
6,316

 
18,037

 
17,105

Total amortization of acquired intangibles
$
15,794

 
$
16,387

 
$
48,422

 
$
43,365


11


Estimated amortization expense for intangible assets with definite lives for the following five fiscal years and thereafter is as follows:
 
(In thousands)
2015 – remaining period
$
15,783

2016
57,281

2017
52,596

2018
48,922

2019
42,927

Thereafter
93,296

Total estimated amortization expense
$
310,805



NOTE 7. STOCK-BASED COMPENSATION
Stock-based compensation expense is reflected in Cadence’s condensed consolidated income statements for the three and nine months ended October 3, 2015 and September 27, 2014 as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
 
(In thousands)
Cost of product and maintenance
$
662

 
$
633

 
$
1,789

 
$
1,600

Cost of services
968

 
926

 
2,615

 
2,338

Marketing and sales
5,764

 
5,930

 
16,447

 
15,086

Research and development
12,847

 
11,580

 
35,625

 
30,948

General and administrative
3,876

 
3,808

 
11,205

 
10,846

Total stock-based compensation expense
$
24,117

 
$
22,877

 
$
67,681

 
$
60,818

Cadence had total unrecognized compensation expense, net of estimated forfeitures, related to stock option and restricted stock grants of $167.7 million as of October 3, 2015, which will be recognized over the remaining vesting period. The remaining weighted-average vesting period of unvested awards is 2.2 years.

NOTE 8. INCOME TAXES
Cadence’s provision (benefit) for income taxes for the three and nine months ended October 3, 2015 primarily resulted from federal, state and foreign income taxes on its anticipated fiscal 2015 income, which was offset by $13.8 million of tax benefit recognized during the three months ended October 3, 2015 related to the effective settlement of a tax examination of a Cadence foreign subsidiary. As a result of the settlement, Cadence recognized a tax benefit of $1.2 million from the release of reserves for certain tax positions. The settlement also provided Cadence with additional visibility into when it could expect to utilize certain tax credits, which in turn allowed Cadence to release $12.6 million of valuation allowance on those credits.
Cadence’s provision for income taxes for the three and nine months ended September 27, 2014 is primarily attributable to federal, state and foreign income taxes on its anticipated fiscal 2014 income.
In determining the adequacy of the provision for income taxes, Cadence regularly assesses new information available at each reporting date regarding the potential settlement outcomes of income tax examinations. However, the final outcomes of tax examinations, including the total amount payable or the timing of any such payments, cannot be estimated with certainty.

12


In July 2015, the United States Tax Court, in Altera Corp. et al. v. Commissioner, determined that part of a 2003 Treasury Regulation requiring taxpayers to include stock-based compensation in qualified intercompany cost sharing arrangements is invalid. A final decision has yet to be issued by the Tax Court. The U.S. Department of the Treasury has not withdrawn the regulation, and the Internal Revenue Service may appeal. Cadence has reviewed this case and concluded that no adjustment to the condensed consolidated financial statements is appropriate at this time. Cadence will continue to monitor developments related to the regulation and the potential impact of those developments on the consolidated financial statements.
In July 2015, a Cadence subsidiary located outside of the United States entered into a settlement agreement with tax authorities on its examination of the 2011 to 2013 tax returns. Cadence’s gross unrecognized tax benefits exclusive of interest and penalties decreased by approximately $9.5 million due to the settlement. Cadence’s gross unrecognized tax benefits at October 3, 2015 were $88.9 million, excluding interest and penalties. If the total gross unrecognized tax benefits at October 3, 2015 were recognized in the future, approximately $46.3 million of the total amount would decrease Cadence’s effective tax rate.

NOTE 9. RESTRUCTURING AND OTHER CHARGES
Cadence has initiated various restructuring plans in an effort to better align its resources with its business strategy. These restructuring plans have primarily been comprised of severance payments and termination benefits related to headcount reductions, estimated lease losses related to facilities vacated under the restructuring plans and charges related to assets abandoned as part of the restructuring plans. During the nine months ended October 3, 2015, Cadence initiated a restructuring plan, or the 2015 Restructuring Plan, and recorded restructuring and other charges of approximately $4.1 million related to severance payments and termination benefits. As of October 3, 2015, total liabilities related to the 2015 Restructuring Plan were $0.9 million. Cadence expects to make cash payments for severance and related benefits for the 2015 Restructuring Plan through the fourth quarter of fiscal 2016.
The following table presents activity relating to Cadence’s restructuring plans during the nine months ended October 3, 2015:
 
Severance
and
Benefits
 
Excess
Facilities
 
Other
 
Total
 
(In thousands)
Balance, January 3, 2015
$
4,462

 
$
1,267

 
$
481

 
$
6,210

Restructuring and other charges (credits):
 
 
 
 
 
 
 
2015 Restructuring Plan
4,080

 

 

 
4,080

Prior restructuring plans
(561
)
 
645

 

 
84

Cash payments
(6,841
)
 
(1,394
)
 

 
(8,235
)
Effect of foreign currency translation
(20
)
 
(52
)
 

 
(72
)
Balance, October 3, 2015
$
1,120

 
$
466

 
$
481

 
$
2,067


The remaining accrual for Cadence’s restructuring plans is recorded in the condensed consolidated balance sheet as follows:
 
As of
 
October 3, 2015
 
(In thousands)
Accounts payable and accrued liabilities
$
1,920

Other long-term liabilities
147

Total liabilities
$
2,067



13


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 October 3, 2015 and September 27, 2014 are as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
 
(In thousands, except per share amounts)
Net income
$
77,624

 
$
37,535

 
$
172,043

 
$
93,868

Weighted average common shares used to calculate basic net income per share
284,818

 
284,462

 
284,880

 
283,141

2015 Warrants
20,548

 
17,580

 
20,031

 
15,070

Stock-based awards
7,820

 
7,953

 
7,988

 
7,384

Weighted average common shares used to calculate diluted net income per share
313,186

 
309,995

 
312,899

 
305,595

Net income per share - basic
$
0.27

 
$
0.13

 
$
0.60

 
$
0.33

Net income per share - diluted
$
0.25

 
$
0.12

 
$
0.55

 
$
0.31

As a result of the 2015 Warrants, Cadence experiences dilution to its diluted earnings per share when its average closing stock price exceeds $10.78 until the remaining 2015 Warrants expire in December 2015. During the three months ended October 3, 2015, approximately 15.2 million of the 2015 warrants expired, requiring Cadence to issue, on a net settlement basis, approximately 7.3 million shares of common stock to the 2015 Warrant counterparties. For an additional description of the 2015 Warrants, see Note 2 in the notes to condensed consolidated financial statements.
The following table presents shares of Cadence’s common stock outstanding for the three and nine months ended October 3, 2015 and September 27, 2014 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
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
 
(In thousands)
Options to purchase shares of common stock
1,472

 
1,403

 
1,362

 
3,479

Non-vested shares of restricted stock
169

 
53

 
68

 
24

Total potential common shares excluded
1,641

 
1,456

 
1,430

 
3,503




14


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. In July 2015, Cadence’s Board of Directors authorized the addition of $578.8 million in the aggregate to the amounts remaining under the prior authorizations. As of October 3, 2015, approximately $1.1 billion remained available under the authorizations.
In July 2015, Cadence’s Board of Directors replaced the two-year, aggregate $450.0 million stock repurchase plan that commenced in the second quarter of fiscal 2015 with an 18-month plan to repurchase shares of Cadence common stock of up to an aggregate of $1.2 billion under the authorizations, beginning in the third quarter of fiscal 2015. The actual timing and amount of repurchases will be subject to business and market conditions, corporate and regulatory requirements, acquisition opportunities and other factors. The stock repurchase program may be suspended, modified or discontinued at any time.
The shares repurchased and the total cost of repurchased shares, including commissions, during the three and nine months ended October 3, 2015 and September 27, 2014 were as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
 
(In thousands)
Shares repurchased
5,856

 
2,154

 
10,745

 
3,748

Total cost of repurchased shares
$
120,059

 
$
37,543

 
$
213,135

 
$
62,575

For additional information regarding share repurchases, see the discussion under Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds.”

NOTE 12. 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.
Other Contingencies
Cadence provides its customers with a warranty on sales of 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 October 3, 2015 and September 27, 2014.
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 October 3, 2015 and September 27, 2014.


15


NOTE 13. OTHER COMPREHENSIVE INCOME (LOSS)
Cadence’s other comprehensive income (loss) 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 (loss) was comprised of the following as of October 3, 2015, and January 3, 2015:
 
As of
 
October 3,
2015
 
January 3,
2015
 
(In thousands)
Foreign currency translation gain (loss)
$
(4,160
)
 
$
15,707

Changes in defined benefit plan liabilities
(2,844
)
 
(3,401
)
Unrealized holding gains on available-for-sale securities
55

 
41

Total accumulated other comprehensive income (loss)
$
(6,949
)
 
$
12,347

For the three and nine months ended October 3, 2015 and September 27, 2014 there were no significant amounts reclassified from accumulated other comprehensive income (loss) to net income.

NOTE 14. 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 operating 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.
The following table presents a summary of revenue by geography for the three and nine months ended October 3, 2015 and September 27, 2014:
 
Three Months Ended
 
Nine Months Ended
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
 
(In thousands)
Americas:
 
 
 
 
 
 
 
United States
$
199,628

 
$
179,883

 
$
579,011

 
$
505,084

Other Americas
6,685

 
6,065

 
19,524

 
17,900

Total Americas
206,313

 
185,948

 
598,535

 
522,984

Asia
106,627

 
89,644

 
301,835

 
264,946

Europe, Middle East and Africa
80,193

 
81,923

 
240,777

 
241,529

Japan
40,630

 
42,981

 
119,865

 
128,375

Total
$
433,763

 
$
400,496

 
$
1,261,012

 
$
1,157,834


16


The following table presents a summary of long-lived assets by geography as of October 3, 2015 and January 3, 2015: 
 
As of
 
October 3,
2015
 
January 3,
2015
 
(In thousands)
Americas:
 
 
 
United States
$
191,273

 
$
200,760

Other Americas
428

 
578

Total Americas
191,701

 
201,338

Asia
23,515

 
22,145

Europe, Middle East and Africa
11,939

 
5,951

Japan
534

 
678

Total
$
227,689

 
$
230,112



17




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 January 3, 2015. 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 system design enablement, or SDE, solutions that our customers use to design whole electronics systems and 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 electronics system, IC or electronic device to market and to reduce their design, development and manufacturing costs. Our SDE product offerings include electronic design automation, or EDA, software, emulation and prototyping 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 electronics systems and semiconductor companies, internet service providers and other technology companies that deliver a wide range of electronics products in a number of market segments, such as mobile and consumer devices, communications, cloud and data center infrastructure, personal computers, automotive systems, medical systems, 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.
Our future performance depends on our ability to innovate, commercialize newly developed solutions and enhance and maintain our current products. We must keep pace with our customers’ technical developments, satisfy industry standards and meet our customers’ increasingly demanding performance, productivity, quality and predictability requirements. We expect to continue to invest in research and development and customer and partner relationships.
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.
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. 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, printed circuit board, or PCB, IC package and system-in-package design and analysis.

18


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 January 3, 2015.
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 headings “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 January 3, 2015.
New Accounting Standards
In May 2014, the Financial Accounting Standards Board, or FASB, issued a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under United States generally accepted accounting principles. The new standard will become effective for us in the first quarter of fiscal 2018 and permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
In April 2015, the FASB issued a new accounting standard requiring debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The new standard will become effective for us in the first quarter of fiscal 2016 and requires retrospective application. Adoption of this standard will not have a material impact on our financial position.
In April 2015, the FASB also issued a new accounting standard that provides explicit guidance with respect to accounting for fees paid in a cloud computing arrangement. The new standard will become effective for us in the first quarter of fiscal 2016 and allows for prospective or retrospective application. We are currently evaluating the effect that the standard will have on our consolidated financial statements.
In September 2015, the FASB issued a new accounting standard to simplify the accounting for measurement period adjustments that occur in periods after a business combination is consummated. The standard requires that an acquirer recognize adjustments to provisional amounts in the reporting period in which the adjustment amounts are determined and eliminates the requirement to retrospectively adjust the financial statements for measurement period adjustments. The new standard will become effective for us in the first quarter of fiscal 2016. Adoption of this standard will not have a material impact on our consolidated financial statements.
We periodically review new accounting standards. Although some of the accounting standards that have been issued may be applicable to us, we have not identified any other new accounting standards that would have a significant impact on our consolidated financial statements.



19


Results of Operations
Financial results for the three and nine months ended October 3, 2015, as compared to the three and nine months ended September 27, 2014, reflect the following:
increased product and maintenance and services revenue, primarily because of increased demand for our software, services and IP offerings;
continued investment in research and development activities and technical sales support;
a tax benefit related to the effective settlement of a tax examination of a Cadence subsidiary; and
favorable changes in foreign currency exchange rates on our operating expenses.

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 in a recurring manner 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. Recurring revenue includes revenue from our license arrangements where revenue is recognized over multiple periods, services, royalties from certain IP arrangements, maintenance on perpetual software licenses and emulation hardware, and our operating leases of emulation hardware. Upfront revenue is primarily generated by our sales of emulation hardware and perpetual software licenses. Our ability to achieve this mix in any single fiscal period may be impacted primarily by hardware sales.
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 January 3, 2015.
Revenue by Period
The following table shows our revenue for the three months ended October 3, 2015 and September 27, 2014 and the change in revenue between periods:
 
Three Months Ended
 
Change
 
October 3,
2015
 
September 27,
2014
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance
$
396.9

 
$
374.1

 
$
22.8

 
6
%
Services
36.9

 
26.4

 
10.5

 
40
%
Total revenue
$
433.8

 
$
400.5

 
$
33.3

 
8
%
The following table shows our revenue for the nine months ended October 3, 2015 and September 27, 2014 and the change in revenue between periods:
 
Nine Months Ended
 
Change
 
October 3,
2015
 
September 27,
2014
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance
$
1,165.4

 
$
1,085.9

 
$
79.5

 
7
%
Services
95.6

 
71.9

 
23.7

 
33
%
Total revenue
$
1,261.0

 
$
1,157.8

 
$
103.2

 
9
%

20


Product and maintenance revenue increased during the three and nine months ended October 3, 2015, as compared to the three and nine months ended September 27, 2014, primarily because of increased business levels. Services revenue also increased during the three and nine months ended October 3, 2015 due to increased demand for our service and IP offerings. Revenue may fluctuate from period to period based on demand for, and our resources to fulfill, our services, emulation hardware and IP offerings.
No one customer accounted for 10% or more of total revenue during the three and nine months ended October 3, 2015 or September 27, 2014.
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 27,
2014
 
January 3,
2015
 
April 4,
2015
 
July 4,
2015
 
October 3,
2015
Functional Verification, including Emulation Hardware
23
%
 
21
%
 
23
%
 
21
%
 
23
%
Digital IC Design and Signoff
29
%
 
28
%
 
28
%
 
29
%
 
28
%
Custom IC Design
27
%
 
28
%
 
27
%
 
27
%
 
26
%
System Interconnect and Analysis
10
%
 
11
%
 
11
%
 
11
%
 
10
%
IP
11
%
 
12
%
 
11
%
 
12
%
 
13
%
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 January 3, 2015, 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
 
October 3,
2015
 
September 27,
2014
 
Amount
 
Percentage
 
(In millions, except percentages)
United States
$
199.6

 
$
179.9

 
$
19.7

 
11
 %
Other Americas
6.7

 
6.1

 
0.6

 
10
 %
Asia
106.6

 
89.6

 
17.0

 
19
 %
Europe, Middle East and Africa
80.2

 
81.9

 
(1.7
)
 
(2
)%
Japan
40.7

 
43.0

 
(2.3
)
 
(5
)%
Total revenue
$
433.8

 
$
400.5

 
$
33.3

 
8
 %
 
Nine Months Ended
 
Change
 
October 3,
2015
 
September 27,
2014
 
Amount
 
Percentage
 
(In millions, except percentages)
United States
$
579.0

 
$
505.1

 
$
73.9

 
15
 %
Other Americas
19.5

 
17.9

 
1.6

 
9
 %
Asia
301.8

 
264.9

 
36.9

 
14
 %
Europe, Middle East and Africa
240.8

 
241.5

 
(0.7
)
 
 %
Japan
119.9

 
128.4

 
(8.5
)
 
(7
)%
Total revenue
$
1,261.0

 
$
1,157.8

 
$
103.2

 
9
 %

21


Most of our revenue is transacted in the United States dollar. However, certain revenue transactions are denominated in foreign currencies, primarily the Japanese yen. 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 Japan decreased during the three and nine months ended October 3, 2015, as compared to the three and nine months ended September 27, 2014, primarily due to difficult business conditions facing many of our Japanese customers and depreciation of the Japanese yen during the three and nine months ended October 3, 2015, when compared to the three and nine months ended September 27, 2014.
For the primary factors contributing to the 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
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
United States
46
%
 
45
%
 
46
%
 
44
%
Other Americas
2
%
 
1
%
 
1
%
 
1
%
Asia
25
%
 
22
%
 
24
%
 
23
%
Europe, Middle East and Africa
18
%
 
21
%
 
19
%
 
21
%
Japan
9
%
 
11
%
 
10
%
 
11
%
Total
100
%
 
100
%
 
100
%
 
100
%
Cost of Revenue
 
Three Months Ended
 
Change
 
October 3,
2015
 
September 27,
2014
 
Amount
 
Percentage
 
(In millions, except percentages)
Cost of product and maintenance
$
41.2

 
$
37.0

 
$
4.2

 
11
%
Cost of services
24.0

 
17.1

 
6.9

 
40
%
 
Nine Months Ended
 
Change
 
October 3,
2015
 
September 27,
2014
 
Amount
 
Percentage
 
(In millions, except percentages)
Cost of product and maintenance
$
115.0

 
$
116.9

 
$
(1.9
)
 
(2
)%
Cost of services
62.6

 
48.7

 
13.9

 
29
 %
Cost of Product and Maintenance
Cost of product and maintenance includes costs associated with the sale and lease of our emulation hardware and licensing of our software and IP products, certain employee salary and benefits and other employee-related costs, cost of our customer support services, amortization of technology-related and maintenance-related acquired intangibles, as well as the costs of technical documentation and royalties payable to third-party vendors. Costs associated with our emulation hardware products include materials, assembly, applicable reserves and overhead. These additional hardware manufacturing costs make our cost of emulation hardware product higher, as a percentage of revenue, than our cost of software and IP products.

22


A summary of cost of product and maintenance is as follows:
 
Three Months Ended
 
Change
 
October 3,
2015
 
September 27,
2014
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance-related costs
$
31.1

 
$
26.9

 
$
4.2

 
16
%
Amortization of acquired intangibles
10.1

 
10.1

 

 
%
Total cost of product and maintenance
$
41.2

 
$
37.0

 
$
4.2

 
11
%
 
Nine Months Ended
 
Change
 
October 3,
2015
 
September 27,
2014
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance-related costs
$
84.6

 
$
90.6

 
$
(6.0
)
 
(7
)%
Amortization of acquired intangibles
30.4

 
26.3

 
4.1

 
16
 %
Total cost of product and maintenance
$
115.0

 
$
116.9

 
$
(1.9
)
 
(2
)%
Cost of product and maintenance depends primarily upon our emulation hardware product sales and gross margins in any given period. Cost of product and maintenance is also affected by employee salary and benefits and other employee-related costs, as well as the timing and extent to which we acquire intangible assets, acquire or license third-parties’ intellectual property or technology and sell our products that include such acquired or licensed intellectual property or technology.
The changes in product and maintenance-related costs for the three and nine months ended October 3, 2015, as compared to the three and nine months ended September 27, 2014, were due to the following:
 
Change
 
Three Months Ended
 
Nine Months Ended
 
(In millions)
Emulation hardware costs
$
4.6

 
$
(6.3
)
Other items
(0.4
)
 
0.3

 
$
4.2

 
$
(6.0
)
Emulation hardware costs increased during the three months ended October 3, 2015, as compared to the three months ended September 27, 2014, due to a higher volume of emulation hardware products sold. Emulation hardware costs decreased during the nine months ended October 3, 2015, as compared to the nine months ended September 27, 2014, primarily because charges for inventory reserves were higher during fiscal 2014. Gross margins on our emulation hardware products may fluctuate based on customer pricing strategies, product competition and product life cycle.
Amortization of acquired intangibles included in cost of product and maintenance increased during the nine months ended October 3, 2015, as compared to the nine months ended September 27, 2014, primarily due to the increase in amortization of intangible assets associated with our fiscal 2014 acquisitions. For an additional description of our expected amortization of intangible assets, see Note 6 in the notes to condensed consolidated financial statements.
Cost of Services
Cost of services primarily includes employee salary, benefits and other employee-related costs to perform work on revenue-generating projects, costs to maintain the infrastructure necessary to manage a services organization, and provisions for contract losses, if any. Cost of services will fluctuate from period to period based on our utilization of design services engineers on revenue-generating projects or on internal development projects. Cost of services increased during the three and nine months ended October 3, 2015, as compared to the three and nine months ended September 27, 2014, primarily due to an overall increase in services revenue and the resources required to meet the demand for our services and IP offerings.


23


Operating Expenses
Our operating expenses include marketing and sales, research and development and general and administrative expenses. Factors that cause our operating expenses to fluctuate include changes in the number of employees due to hiring and acquisitions, foreign exchange rates, stock-based compensation and the impact of our variable compensation programs that are driven by overall operating results.
Stock-based compensation included in operating expenses increased by approximately $1.2 million during the three months ended October 3, 2015, as compared to the three months ended September 27, 2014, and $6.4 million during the nine months ended October 3, 2015, as compared to the nine months ended September 27, 2014. The increase in stock-based compensation is primarily due to higher grant-date fair values of stock awards.
Many of our operating expenses are transacted in various foreign currencies. We recognize lower expenses in periods when the United States dollar strengthens in value against other currencies and we recognize higher expenses when the United States dollar weakens against other currencies. During the three and nine months ended October 3, 2015, as compared to the three and nine months ended September 27, 2014, we experienced a favorable impact on expenses as a result of the strengthening value of the United States dollar against other currencies, including the European Union euro and the Japanese yen. For an additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see the discussion in Item 3, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”
Our operating expenses for the three and nine months ended October 3, 2015 and September 27, 2014 were as follows:
 
Three Months Ended
 
Change
 
October 3,
2015
 
September 27,
2014
 
Amount
 
Percentage
 
(In millions, except percentages)
Marketing and sales
$
102.0

 
$
100.4

 
$
1.6

 
2
%
Research and development
154.6

 
148.7

 
5.9

 
4
%
General and administrative
28.1

 
25.9

 
2.2

 
8
%
Total operating expenses
$
284.7

 
$
275.0

 
$
9.7

 
4
%
 
Nine Months Ended
 
Change
 
October 3,
2015
 
September 27,
2014
 
Amount
 
Percentage
 
(In millions, except percentages)
Marketing and sales
$
298.9

 
$
297.3

 
$
1.6

 
1
 %
Research and development
475.6

 
447.9

 
27.7

 
6
 %
General and administrative
83.2

 
86.7

 
(3.5
)
 
(4
)%
Total operating expenses
$
857.7

 
$
831.9

 
$
25.8

 
3
 %
Our operating expenses, as a percentage of total revenue, for the three and nine months ended October 3, 2015 and September 27, 2014 were as follows:
 
Three Months Ended