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EX-32.02 - EXHIBIT 32.02 - CADENCE DESIGN SYSTEMS INCex3202cdns10012016.htm
EX-32.01 - EXHIBIT 32.01 - CADENCE DESIGN SYSTEMS INCex3201cdns10012016.htm
EX-31.02 - EXHIBIT 31.02 - CADENCE DESIGN SYSTEMS INCex3102cdns10012016.htm
EX-31.01 - EXHIBIT 31.01 - CADENCE DESIGN SYSTEMS INCex3101cdns10012016.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 1, 2016
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
_____________________________________ 
cdnslogoa01a01a01a01a03.jpg
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 1, 2016, approximately 286,715,000 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 1,
2016
 
January 2,
2016
 
 
 
As Adjusted
(Note 1)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
524,333

 
$
616,686

Short-term investments
8,503

 
94,498

Receivables, net
152,025

 
164,848

Inventories
64,476

 
56,762

Prepaid expenses and other
42,953

 
31,441

Total current assets
792,290

 
964,235

Property, plant and equipment, net of accumulated depreciation of $613,314 and $581,345, respectively
240,590

 
228,599

Goodwill
573,890

 
551,772

Acquired intangibles, net of accumulated amortization of $253,562 and $216,589, respectively
273,381

 
296,482

Long-term receivables
14,961

 
4,498

Other assets
298,975

 
299,929

Total assets
$
2,194,087

 
$
2,345,515

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Revolving credit facility
$
50,000

 
$

Accounts payable and accrued liabilities
192,948

 
238,022

Current portion of deferred revenue
288,373

 
298,285

Total current liabilities
531,321

 
536,307

Long-term liabilities:
 
 
 
Long-term portion of deferred revenue
36,338

 
30,209

Long-term debt
643,277

 
343,288

Other long-term liabilities
56,355

 
59,596

Total long-term liabilities
735,970

 
433,093

Commitments and contingencies (Note 12)


 


Stockholders’ equity:
 
 
 
Common stock and capital in excess of par value
1,801,125

 
1,863,086

Treasury stock, at cost
(963,604
)
 
(400,555
)
Retained earnings (accumulated deficit)
98,425

 
(73,991
)
Accumulated other comprehensive loss
(9,150
)
 
(12,425
)
Total stockholders’ equity
926,796

 
1,376,115

Total liabilities and stockholders’ equity
$
2,194,087

 
$
2,345,515

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 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
Revenue:
 
 
 
 
 
 
 
Product and maintenance
$
415,370

 
$
396,867

 
$
1,247,077

 
$
1,165,455

Services
30,850

 
36,896

 
100,026

 
95,557

Total revenue
446,220

 
433,763

 
1,347,103

 
1,261,012

Costs and expenses:
 
 
 
 
 
 
 
Cost of product and maintenance
38,740

 
41,206

 
125,881

 
114,980

Cost of services
17,867

 
24,005

 
54,563

 
62,571

Marketing and sales
96,793

 
101,950

 
297,103

 
298,880

Research and development
191,547

 
154,627

 
553,824

 
475,597

General and administrative
30,441

 
28,084

 
95,129

 
83,193

Amortization of acquired intangibles
3,889

 
5,687

 
14,206

 
18,037

Restructuring and other charges
101

 
303

 
14,613

 
4,164

Total costs and expenses
379,378

 
355,862

 
1,155,319

 
1,057,422

Income from operations
66,842

 
77,901

 
191,784

 
203,590

Interest expense
(6,053
)
 
(4,177
)
 
(17,306
)
 
(24,111
)
Other income, net
2,836

 
1,839

 
10,441

 
7,967

Income before provision (benefit) for income taxes
63,625

 
75,563

 
184,919

 
187,446

Provision (benefit) for income taxes
(1,087
)
 
(2,061
)
 
20,310

 
15,403

Net income
$
64,712

 
$
77,624

 
$
164,609

 
$
172,043

Net income per share - basic
$
0.23

 
$
0.27

 
0.57

 
0.60

Net income per share - diluted
$
0.23

 
$
0.25

 
0.56

 
0.55

Weighted average common shares outstanding – basic
280,622

 
284,818

 
288,476

 
284,880

Weighted average common shares outstanding – diluted
287,473

 
313,186

 
295,369

 
312,899











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 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
Net income
$
64,712

 
$
77,624

 
$
164,609

 
$
172,043

Other comprehensive income (loss), net of tax effects:
 
 
 
 
 
 
 
Foreign currency translation adjustments
951

 
(6,449
)
 
2,858

 
(19,867
)
Changes in unrealized holding gains or losses on available-for-sale securities, net of reclassification adjustment for realized gains and losses
122

 
1

 
682

 
13

Changes in defined benefit plan liabilities
(238
)
 
240

 
(265
)
 
558

Total other comprehensive income (loss), net of tax effects
835

 
(6,208
)
 
3,275

 
(19,296
)
Comprehensive income
$
65,547

 
$
71,416

 
$
167,884

 
$
152,747





































See notes to condensed consolidated financial statements.



CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
 
October 1,
2016
 
October 3,
2015
Cash and cash equivalents at beginning of period
$
616,686

 
$
932,161

Cash flows from operating activities:
 
 
 
Net income
164,609

 
172,043

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
89,726

 
88,006

Amortization of debt discount and fees
792

 
9,185

Stock-based compensation
79,986

 
67,681

Gain on investments, net
(4,070
)
 
(1,434
)
Gain on sale of property, plant and equipment
(482
)
 

Deferred income taxes
8,657

 
1,713

Other non-cash items
1,869

 
(69
)
Changes in operating assets and liabilities, net of effect of acquired businesses:
 
 
 
Receivables
2,873

 
(10,100
)
Inventories
(16,339
)
 
(1,861
)
Prepaid expenses and other
(12,135
)
 
(12,451
)
Other assets
(3,822
)
 
300

Accounts payable and accrued liabilities
(46,585
)
 
(28,154
)
Deferred revenue
(10,823
)
 
(9,207
)
Other long-term liabilities
(6,239
)
 
(20,303
)
Net cash provided by operating activities
248,017

 
255,349

Cash flows from investing activities:
 
 
 
Purchases of available-for-sale securities
(20,525
)
 
(81,300
)
Proceeds from the sale of available-for-sale securities
55,418

 
50,806

Proceeds from the maturity of available-for-sale securities
52,362

 
25,550

Proceeds from the sale of long-term investments
2,913

 
4,510

Proceeds from the sale of property, plant and equipment
482

 

Purchases of property, plant and equipment
(42,452
)
 
(34,093
)
Cash paid in business combinations and asset acquisitions, net of cash acquired
(41,627
)
 

Net cash provided by (used for) investing activities
6,571

 
(34,527
)
Cash flows from financing activities:
 
 
 
Proceeds from term loans
300,000

 

Proceeds from revolving credit facility
50,000

 

Payment of debt issuance costs
(622
)
 

Payment of convertible notes

 
(349,999
)
Payment of convertible notes embedded conversion derivative liability

 
(530,643
)
Proceeds from convertible notes hedges

 
530,643

Excess tax benefits from stock-based compensation

 
16,940

Proceeds from issuance of common stock
50,293

 
59,448

Stock received for payment of employee taxes on vesting of restricted stock
(35,532
)
 
(31,795
)
Payments for repurchases of common stock
(720,196
)
 
(213,135
)
Net cash used for financing activities
(356,057
)
 
(518,541
)
Effect of exchange rate changes on cash and cash equivalents
9,116

 
(18,351
)
Decrease in cash and cash equivalents
(92,353
)
 
(316,070
)
Cash and cash equivalents at end of period
$
524,333

 
$
616,091

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
11,238

 
$
12,134

Cash paid for taxes, net
$
27,332

 
$
23,930




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 United States generally accepted accounting principles, or U.S. GAAP, 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 2, 2016. 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.
Use of Estimates
Preparation of the condensed consolidated financial statements in conformity with U.S. GAAP 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.
New Accounting Standards
In March 2016, the Financial Accounting Standards Board, or FASB, issued a new accounting standard intended to simplify various aspects related to how stock-based awards are accounted for and presented in the financial statements. The new standard: (a) requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled, (b) requires classification of excess tax benefits as an operating activity in the statement of cash flows rather than a financing activity, (c) eliminates the requirement to defer recognition of an excess tax benefit until the benefit is realized through a reduction to taxes payable, (d) modifies statutory withholding tax requirements, and (e) provides for a policy election to account for forfeitures as they occur. The guidance is effective in the first quarter of fiscal 2017 and early adoption is permitted if all amendments are adopted in the same period. Cadence elected to early adopt the new standard during the first quarter of fiscal 2016. As a result of early adoption, Cadence recorded all income tax effects of share-based awards in its provision for income taxes in the condensed consolidated income statements. Cadence also recorded a cumulative effect adjustment of approximately $7.8 million as a reduction of opening accumulated deficit on Cadence’s condensed consolidated balance sheets. The cumulative effect adjustment was comprised of approximately $8.1 million related to the recognition of income tax benefits in excess of compensation expense, offset by $0.3 million related to the policy election to recognize the impact of forfeitures on stock-based compensation expense as they occur. Additionally, Cadence adopted the change in presentation in the condensed consolidated statement of cash flows related to excess tax benefits on a prospective basis. Accordingly, prior periods have not been adjusted. There was no impact for the change in presentation in the statement of cash flows related to statutory tax withholding requirements as Cadence has historically classified the statutory tax withholding as a financing activity in its consolidated statement of cash flows.
In April 2015, the FASB issued a new accounting standard requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the associated debt liability. The new standard became effective for Cadence in the first quarter of fiscal 2016 and required retrospective application. As a result, prior period balances have been reclassified to conform to the current period presentation. Adoption of this standard did not have a material impact on Cadence’s consolidated balance sheets.

5


In May 2014, the FASB issued a comprehensive revenue recognition standard for revenue associated with the delivery of goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB deferred the effective date of the new revenue standard for periods beginning after December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original effective date of December 15, 2016. Accordingly, the updated standard is effective for Cadence in the first quarter of fiscal 2018. In March 2016, the FASB finalized its amendments to the guidance in the new standard on assessing whether an entity is a principal or an agent in a revenue transaction. This conclusion impacts whether an entity reports revenue on a gross or net basis. In April 2016, the FASB finalized additional amendments to the guidance in the new revenue standard on identifying performance obligations and accounting for licenses of intellectual property. Cadence has not yet selected a transition method and is currently evaluating the effect that the updated standard, and the recently issued amendments, will have on its consolidated financial statements and related disclosures.
In January 2016, the FASB issued a new accounting standard that will impact certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The updated standard is effective for Cadence in the first quarter of fiscal 2018, and early adoption is permitted. Cadence is currently evaluating the effect the updated standard will have on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued a new accounting standard requiring, among other things, the recognition of lease assets and lease liabilities on the balance sheet by lessees for certain lease arrangements that are classified as operating leases under the previous standard. The updated standard is effective for Cadence in the first quarter of fiscal 2019, and early adoption is permitted. Cadence is currently evaluating the effect the updated standard will have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued a new accounting standard intended to simplify the accounting for equity method investments when there is an increase in the level of ownership interest or degree of influence. The new standard is effective for Cadence in the first quarter of fiscal 2017 and requires prospective application. Adoption of this standard is not expected to have a material impact on Cadence’s consolidated financial statements.

NOTE 2. DEBT
Cadence’s outstanding debt as of October 1, 2016 and January 2, 2016 was as follows:
 
October 1, 2016
 
January 2, 2016
 
(In thousands)
 
Principal
 
Unamortized Discount and Debt Issuance Costs
 
Carrying Value
 
Principal
 
Unamortized Discount and Debt Issuance Costs
 
Carrying Value
Revolving Credit Facility
$
50,000

 

 
$
50,000

 

 
$

 
$

2019 Term Loan
300,000

 
(487
)
 
299,513

 

 
$

 

2024 Notes
350,000

 
(6,236
)
 
343,764

 
350,000

 
(6,712
)
 
343,288

Total outstanding debt
$
700,000

 
$
(6,723
)
 
$
693,277

 
$
350,000

 
$
(6,712
)
 
$
343,288

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. As of October 1, 2016, the interest rate on Cadence’s revolving credit facility was 2.16%. 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.

6


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 3.00 to 1. As of October 1, 2016 and January 2, 2016, Cadence was in compliance with all financial covenants associated with the revolving credit facility.
2019 Term Loan
On January 28, 2016, Cadence entered into a $300.0 million three-year senior unsecured non-amortizing term loan facility due on January 28, 2019, or the 2019 Term Loan, with a group of lenders led by JPMorgan Chase Bank, N.A., as administrative agent. The 2019 Term Loan is unsecured, and the proceeds will be used for general corporate purposes, including the repurchase of common stock.
Amounts outstanding under the 2019 Term Loan initially accrue interest at a rate equal to LIBOR plus a margin of 1.125% per annum, which may increase to a rate equal to LIBOR plus a margin of up to 1.875% per annum, depending on Cadence’s leverage ratio. As of October 1, 2016, the interest rate on Cadence’s 2019 Term Loan was 2.12%.
The covenants of the 2019 Term Loan are generally consistent with Cadence’s existing five-year senior unsecured revolving credit facility. In addition, the term loan agreement contains certain financial covenants that require Cadence to maintain a funded debt to EBITDA ratio not greater than 2.75 to 1, with a step-up to 3.25 to 1 for one year following an acquisition by Cadence of at least $250.0 million that results in a pro forma leverage ratio between 2.50 to 1 and 3.00 to 1. As of October 1, 2016, Cadence was in compliance with all financial covenants associated with the 2019 Term Loan.
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.
For information regarding the impact of new accounting standards on the presentation of debt issuance costs, see Note 1 under the heading “New Accounting Standards.”

NOTE 3. CASH, CASH EQUIVALENTS AND INVESTMENTS
Cadence’s cash, cash equivalents and short-term investments at fair value as of October 1, 2016 and January 2, 2016 were as follows:
 
As of
 
October 1,
2016
 
January 2,
2016
 
(In thousands)
Cash and cash equivalents
$
524,333

 
$
616,686

Short-term investments
8,503

 
94,498

Cash, cash equivalents and short-term investments
$
532,836

 
$
711,184


7


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 1, 2016 and January 2, 2016:
 
As of
 
October 1,
2016
 
January 2,
2016
 
(In thousands)
Cash and interest bearing deposits
$
227,262

 
$
255,995

Money market funds
297,071

 
360,691

Total cash and cash equivalents
$
524,333

 
$
616,686

Short-Term Investments
The following tables summarize Cadence’s short-term investments as of October 1, 2016 and January 2, 2016:
 
As of October 1, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Corporate debt securities
$
400

 
$

 
$

 
$
400

Bank certificates of deposit
2,000

 

 

 
2,000

United States Treasury securities
2,000

 

 

 
2,000

Commercial paper
1,000

 

 

 
1,000

Marketable debt securities
5,400

 

 

 
5,400

Marketable equity securities
2,211

 
892

 

 
3,103

Total short-term investments
$
7,611

 
$
892

 
$

 
$
8,503

The marketable debt securities included in short-term investments as of October 1, 2016 have contractual maturities of less than one year. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.
 
As of January 2, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Corporate debt securities
$
34,905

 
$
1

 
$
(77
)
 
$
34,829

Bank certificates of deposit
15,049

 
1

 
(4
)
 
15,046

United States Treasury securities
36,372

 
2

 
(88
)
 
36,286

United States government agency securities
4,151

 
1

 

 
4,152

Commercial paper
1,993

 

 

 
1,993

Marketable debt securities
92,470

 
5

 
(169
)
 
92,306

Marketable equity securities
1,817

 
375

 

 
2,192

Total short-term investments
$
94,287

 
$
380

 
$
(169
)
 
$
94,498

Realized gains and losses from the sale of marketable debt and equity securities are recorded in other income, net in the condensed consolidated income statements.


8


NOTE 4. RECEIVABLES, NET
Cadence’s current and long-term receivables balances as of October 1, 2016 and January 2, 2016 were as follows:
 
As of
 
October 1,
2016
 
January 2,
2016
 
(In thousands)
Accounts receivable
$
80,034

 
$
107,041

Unbilled accounts receivable
71,991

 
57,807

Long-term receivables
14,961

 
4,498

Total receivables
166,986

 
169,346

Less allowance for doubtful accounts

 

Total receivables, net
$
166,986

 
$
169,346

Cadence’s customers are primarily concentrated within the semiconductor and electronics systems industries. As of October 1, 2016, no one customer accounted for 10% or more of Cadence’s total receivables. As of January 2, 2016, one customer accounted for 12% of Cadence’s total receivables, and no other customer accounted for 10% or more of Cadence’s total receivables. As of October 1, 2016, approximately 44% of Cadence’s total receivables were attributable to the ten customers with the largest balances of total receivables. As of January 2, 2016, approximately 45% of Cadence’s total receivables were attributable to the ten customers with the largest balances of total receivables.

NOTE 5. STOCK REPURCHASE PROGRAMS
In July 2015, Cadence’s Board of Directors approved an 18-month plan to repurchase shares of Cadence common stock of up to an aggregate of $1.2 billion, beginning in the third quarter of fiscal 2015. The actual timing and amount of repurchases are 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. As of October 1, 2016, the remaining amount authorized for the repurchase of shares was $240 million.
The shares repurchased under Cadence’s repurchase authorizations and the total cost of repurchased shares, including commissions, during the three and nine months ended October 1, 2016 and October 3, 2015 were as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
 
(In thousands)
Shares repurchased
9,596

 
5,856

 
31,177

 
10,745

Total cost of repurchased shares
$
240,096

 
$
120,059

 
$
720,196

 
$
213,135

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


9


NOTE 6. STOCK-BASED COMPENSATION
Stock-based compensation expense is reflected in Cadence’s condensed consolidated income statements for the three and nine months ended October 1, 2016 and October 3, 2015 as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
 
(In thousands)
Cost of product and maintenance
$
550

 
$
662

 
$
1,461

 
$
1,789

Cost of services
807

 
968

 
2,141

 
2,615

Marketing and sales
6,040

 
5,764

 
16,881

 
16,447

Research and development
18,002

 
12,847

 
46,376

 
35,625

General and administrative
4,599

 
3,876

 
13,127

 
11,205

Total stock-based compensation expense
$
29,998

 
$
24,117

 
$
79,986

 
$
67,681

Cadence had total unrecognized compensation expense related to stock option and restricted stock grants of $229.9 million as of October 1, 2016, which will be recognized over the remaining vesting period. The remaining weighted-average vesting period of unvested awards is 2.5 years.
For information regarding the impact of new accounting standards impacting stock-based compensation, see Note 1 under the heading “New Accounting Standards.”

NOTE 7. ACQUISITIONS
During the nine months ended October 1, 2016, Cadence completed two business combinations for total cash consideration of $42.4 million, after taking into account cash acquired of $1.8 million. The total purchase consideration was allocated to the assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition dates. Cadence will also make payments to certain employees over a period of up to four years subject to continued employment and other conditions. Cadence recorded a total of $23.6 million of goodwill, $23.2 million of acquired intangible assets and $2.6 million of net liabilities consisting primarily of deferred revenue.
The recorded goodwill is primarily related to expected synergies from combining operations of the acquired companies. The weighted-average amortization period for definite-lived intangible assets acquired is approximately 8.0 years.
Results of operations and the estimated fair value of acquired assets and assumed liabilities are recorded in the consolidated financial statements from the date of acquisition. Pro forma results of operations for the business combinations completed during the nine months ended October 1, 2016 have not been presented because the effects of these acquisitions, individually and in the aggregate, would not have been material to Cadence’s financial results. The fair values of acquired intangible assets 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 11 in the notes to condensed consolidated financial statements.
A trust for the benefit of the children of Lip-Bu Tan, Cadence’s President, Chief Executive Officer, or CEO, and director, owned less than 2% of Rocketick Technologies Ltd., one of the acquired companies, and Mr. Tan and his wife serve as co-trustees of the trust and disclaim pecuniary and economic interest in the trust. The Board of Directors of Cadence reviewed the transaction and concluded that it was in the best interests of Cadence to proceed with the transaction. Mr. Tan recused himself from the Board of Directors’ discussion of the valuation of Rocketick Technologies Ltd. and on whether to proceed with the transaction. A financial advisor provided a fairness opinion to Cadence in connection with the transaction.


10


NOTE 8. GOODWILL AND ACQUIRED INTANGIBLES
Goodwill
The changes in the carrying amount of goodwill during the nine months ended October 1, 2016 were as follows:
 
Gross Carrying
Amount
 
(In thousands)
Balance as of January 2, 2016
$
551,772

Goodwill resulting from acquisitions
23,579

Effect of foreign currency translation
(1,461
)
Balance as of October 1, 2016
$
573,890

Acquired Intangibles, Net
Acquired intangibles as of October 1, 2016 were as follows, excluding intangibles that were fully amortized as of January 2, 2016:
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Acquired
Intangibles, Net
 
(In thousands)
Existing technology
$
342,427

 
$
(150,109
)
 
$
192,318

Agreements and relationships
174,709

 
(97,010
)
 
77,699

Tradenames, trademarks and patents
9,807

 
(6,443
)
 
3,364

Total acquired intangibles
$
526,943

 
$
(253,562
)
 
$
273,381

Acquired intangibles as of January 2, 2016 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
$
329,627

 
$
(124,097
)
 
$
205,530

Agreements and relationships
173,325

 
(86,808
)
 
86,517

Tradenames, trademarks and patents
10,119

 
(5,684
)
 
4,435

Total acquired intangibles
$
513,071

 
$
(216,589
)
 
$
296,482

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 1, 2016 and October 3, 2015 was as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
 
(In thousands)
Cost of product and maintenance
$
10,593

 
$
10,107

 
$
31,802

 
$
30,385

Amortization of acquired intangibles
3,889

 
5,687

 
14,206

 
18,037

Total amortization of acquired intangibles
$
14,482

 
$
15,794

 
$
46,008

 
$
48,422


11


Estimated amortization expense for intangible assets with definite lives for the following five fiscal years and thereafter is as follows:
 
(In thousands)
2016 – remaining period
$
14,478

2017
56,075

2018
52,273

2019
45,243

2020
40,036

Thereafter
65,276

Total estimated amortization expense
$
273,381



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 1, 2016, Cadence initiated a restructuring plan, or the 2016 Restructuring Plan, and recorded restructuring and other charges of approximately $14.1 million related to severance payments and termination benefits. As of October 1, 2016, total liabilities related to the 2016 Restructuring Plan were $0.6 million. Cadence expects to make cash payments for severance and related benefits for the 2016 Restructuring Plan through fiscal 2016.
The following table presents activity relating to Cadence’s restructuring plans during the nine months ended October 1, 2016:
 
Severance
and
Benefits
 
Excess
Facilities
 
Total
 
(In thousands)
Balance, January 2, 2016
$
751

 
$
386

 
$
1,137

Restructuring and other charges (credits):
 
 
 
 
 
2016 Restructuring Plan
14,116

 

 
14,116

Prior restructuring plans
21

 
476

 
497

Non-cash charges

 
(133
)
 
(133
)
Cash payments
(14,484
)
 
(593
)
 
(15,077
)
Effect of foreign currency translation
286

 
(28
)
 
258

Balance, October 1, 2016
$
690

 
$
108

 
$
798

The remaining accrual for Cadence’s restructuring plans is recorded in accounts payable and accrued liabilities in the condensed consolidated balance sheet.


12


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 1, 2016 and October 3, 2015 are as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
 
(In thousands, except per share amounts)
Net income
$
64,712

 
$
77,624

 
$
164,609

 
$
172,043

Weighted average common shares used to calculate basic net income per share
280,622

 
284,818

 
288,476

 
284,880

2015 Warrants

 
20,548

 

 
20,031

Stock-based awards
6,851

 
7,820

 
6,893

 
7,988

Weighted average common shares used to calculate diluted net income per share
287,473

 
313,186

 
295,369

 
312,899

Net income per share - basic
$
0.23

 
$
0.27

 
$
0.57

 
$
0.60

Net income per share - diluted
$
0.23

 
$
0.25

 
$
0.56

 
$
0.55

The 2015 Warrants expired in December 2015. For an additional description of the 2015 Warrants, see Note 3 in the notes to consolidated financial statements in Cadence’s Annual Report on Form 10-K for the fiscal year ended January 2, 2016.
The following table presents shares of Cadence’s common stock outstanding for the three and nine months ended October 1, 2016 and October 3, 2015 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 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
 
(In thousands)
Long-term performance-based stock awards
1,250

 

 
1,008

 

Options to purchase shares of common stock
160

 
1,472

 
729

 
1,362

Non-vested shares of restricted stock
7

 
169

 
36

 
68

Total potential common shares excluded
1,417

 
1,641

 
1,773

 
1,430



NOTE 11. 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.

13


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 1, 2016.
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 1, 2016 and January 2, 2016:
 
Fair Value Measurements as of October 1, 2016
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
297,071

 
$
297,071

 
$

 
$

Short-term investments:

 
 
 
 
 
 
Corporate debt securities
400

 

 
400

 

Bank certificates of deposit
2,000

 

 
2,000

 

United States Treasury securities
2,000

 
2,000

 

 

Commercial paper
1,000

 

 
1,000

 

Marketable equity securities
3,103

 
3,103

 

 

Trading securities held in Non-Qualified Deferred Compensation, or NQDC, trust
25,657

 
25,657

 

 

Foreign currency exchange contracts
349

 

 
349

 

Total Assets
$
331,580

 
$
327,831

 
$
3,749

 
$

 
 
 
 
 
 
 
 
As of October 1, 2016, Cadence did not have any financial liabilities requiring a recurring fair value measurement.
 
 
 
 
 
 
 
 
 
Fair Value Measurements as of January 2, 2016
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets
 
Cash equivalents:


 
 
 
 
 
 
Money market funds
$
360,691

 
$
360,691

 
$

 
$

Short-term investments:
 
 
 
 
 
 
 
Corporate debt securities
34,829

 

 
34,829

 

Bank certificates of deposit
15,046

 

 
15,046

 

United States Treasury securities
36,286

 
36,286

 

 

United States government agency securities
4,152

 
4,152

 

 

Commercial paper
1,993

 

 
1,993

 

Marketable equity securities
2,192

 
2,192

 

 

Trading securities held in NQDC trust
24,905

 
24,905

 

 

Total Assets
$
480,094

 
$
428,226

 
$
51,868

 
$

 
 
 
 
 
 
 
 
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Liabilities
 
Foreign currency exchange contracts
362

 

 
362

 

Total Liabilities
$
362

 
$

 
$
362

 
$


14


Level 3 Measurements
During the nine months ended October 1, 2016, Cadence acquired intangible assets of $23.2 million. The fair value of the intangible assets acquired was determined using the income and cost approaches and level 3 inputs. Key assumptions include the amount and timing of expected future cash flows, market conditions, projected costs, assumed profit margins, discount rates 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 14.0% to 17.5% to value the intangible assets acquired.
As part of its acquisitions during the nine months ended October 1, 2016, Cadence also assumed obligations related to deferred revenue, which were 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. Cadence assumed a profit margin of 14.5% when valuing these liabilities, which were then adjusted to present value using a discount rate of 3.5%. The resulting fair value using this approach approximates the amount that Cadence would be required to pay a third party to assume the obligation. The fair value of the deferred revenue obligations assumed was affected most significantly by the estimated costs required to fulfill the obligation, but was also affected by the assumed profit margin 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 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 1, 2016 and October 3, 2015.
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 1, 2016 and October 3, 2015.


15


NOTE 13. OTHER COMPREHENSIVE LOSS
Cadence’s other comprehensive loss is comprised of foreign currency translation 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 loss was comprised of the following as of October 1, 2016 and January 2, 2016:
 
As of
 
October 1,
2016
 
January 2,
2016
 
(In thousands)
Foreign currency translation loss
$
(6,711
)
 
$
(9,569
)
Changes in defined benefit plan liabilities
(3,331
)
 
(3,066
)
Unrealized holding gains on available-for-sale securities
892

 
210

Total accumulated other comprehensive loss
$
(9,150
)
 
$
(12,425
)
For the three and nine months ended October 1, 2016 and October 3, 2015 there were no significant amounts reclassified from accumulated other comprehensive 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 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 1, 2016 and October 3, 2015:
 
Three Months Ended
 
Nine Months Ended
 
October 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
 
(In thousands)
Americas:
 
 
 
 
 
 
 
United States
$
197,715

 
$
199,628

 
$
614,153

 
$
579,011

Other Americas
6,924

 
6,685

 
23,361

 
19,524

Total Americas
204,639

 
206,313

 
637,514

 
598,535

Asia
120,206

 
106,627

 
330,417

 
301,835

Europe, Middle East and Africa
83,124

 
80,193

 
257,308

 
240,777

Japan
38,251

 
40,630

 
121,864

 
119,865

Total
$
446,220

 
$
433,763

 
$
1,347,103

 
$
1,261,012


16


The following table presents a summary of long-lived assets by geography as of October 1, 2016 and January 2, 2016: 
 
As of
 
October 1,
2016
 
January 2,
2016
 
(In thousands)
Americas:
 
 
 
United States
$
193,611

 
$
189,665

Other Americas
823

 
387

Total Americas
194,434

 
190,052

Asia
31,943

 
24,767

Europe, Middle East and Africa
13,133

 
12,832

Japan
1,080

 
948

Total
$
240,590

 
$
228,599




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 2, 2016. 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, 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, system interconnect and analysis 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, 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 infrastructure and service companies and other technology companies that develop a wide range of electronics products and services 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 combine our products and technologies into categories related to major design activities:
Functional Verification, including Emulation and Prototyping 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 SiP 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 2, 2016.
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 2, 2016.
New Accounting Standards
For information regarding new accounting standards applicable to us, see Note 1 in the notes to condensed consolidated financial statements under the heading “New Accounting Standards.”
Results of Operations
Financial results for the three and nine months ended October 1, 2016, as compared to the three and nine months ended October 3, 2015, reflect the following:
increased product and maintenance revenue, primarily because of increased demand for our software and emulation and prototyping hardware;
continued investment in research and development activities focused on creating and enhancing our software products to maintain the pace of innovation required by our customers;
increased stock-based compensation included in operating expenses; and
restructuring activities.
Revenue
We primarily generate revenue from licensing our software and IP, selling or leasing our emulation and prototyping hardware technology, providing maintenance for our software, 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, hardware and IP products generating revenue in any given period and whether the revenue 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 software and IP license arrangements where revenue is recognized over multiple periods, services, royalties from certain IP arrangements, maintenance on perpetual software licenses and hardware, and our operating leases of hardware. Upfront revenue is primarily generated by our sales of emulation and prototyping hardware and perpetual software and IP licenses. Our ability to achieve this mix in any single fiscal period may be impacted primarily by delivery of hardware and IP products to our customers.
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 2, 2016.

19


Revenue by Period
The following table shows our revenue for the three months ended October 1, 2016 and October 3, 2015 and the change in revenue between periods:
 
Three Months Ended
 
Change
 
October 1,
2016
 
October 3,
2015
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance
$
415.4

 
$
396.9

 
$
18.5

 
5
 %
Services
30.8

 
36.9

 
(6.1
)
 
(16
)%
Total revenue
$
446.2

 
$
433.8

 
$
12.4

 
3
 %
The following table shows our revenue for the nine months ended October 1, 2016 and October 3, 2015 and the change in revenue between periods:
 
Nine Months Ended
 
Change
 
October 1,
2016
 
October 3,
2015
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance
$
1,247.1

 
$
1,165.4

 
$
81.7

 
7
%
Services
100.0

 
95.6

 
4.4

 
5
%
Total revenue
$
1,347.1

 
$
1,261.0

 
$
86.1

 
7
%
Product and maintenance revenue increased during the three and nine months ended October 1, 2016, as compared to the three and nine months ended October 3, 2015, primarily because of increased revenue for our emulation and prototyping hardware and generally increased business levels. The fluctuations in services revenue during the three and nine months ended October 1, 2016, compared to the three and nine months ended October 3, 2015, are primarily due to the timing of incremental revenue from certain customer agreements that was recognized at the completion of the contract when all specified deliverables were made available. Total 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 1, 2016 or October 3, 2015.
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
 
October 3,
2015
 
January 2,
2016
 
April 2,
2016
 
July 2,
2016
 
October 1,
2016
Functional Verification, including Emulation and Prototyping Hardware
23
%
 
25
%
 
26
%
 
27
%
 
24
%
Digital IC Design and Signoff
28
%
 
28
%
 
30
%
 
27
%
 
28
%
Custom IC Design
26
%
 
25
%
 
25
%
 
26
%
 
27
%
System Interconnect and Analysis
10
%
 
10
%
 
9
%
 
10
%
 
10
%
IP
13
%
 
12
%
 
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 January 2, 2016, 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.

20


Revenue by Geography
 
Three Months Ended
 
Change
 
October 1,
2016
 
October 3,
2015
 
Amount
 
Percentage
 
(In millions, except percentages)
United States
$
197.7

 
$
199.6

 
$
(1.9
)
 
(1
)%
Other Americas
6.9

 
6.7

 
0.2

 
3
 %
Asia
120.2

 
106.6

 
13.6

 
13
 %
Europe, Middle East and Africa
83.1

 
80.2

 
2.9

 
4
 %
Japan
38.3

 
40.7

 
(2.4
)
 
(6
)%
Total revenue
$
446.2

 
$
433.8

 
$
12.4

 
3
 %
 
Nine Months Ended
 
Change
 
October 1,
2016
 
October 3,
2015
 
Amount
 
Percentage
 
(In millions, except percentages)
United States
$
614.1

 
$
579.0

 
$
35.1

 
6
%
Other Americas
23.4

 
19.5

 
3.9

 
20
%
Asia
330.4

 
301.8

 
28.6

 
9
%
Europe, Middle East and Africa
257.3

 
240.8

 
16.5

 
7
%
Japan
121.9

 
119.9

 
2.0

 
2
%
Total revenue
$
1,347.1

 
$
1,261.0

 
$
86.1

 
7
%
Most of our revenue is transacted in the United States dollar. However, certain revenue transactions are denominated in foreign currencies. 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 by Geography as a Percent of Total Revenue
 
Three Months Ended
 
Nine Months Ended
 
October 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
United States
44
%
 
46
%
 
46
%
 
46
%
Other Americas
2
%
 
2
%
 
2
%
 
1
%
Asia
27
%
 
25
%
 
25
%
 
24
%
Europe, Middle East and Africa
19
%
 
18
%
 
19
%
 
19
%
Japan
8
%
 
9
%
 
8
%
 
10
%
Total
100
%
 
100
%
 
100
%
 
100
%
Cost of Revenue
 
Three Months Ended
 
Change
 
October 1,
2016
 
October 3,
2015
 
Amount
 
Percentage
 
(In millions, except percentages)
Cost of product and maintenance
$
38.7

 
$
41.2

 
$
(2.5
)
 
(6
)%
Cost of services
17.9

 
24.0

 
(6.1
)
 
(25
)%

21


 
Nine Months Ended
 
Change
 
October 1,
2016
 
October 3,
2015
 
Amount
 
Percentage
 
(In millions, except percentages)
Cost of product and maintenance
$
125.9

 
$
115.0

 
$
10.9

 
9
 %
Cost of services
54.6

 
62.6

 
(8.0
)
 
(13
)%
Cost of Product and Maintenance
Cost of product and maintenance includes costs associated with the sale and lease of our emulation and prototyping 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, costs of technical documentation and royalties payable to third-party vendors. Costs associated with our emulation and prototyping hardware products include materials, assembly, applicable reserves and overhead. These hardware manufacturing costs make our cost of emulation and prototyping hardware product higher, as a percentage of revenue, than our cost of software and IP products.
A summary of cost of product and maintenance is as follows:
 
Three Months Ended
 
Change
 
October 1,
2016
 
October 3,
2015
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance-related costs
$
28.1

 
$
31.1

 
$
(3.0
)
 
(10
)%
Amortization of acquired intangibles
10.6

 
10.1

 
0.5

 
5
 %
Total cost of product and maintenance
$
38.7

 
$
41.2

 
$
(2.5
)
 
(6
)%
 
Nine Months Ended
 
Change
 
October 1,
2016
 
October 3,
2015
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance-related costs
$
94.1

 
$
84.6

 
$
9.5

 
11
%
Amortization of acquired intangibles
31.8

 
30.4

 
1.4

 
5
%
Total cost of product and maintenance
$
125.9

 
$
115.0

 
$
10.9

 
9
%
Cost of product and maintenance depends primarily on our hardware product sales 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 1, 2016, as compared to the three and nine months ended October 3, 2015, were due to the following:
 
Change
 
Three Months Ended
 
Nine Months Ended
 
(In millions)
Emulation and prototyping hardware costs
$
(2.1
)
 
$
10.4

Other items
(0.9
)
 
(0.9
)
Total change in product and maintenance-related costs
$
(3.0
)
 
$
9.5

Emulation and prototyping hardware costs decreased during the three months ended October 1, 2016, as compared to the three months ended October 3, 2015, primarily due to lower total cost of inventory sold. Emulation and prototyping hardware costs increased during the nine months ended October 1, 2016, as compared to the nine months ended October 3, 2015, primarily due to higher emulation hardware sales. Gross margins on our hardware products will fluctuate based on customer pricing strategies, product mix, product competition and product life cycle.

22


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 decreased during the three and nine months ended October 1, 2016, as compared to the three and nine months ended October 3, 2015, primarily due to a decrease in the resources dedicated to deliver and support our services and custom IP offerings.
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, restructuring activities, foreign exchange rates, stock-based compensation and the impact of our variable compensation programs that are driven by overall operating results.
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. 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 1, 2016 and October 3, 2015 were as follows:
 
Three Months Ended
 
Change
 
October 1,
2016
 
October 3,
2015
 
Amount
 
Percentage
 
(In millions, except percentages)
Marketing and sales
$
96.8

 
$
102.0

 
$
(5.2
)
 
(5
)%
Research and development
191.5

 
154.6

 
36.9

 
24
 %
General and administrative
30.4

 
28.1

 
2.3

 
8
 %
Total operating expenses
$
318.7

 
$
284.7

 
$
34.0

 
12
 %
 
Nine Months Ended
 
Change
 
October 1,
2016
 
October 3,
2015
 
Amount
 
Percentage
 
(In millions, except percentages)
Marketing and sales
$
297.1

 
$
298.9

 
$
(1.8
)
 
(1
)%
Research and development
553.8

 
475.6

 
78.2

 
16
 %
General and administrative
95.1

 
83.2

 
11.9

 
14
 %
Total operating expenses
$
946.0

 
$
857.7

 
$
88.3

 
10
 %
Our operating expenses, as a percentage of total revenue, for the three and nine months ended October 1, 2016 and October 3, 2015 were as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
Marketing and sales
22
%
 
24
%
 
22
%
 
24
%
Research and development
43
%
 
36
%
 
41
%
 
38
%
General and administrative
7
%
 
6
%
 
7
%
 
7
%
Total operating expenses
72
%
 
66
%
 
70
%
 
69
%

23


Marketing and sales
Costs of marketing and sales decreased during the three and nine months ended October 1, 2016, as compared to the three and nine months ended October 3, 2015, primarily due to a reduction in outside services and certain operational improvements within our sales organization. The changes in marketing and sales expense for the three and nine months ended October 1, 2016, as compared to the three and nine months ended October 3, 2015, were due to the following:
 
Change
 
Three Months Ended
 
Nine Months Ended
 
(In millions)
Salary, benefits and other employee-related costs
$
(3.3
)
 
$
(1.7
)
Professional services
(1.7
)
 
(1.5
)
Other items
(0.2
)
 
1.4

Total change in marketing and sales expense
$
(5.2
)
 
$
(1.8
)
Research and Development
Costs included in research and development increased during the three and nine months ended October 1, 2016, as compared to the three and nine months ended October 3, 2015, primarily due to incremental investments in research and development as a result of additional hiring as well as headcount added from acquisitions.
Stock-based compensation included in research and development increased during the three months ended October 1, 2016, as compared to the three months ended October 3, 2015, and during the nine months ended October 1, 2016, as compared to the nine months ended October 3, 2015, primarily because of higher grant-date fair values of stock awards vesting during the three and six months ended July 2, 2016. We expect stock-based compensation included in research and development to increase during the remainder of fiscal 2016, as compared to fiscal 2015, due to higher grant-date fair values of stock awards vesting during fiscal 2016.
The changes in research and development expense for the three and nine months ended October 1, 2016, as compared to the three and nine months ended October 3, 2015, were due to the following:
 
Change
 
Three Months Ended
 
Nine Months Ended
 
(In millions)
Salary, benefits and other employee-related costs
$
25.8

 
$
60.3

Stock-based compensation
5.2

 
10.8

Facilities and other infrastructure costs
3.0

 
7.1

Materials and other pre-production costs
1.5

 
(4.3
)
Travel and professional development
0.7

 
2.5

Other items
0.7

 
1.8

Total change in research and development expense
$
36.9

 
$
78.2


24


General and administrative
The changes in general and administrative expense for the three and nine months ended October 1, 2016, as compared to the three and nine months ended October 3, 2015, were due to the following:
 
Change
 
Three Months Ended
 
Nine Months Ended
 
(In millions)
Acquisition-related costs
$

 
$