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EX-32.02 - EXHIBIT 32.02 - CADENCE DESIGN SYSTEMS INCex3202cdns12302017.htm
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EX-10.27 - EXHIBIT 10.27 - CADENCE DESIGN SYSTEMS INCex1027cdns12302017.htm

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________ 
FORM 10-K
_____________________________________  
(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2017
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 0-15867
_____________________________________ 
cdnslogo17.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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Names of Each Exchange on which Registered
Common Stock, $0.01 par value per share
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ¨    No  x
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 (§ 232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer
 
x
 
Accelerated filer
 
o
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
o
 
 
 
 
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  ¨    No  x
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter ended July 1, 2017 was approximately $9,383,931,490.
On February 3, 2018, approximately 282,869,000 shares of the Registrant’s Common Stock, $0.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for Cadence Design Systems, Inc.’s 2018 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
 



CADENCE DESIGN SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2017
Table of Contents
    
 
 
 
Page
PART I.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
 
 
PART III.
 
 
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
 
PART IV.
 
 
 
 
 
Item 15.
 
 
 
Item 16.
 
 
 
 



PART I.

Item 1. Business
This Annual Report on Form 10-K and the documents incorporated by reference in this Annual Report on Form 10-K contain statements that are not historical in nature, are predictive, or that depend upon or refer to future events or conditions or contain other 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 and services, 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. Important risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements include, but are not limited to, those identified in “Proprietary Technology,” “Competition,” “Risk Factors,” “Critical Accounting Estimates,” “Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk” and “Liquidity and Capital Resources” contained in this Annual Report on Form 10-K and the risks discussed in our other Securities and Exchange Commission (“SEC”) filings.
We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K are made only as of the date of this Annual Report on Form 10-K. We do not intend, and undertake no obligation, to update these forward-looking statements.
Overview
We enable our customers to design electronic products. Our products and services are designed to give our customers a competitive edge in their development of electronic systems, integrated circuits (“ICs”), electronic devices and increasingly sophisticated manufactured products. Our products and services do this by optimizing performance, minimizing power consumption, shortening the time to bring our customers’ products to market and reducing their design, development and manufacturing costs. Our customers create and sell electronic products at differing levels of completeness. Our electronic systems customers deliver entire devices, such as smartphones, laptop computers, gaming systems, automobiles, servers, medical equipment and networking products. These systems companies internally develop, or externally purchase, the sub-components for their products, including printed circuit boards (“PCBs”), which interconnect all the hardware components, ICs, which are often referred to as computer chips, and software at various levels which runs on the hardware. Our semiconductor customers deliver ICs, which include subcategories, such as memory chips, systems-on-chip (“SoCs”), analog chips, processors and other types of chips.
We offer software, hardware, services and reusable IC design blocks, which are commonly referred to as intellectual property (“IP”). Systems customers use our offerings to develop and integrate software that is key to the functionality of their products, as well as to design their ICs and PCBs. Our semiconductor customers use our offerings to design, configure, analyze and verify ICs. Additionally, some customers license our IP, which accelerates their product development processes by providing pre-designed and verified circuit blocks for their ICs.
Our strategy, which we call System Design Enablement (“SDE”), is to provide the technologies necessary for our customers to develop a complete and functional electronic product. Our SDE strategy enables us to address the growing trends of electronic systems companies developing their own ICs as part of their end product systems, as well as semiconductor companies delivering greater portions of the systems into which their IC products are integrated. The development of electronic products, or their sub-components, is complex and requires many engineers using our solutions with specialized knowledge and skill. The rate of technical innovation in electronics is swift, long driven by a concept known as Moore’s Law, which more than 50 years ago predicted that the complexity of ICs would double about every 24 months. In order to make our customers successful, our products must handle this exponential growth rate in complexity, without requiring a corresponding increase in our customers’ costs. Historically, the industry that provided the tools used by IC engineers was referred to as Electronic Design Automation (“EDA”). Today, our offerings include and extend beyond EDA tools to include SDE.

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Our SDE solutions facilitate the electronic product creation process at four levels. First, our core EDA offerings enable engineers to complete tasks associated with the design, analysis and verification of ICs. Core EDA tools and services are specifically designed to meet the requirements of engineers who develop different types of ICs. The second level of SDE solutions is IP, which consists of design IP and verification IP (“VIP”). Design IP is directly integrated into the IC by the customer as part of its development process. VIP consists of technologies and methodologies useful for verifying how design IP is integrated into the IC, but VIP does not become part of the IC product. The third level of SDE solutions is System Interconnect, and includes tools and services used for the design, analysis and verification of PCBs, as well as the packages that encapsulate the ICs for electrical and physical connection to the PCB. The fourth level of SDE solutions is System Integration, which includes the engineering tasks associated with designing and analyzing systems, verifying system functionality, combining software with hardware, or developing new software for an IC or system prior to its manufacture.
Business Drivers
Our products and services enable our customers to design complex and innovative electronic products, so demand for our products is driven by our customers’ investment in new designs and products. The most promising new opportunities for us involve enabling the design of electronic systems for machine learning, augmented reality, virtual reality, internet-of-things, aerospace and defense and autonomous vehicle sub-systems. Large and existing electronics categories, such as datacenter servers, smartphones and networking products continue to provide business opportunities for us as customers initiate new design projects. Conversely, the decline of previously vibrant categories, and the integration of previously separate capabilities into a single device, can potentially reduce our business opportunities. For example, digital cameras and navigation devices were once independent devices, and are now also available as features on a smartphone. Likewise, the laptop computer category has been negatively affected by the proliferation of mobile devices.
Underlying the requirements within any particular vertical market sector is the availability of rapidly improving IC manufacturing technology. In order for our customers to take advantage of such advancements, certain of our products must first be developed to exploit these new manufacturing capabilities. This dependency means that we must invest significantly in product research and development to keep pace with the latest manufacturing technology. The demand for new IC manufacturing technology directly impacts the demand for our newest products.
Another driver for our business is the differentiation, capabilities and benefits provided to our customers by our products. With the rapid pace of innovation comes the opportunity for our products to address key challenges associated with electronic product creation, such as power consumption, performance and cost. Our products have unique attributes that our customers value. In general, these attributes can be grouped into broader categories such as quality of results (in terms of power consumption, performance and chip area), engineering productivity, tool performance, new capabilities or methods and faster time-to-market. Our business opportunities are significantly enhanced when our offerings address these key factors.
Products and Product Strategy
Our strategy is to provide our customers with the ability to address the broad range of issues that arise as they develop electronic products. Our SDE solutions are comprised of products that are categorized according to the role they play in the electronic product design process. We combine our products and technologies into categories related to major design activities. The following table shows the relationship between our product categories and the SDE levels to which they relate.
 
System Design Enablement Levels
Cadence Product Categories
IC Development (Core EDA)
IP Integration
System Interconnect
System Integration
Functional Verification (including hardware for emulation and prototyping)
N/A
Digital IC Design and Signoff

N/A
Custom IC Design and Verification

N/A
N/A
System Interconnect and Analysis (PCB and IC package)
N/A
N/A
IP (includes design IP and VIP)

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Functional Verification, including Emulation and Prototyping Hardware
Functional verification products are used by our customers to efficiently and effectively verify that the circuitry or the software they have designed will perform as intended. Verification takes place before implementing or manufacturing the circuitry, significantly reducing the risk of discovering an error in the completed product. Our functional verification offering consists of four primary verification engines:
JasperGold® formal verification platform
Xcelium™ parallel simulation platform
Palladium® Z1 verification computing platform
Protium™ S1 FPGA prototyping platform
These engines are used for early bug detection, verification of block-level functionality, verification acceleration and emulation of system-level functionality, system-level power exploration, analysis and optimization and system-level prototyping for hardware/software co-verification. Our emulation hardware offering--the Palladium Z1 enterprise emulation system--provides high throughput, capacity, datacenter reliability and workgroup productivity to enable global design teams to develop advanced hardware-software systems. The Protium S1, a prototyping solution based on Field-Programmable Gate Arrays (“FPGAs”), leverages a common front end with Palladium Z1 in order to move designs rapidly from emulation to the prototyping stage for early software development.
Also included in our functional verification offering are products that are used for verification planning and metric tracking, testbench automation, debugging and software-driven tests. These products enable our customers to coordinate verification activities across multiple teams and various specialists for verification planning and closure.
Digital IC Design and Signoff
Digital IC design offerings are used by our customers to create logical representations of a digital circuit or an IC that can be verified for correctness prior to implementation (please refer to the discussion under “Functional Verification, including Emulation and Prototyping Hardware” above). Once the logic is verified, the design representation is implemented, or converted to a format ready for silicon manufacturing, using additional software tools within this category. The manufacturing representation is also analyzed and verified. Our digital IC offerings include three major categories: logic design, physical implementation and signoff.
Our logic design offering is comprised of logic synthesis, test and equivalence checking capabilities and is typically used by customers to create and verify designs in conjunction with our functional verification capabilities. This offering provides chip planning, design, verification and test technologies and services to customers. The offering includes the Genus™ synthesis solution, a logic synthesis offering that provides fast throughput while also offering high quality results, the Stratus™ high-level synthesis solution for system-level synthesis, and the Joules™ RTL power solution, which delivers fast power analysis while preserving near-signoff accuracy. We also offer the Modus™ design-for-test software solution, which reduces SoC test time.
Our physical implementation offering comprises tools used near the end of the design process, including place and route, signal integrity, optimization and multiple patterning preparation. The Innovus™ implementation system is a physical implementation offering that delivers fast design turnaround time while also delivering improved power, performance and area characteristics. This offering enables customers to address the technology challenges of the latest semiconductor advanced process nodes, create a physical representation of logic models and prepare a design for signoff.
Our signoff offering is comprised of tools used to signoff the design as ready for manufacture by a silicon foundry, which provides certification for this step. This offering includes Tempus™ timing analysis, Voltus™ power analysis, Quantus™ QRC extraction solutions and Pegasus™ physical verification system. Our design for manufacturing products are also included in our signoff offering and are used by customers to address manufacturing and yield issues as early in the product development process as possible.
Custom IC Design and Verification
Custom IC design and verification offerings are used by our customers to create schematic and physical representations of circuits down to the transistor level for analog, mixed-signal, custom digital, memory and radio frequency (“RF”) designs. These representations are verified using simulation tools optimized for each type of design. The offering includes the design capture environment, simulation and IC layout capabilities within the Virtuoso® custom design platform. Other tools in the custom IC portfolio are used to prepare the designs for manufacturing.

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Virtuoso Advanced Node adds functionality to the base Virtuoso package to enable the use of three-dimensional transistors (“FinFETs”), multiple patterning and other technologies required for advanced designs. Virtuoso for Electrically Aware Design introduces a new time-saving paradigm that shortens the loop between design and verification by verifying designs as they are being created. Spectre® XPS is a Fast SPICE offering that speeds verification time over previously existing solutions. Virtuoso System Design Platform enables engineers to design and verify concurrently across the chip, package and board. Finally, Legato Memory Solution is the industry’s first integrated solution for memory design and verification.
System Interconnect and Analysis
Our System Interconnect and Analysis offerings are used by our customers to develop PCBs and IC packages. The capabilities in the Allegro® system interconnect design platform include PCB authoring and implementation, IC package and System-in-Package design and signal and power integrity analysis and PCB library design management and collaboration. Certain offerings also include the simulation capability within the Virtuoso custom design platform. Sigrity™ analysis tools have been integrated with our Allegro platform, enabling a comprehensive front-to-back flow for implementation and full signal and power integrity analysis for designs featuring high speed interface protocols. These offerings enable engineers who are responsible for the capture, layout and analysis of advanced PCB and IC packages to design high-performance electronic products across the domains of ICs, IC packages and PCBs, to increase functional density and to manage design complexity while reducing cost and time-to-market. The need for compact, high performance mobile, consumer and automotive design with advanced serial interconnect is driving technology evolution for our PCB offering. For mainstream PCB customers, where individual or small team productivity is a focus, we provide the OrCAD® family of offerings that is primarily marketed worldwide through a network of resellers.
IP
Our design IP offerings consist of pre-verified, customizable functional blocks, which customers integrate into their ICs to accelerate the development process and to reduce the risk of errors in the design process. We offer many types of design IP, including Tensilica® configurable digital signal processors vertically targeted subsystems for audio/voice, baseband and vision/imaging applications, controllers and physical interfaces for standard protocols and analog IP. We have significantly expanded our design IP portfolio in recent years through acquisitions and internal development. During the fourth quarter of fiscal 2017, we acquired nusemi inc, a company focused on the development of ultra-high-speed Serializer/Deserializer (“SerDes”) communications IP.
We also offer a broad range of VIP and memory models, which model the expected behavior of many industry standard protocols when used with verification solutions and are complementary to our design IP offerings. VIP and accelerated VIP, which is used in emulation, are used across the suite of functional verification engines to verify the correct interaction with dozens of design IP interface protocols such as DDR, USB and PCI Express. Our VIP offerings are also used in system-level verification to model correct behavior of full systems interacting with their environments.
Product Arrangements
We primarily license our software using time-based licenses. Our time-based license arrangements offer customers the right to access and use all of the products delivered at the outset of an arrangement and updates throughout the entire term of the arrangement, which is generally two to three years, with no rights to return. Our updates provide for continued access to our evolving technology as our customers’ designs migrate to more advanced nodes. In addition, certain time-based license arrangements include:
the right for the customer to remix among the products delivered at the outset of the arrangement, so long as the cumulative contractual value of all products in use does not exceed the total license fee determined at the outset of the arrangement; and
use of unspecified additional products that become commercially available during the term of the arrangement.
A small portion of our software is licensed under perpetual licenses, which does not include the right to use new technology. Payment terms for time-based licenses generally provide for payments to be made over the license period and payment terms for perpetual licenses generally are net 30 days.
Our emulation and prototyping hardware products are either sold or leased to our customers.
We generally license our design IP under nonexclusive license agreements that provide usage rights for specific designs. In addition, for certain of our IP license agreements, we collect royalties as our customers ship their product that includes our IP to their customers.
For a further description of our license agreements, our emulation and prototyping hardware sale or lease agreements, revenue recognition policies and results of operations, please refer to the discussion under “Critical Accounting Estimates” under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Technical Support and Maintenance
Customer service and support is critical to the adoption and successful use of our products. We provide our customers with technical support and maintenance to facilitate their use of our software, hardware and IP solutions.
Services
We offer a number of services, including services related to methodology, education and hosted design solutions. These services may be sold separately or sold and performed in conjunction with the license, sale or lease of our products. As necessary, certain of our design services engineers are assigned to internal research and development projects associated with our design IP business.
As part of our services offerings, we design advanced ICs, develop custom IP and address industry design issues that may not be solved adequately by today’s EDA technologies. This enables us to target and accelerate the development of new software technology and products to satisfy current and future design requirements.
We offer engineering services to collaborate with our customers in the design of complex ICs and the implementation of key design capabilities, including low power design, IC packaging and board design, functional verification, digital implementation, analog/mixed-signal design and system-level design. The customers for these services primarily consist of semiconductor and systems companies developing products for the consumer, communications, military, aerospace and computing markets. These ICs range from digital SoCs and analog and RF designs to complex mixed-signal ICs.
In delivering methodology services, we leverage our experience and knowledge of design techniques, our products, leading practices and different design environments to improve the productivity of our customers’ engineering teams. Depending on the customers’ projects and needs, we work with customers using outsourcing, consultative and collaborative offerings.
Our education services offerings can be customized and include training programs that are conducted via the internet or in a classroom setting. The content of these offerings ranges from the latest IC design techniques to methodologies for using the most recent features of our EDA products. The primary focus of education services is to accelerate our customers’ path to productivity in the use of our products.
Third-Party Programs and Initiatives
In addition to our products, many customers use design tools that are provided by other EDA companies, as well as design IP available from multiple suppliers. We support the use of third-party design products and design IP through our Connections® program and through our participation in industry groups such as the Silicon Integration Initiative and Accellera System Initiative. We actively contribute to the development and deployment of industry standards.
Product and Maintenance and Services Revenue
Revenue, and revenue as a percentage of total revenue, from our product and maintenance and services offerings for the last three fiscal years were as follows:
 
2017
 
2016
 
2015
 
(In millions, except percentages)
Product and maintenance
$
1,814.0

 
93
%
 
$
1,683.8

 
93
%
 
$
1,578.9

 
93
%
Services
129.0

 
7
%
 
132.3

 
7
%
 
123.2

 
7
%
Total revenue
$
1,943.0

 
 
 
$
1,816.1

 
 
 
$
1,702.1

 
 
Our revenue mix is such that approximately 90% of our revenue is recognized over the contract life, and the remainder of the revenue is recognized up front, upon completion of delivery.
For an additional description of our product and maintenance and services revenue, see the discussion under “Results of Operations” under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” For our fiscal 2016 results of operations and our financial position as of December 30, 2017, see Part IV, Item 15, “Exhibits and Financial Statement Schedules.”
Backlog
Our backlog was $2.7 billion and $2.5 billion as of December 30, 2017 and December 31, 2016, respectively. Our backlog as of December 30, 2017 consisted of the deferred revenue on our balance sheet and the remaining unbilled portion of fully executed arrangements with effective dates commencing no later than December 30, 2017 with revenue to be recognized thereafter, and included a variety of types, generally including, but not limited to:
licenses for software products and IP;

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maintenance on software, hardware and IP products;
bookings for the sale and lease of hardware products, including those that have expected delivery dates after December 30, 2017 but before March 31, 2018; and
the undelivered portion of engineering services contracts.
The substantial majority of our backlog consists of customer contracts for which product and maintenance revenue is recognized over the contract life. Historically, we have not experienced significant cancellations of our contracts with customers. For engineering services contracts in backlog, completion dates are occasionally rescheduled, delaying revenue recognition under those contracts beyond the original anticipated completion date. During fiscal 2017, approximately 70% of our revenue came from arrangements that were in backlog as of December 31, 2016. We expect $1.4 billion, or approximately 70% of our fiscal 2018 revenue, to come from arrangements that were in backlog as of December 30, 2017. The actual percentage of revenue coming from backlog during fiscal 2018 may change if our actual business levels in fiscal 2018 are different than our current expectations.
Marketing and Sales
We generally market our products and provide services to existing and prospective customers through a direct sales force consisting of sales people and applications engineers. Applications engineers provide technical pre-sales and post-sales support for our products. Due to the complexity of many of our products and the system design process, the sales cycle is generally long, requiring three to six months or more. During the sales cycle, our direct sales force generally provides technical presentations, product demonstrations and support for on-site customer evaluation of our solutions. We also promote our products and services through advertising, marketing automation, trade shows, public relations and the internet. We selectively utilize value-added resellers to broaden our reach and reduce cost of sales. Our OrCAD products and certain Allegro products are primarily marketed through these channels. With respect to international sales, we generally market and support our products and services through our subsidiaries. We also use a third-party distributor to license our software products and services to certain customers in Japan.
Research and Development    
Our research and development expense was $804.2 million during fiscal 2017, $735.3 million during fiscal 2016 and $637.6 million during fiscal 2015.
The primary areas of our research and development include the following:
Functional Verification, including Emulation and Prototyping Hardware;
Digital IC Design and Signoff;
Custom IC Design and Verification;
System Interconnect and Analysis; and
IP.
Our future performance depends on our ability to innovate, commercialize newly developed solutions and enhance and maintain our current products. We must continuously re-engineer our products to solve new or increased physics challenges that arise with each successive process node and address the increase in complexity that is introduced by the resulting much larger designs. We must also keep pace with our customers’ technical developments, satisfy industry standards and meet our customers’ increasingly demanding performance, productivity, quality and predictability requirements. Therefore, we expect to continue to invest in research and development.
Hardware Manufacturing and Software Distribution
Our emulation and prototyping hardware, including all individual PCBs, custom ICs and FPGA-based prototyping products, is manufactured, assembled and tested by subcontractors before delivery to our customers. Software and documentation are primarily distributed to customers by secure electronic delivery or on DVD.

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Proprietary Technology
Our success depends, in part, upon our proprietary technology. We generally rely on patents, copyrights, trademarks and trade secret laws, licenses and restrictive agreements to establish and protect our proprietary rights in technology and products. Many of our products include software or other intellectual property licensed from third parties. We may have to seek new licenses or renew existing licenses for third-party software and other intellectual property in the future. As part of performing engineering services for customers, our engineering services business uses certain software and other intellectual property licensed from third parties, including that of our competitors.
Competition
We compete most frequently with Synopsys, Inc. and Mentor Graphics Corporation, which was acquired by Siemens AG in 2017, and with numerous other EDA providers, manufacturers of electronic devices that have developed, acquired or have the capability to develop their own EDA products, electronics design and consulting companies, and other IP companies. These include Altium Limited, Ansys, Inc., CEVA, Inc., Keysight Technologies, Inc. and Zuken Ltd.
Certain competitive factors in the engineering services business differ from those of the products businesses. While we compete with other EDA companies in the engineering services business, our principal competitors include independent engineering service businesses. Many of these companies are also customers, and therefore use our product offerings in the delivery of their services or products.
Corporate Information
We were organized as a Delaware corporation in June 1988. Our headquarters is located at 2655 Seely Avenue, San Jose, California 95134. Our telephone number is (408) 943-1234. We use our website at www.cadence.com to communicate important information about our company, including news releases and financial information. Our website permits investors to subscribe to e-mail notification alerts when we post new material information on our website. We also make available on our investor relations webpage, free of charge, copies of our SEC filings and submissions as soon as reasonably practicable after electronically filing or furnishing such documents with the SEC. Stockholders may also request copies of these documents by writing to our Corporate Secretary at the address above. Information on our website is not incorporated by reference in this Annual Report on Form 10-K unless expressly noted.
International Operations
As of December 30, 2017, we had 52 sales offices, design centers and research and development facilities, approximately 70% of which are located outside of the United States. We primarily consider customer sales and support requirements, the availability of a skilled workforce, and costs and efficiencies, among other relative benefits, when determining what operations to locate internationally. For additional information relating to our international operations, including revenue and long-lived assets by geographic area, see Note 19 in the notes to consolidated financial statements. For risks related to our international operations, see the discussion under “The effect of foreign exchange rate fluctuations may adversely impact our financial condition” and “Risks associated with our international operations could seriously harm our financial condition” under Item 1A, “Risk Factors.”
Fiscal Year End
Our fiscal years are 52- or 53-week periods ending on the Saturday closest to December 31. Fiscal 2017, 2016 and 2015 were each 52-week fiscal years.
Employees
As of December 30, 2017, we had approximately 7,200 full-time employees.
Executive Officers of the Registrant
The following table provides information regarding our executive officers as of February 20, 2018:
Name
 
Age
 
Positions and Offices
Lip-Bu Tan
 
58
 
Chief Executive Officer and Director
John M. Wall
 
47
 
Senior Vice President and Chief Financial Officer
Anirudh Devgan
 
48
 
President
Thomas P. Beckley
 
60
 
Senior Vice President, Research and Development
James J. Cowie
 
53
 
Senior Vice President, General Counsel and Secretary
Surendra Babu Mandava
 
59
 
Senior Vice President, Research and Development
Neil Zaman
 
49
 
Senior Vice President, Worldwide Field Operations

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Our executive officers are appointed by the Board of Directors and serve at the discretion of the Board of Directors.
LIP-BU TAN has served as Chief Executive Officer of Cadence since January 2009. From January 2009 to November 2017, Mr. Tan also served as President of Cadence. Mr. Tan has been a member of the Cadence Board of Directors since February 2004. In 1987, Mr. Tan founded Walden International, an international venture capital firm, and since that time has served as its Chairman. Mr. Tan serves as a director of Aquantia Corp., Hewlett Packard Enterprise Company, Quantenna Communications, Inc. and Semiconductor Manufacturing International Corporation. Mr. Tan has a B.S. from Nanyang University in Singapore, an M.S. in nuclear engineering from the Massachusetts Institute of Technology and an M.B.A. from the University of San Francisco.
JOHN M. WALL has served as Senior Vice President and Chief Financial Officer of Cadence since October 2017. From October 2000 to September 2017, Mr. Wall held several positions at Cadence, most recently as Corporate Vice President and Corporate Controller from April 2016 to October 2017, Vice President, Finance and Operations, Worldwide Revenue Accounting and Sales Finance from 2015 to 2016 and Vice President, Finance and Operations, EMEA and Worldwide Revenue Accounting from 2005 to 2015. Mr. Wall has an NCBS from the Institute of Technology, Tralee and is a Fellow of the Association of Chartered Certified Accountants.
ANIRUDH DEVGAN has served as President of Cadence since November 2017. From May 2012 to November 2017, Dr. Devgan held several positions at Cadence, most recently as Executive Vice President, Research and Development from March 2017 to November 2017 and Senior Vice President, Research and Development from November 2013 to March 2017. Prior to joining Cadence, from May 2005 to March 2012, Dr. Devgan served as Corporate Vice President and General Manager of the Custom Design Business Unit at Magma Design Automation, Inc., an electronic design automation company. Dr. Devgan has a B.Tech. in electrical engineering from the Indian Institute of Technology, Delhi, and an M.S. and Ph.D. in electrical and computer engineering from Carnegie Mellon University.
THOMAS P. BECKLEY has served as Senior Vice President, Research and Development of Cadence since September 2012. From April 2004 to September 2012, Mr. Beckley served as Corporate Vice President, Research and Development of Cadence. Prior to joining Cadence, Mr. Beckley served as President and Chief Executive Officer of Neolinear, Inc., a developer of auto-interactive and automated analog/RF tools and solutions for mixed-signal design that was acquired by Cadence in April 2004. Mr. Beckley has a B.S. in mathematics and physics from Kalamazoo College and an M.B.A. from Vanderbilt University.
JAMES J. COWIE has served as Senior Vice President and General Counsel of Cadence since April 2008 and Secretary of Cadence since May 2008. From August 2000 to March 2008, Mr. Cowie held several positions at Cadence, most recently as Corporate Vice President - Business Development, Associate General Counsel and Assistant Secretary. Mr. Cowie has an A.B. in economics from Duke University and a J.D. from Stanford Law School.
SURENDRA BABU MANDAVA has served as Senior Vice President, Research and Development of Cadence since January 2017. Prior to joining Cadence, Mr. Mandava served as Chief Executive Officer of Ineda Systems Inc., a low-power System-on-Chip solutions company, from November 2014 to July 2016, Vice President of Broadcom Corporation, a provider of semiconductor solutions, from November 2010 to December 2012, and President and then as Chief Executive Officer of Beceem Communications Inc., a semiconductor company, from December 2003 until it was acquired by Broadcom in November 2010. Mr. Mandava has a B.Tech. in electronics and communication engineering from the Regional Engineering College, Trichy, and a M.Tech. in electrical engineering and computer science from the Indian Institute of Technology, Kanpur.
NEIL ZAMAN has served as Senior Vice President, Worldwide Field Operations of Cadence since September 2015. From October 1999 to September 2015, Mr. Zaman held several positions at Cadence, most recently as Corporate Vice President, North America Field Operations. Prior to joining Cadence, Mr. Zaman held positions at Phoenix Technologies Ltd. and IBM Corporation. Mr. Zaman has a B.S. in Finance from California State University, Hayward.



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Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including those described in the sections below, that could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock.
Risks Related to Our Business
Any periods of uncertainty in the global economy in general, and any potential downturn in the semiconductor and electronics industries in particular, may negatively impact our business and reduce our bookings levels and revenue.
Purchases of our products and services are dependent upon the commencement of new design projects by IC manufacturers and electronics systems companies. The IC and electronics systems industries are cyclical and are characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand.
The IC and electronics systems industries have also experienced significant downturns in connection with, or in anticipation of, maturing product cycles of both these industries’ and their customers’ products. While spending on EDA products and services has grown in recent years, the current outlook for the semiconductor industry is uncertain and may result in a decrease in spending on EDA products and services, which are a part of our overall SDE offering.
While we cannot predict global economic conditions, uncertainty about future political and economic conditions and future decline in consumer spending could negatively impact our customers’ businesses, reducing the number of new chip designs and their overall research and development spending, including their spending on our products and services, and as a result decrease demand for our products. Decreased bookings for our products and services, customer bankruptcies, consolidation among our customers, or problems or delays with our hardware suppliers or with the supply or delivery of our hardware products could also adversely affect our ability to grow our business or adversely affect our future revenues and financial results. Our future business and financial results are subject to considerable uncertainty that could impact our stock price. If economic conditions deteriorate in the future, or, in particular, if semiconductor or electronics systems industry revenues do not grow or our suppliers of our hardware components and products are subject to problems or delays, our future revenues and financial results could be adversely affected. However, if economic conditions improve for our customers, the positive impact on our revenues and financial results may be deferred due to cautious customer research and development spending and our mix of licenses that yield revenue recognized over time.
Customer consolidation could affect our operating results.
There has been a trend toward customer consolidation in the semiconductor industry through business combinations, including mergers, asset acquisitions and strategic partnerships. As this trend continues, it could make us dependent on fewer customers who may be able to exert increased pressure on our prices and other contract terms and could increase the portion of our total sales concentration for any single customer. Customer consolidation activity could also reduce the demand for our products and services if such customers streamline research and development or operations, reduce purchases or delay purchasing decisions. These outcomes could negatively impact our financial condition.
Our failure to respond quickly to technological developments or customers’ increasing technological requirements could make our products uncompetitive and obsolete.
The industries in which we compete experience rapid technology developments, rapid changes in industry standards and customer requirements, and frequent introductions and improvements of new products. Currently, the industries we serve are experiencing the following trends:
changes in the design and manufacturing of ICs, including migration to advanced process nodes and three-dimensional transistors, such as FinFETs, present major challenges to the semiconductor industry, particularly in IC design, design automation, design of manufacturing equipment, and the manufacturing process itself. With migration to advanced process nodes, the industry must adapt to more complex physics and manufacturing challenges such as the need to draw features on silicon that are many times smaller than the wavelength of light used to draw the features via lithography. Models of each component’s electrical properties and behavior also become more complex as do requisite analysis, design, verification and manufacturing capabilities. Novel design tools and methodologies must be invented and enhanced quickly to remain competitive in the design of electronics in the smallest nanometer ranges;
the ability to design SoCs increases the complexity of managing a design that, at the lowest level, is represented by billions of shapes on fabrication masks. In addition, SoCs typically incorporate microprocessors and digital signal processors that are programmed with software, requiring simultaneous design of the IC and the related software embedded on the IC;

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with the availability of seemingly endless gate capacity, there is an increase in design reuse, or the combining of off-the-shelf design IP with custom logic to create ICs or SoCs. The unavailability of a broad range of high-quality design IP (including our own) that can be reliably incorporated into a customer’s design with our software products and services could lead to reduced demand for our products and services;
increased technological capability of the FPGA, which is a programmable logic chip, creates an alternative to IC implementation for some electronics companies. This could reduce demand for our IC implementation products and services;
a growing number of low-cost engineering services businesses could reduce the need for some IC companies to invest in EDA products; and
adoption of cloud computing technologies with accompanying new business models for an increasing number of software categories.
If we are unable to respond quickly and successfully to these trends, we may lose our competitive position, and our products or technologies may become obsolete. To compete successfully, we must develop, acquire or license new products and improve our existing products and processes on a schedule that keeps pace with technological developments and the requirements for products addressing a broad spectrum of designers and designer expertise in our industries. We must provide frequent and relevant updates to our software products in order to provide substantial benefit to the customer throughout the license periods because of the rapid changes in our customer’s industries. The market must also accept our new and improved products. Our hardware platforms must be enhanced periodically to reduce the likelihood that a competitor surpasses the capabilities we offer. Our introduction of new products could reduce the demand and revenue of our older products or affect their pricing. We must also be able to support a range of changing computer software, hardware platforms and customer preferences. A rapid transition to different business models associated with cloud computing technologies could result in reduced revenue. We cannot guarantee that we will be successful in keeping pace with all, or any, of the customer trends.
Competitive pressures may require us to reduce our pricing, which could have an adverse effect on our results of operations.
The highly competitive markets in which we do business can put pressure on us to reduce the prices of our software, emulation and prototyping hardware and IP. If our competitors offer deep discounts on certain products in an effort to recapture or gain market share or to sell other software or hardware products, we may then need to lower our prices or offer other favorable terms to compete successfully. Any such changes would be likely to reduce our profit margins and could adversely affect our operating results. Any substantial changes to our prices and pricing policies could cause revenues to decline or be delayed as our sales force implements and our customers adjust to the new pricing policies. Some of our competitors bundle products for promotional purposes or as a long-term pricing strategy or provide guarantees of prices and product implementations. These practices could, over time, significantly constrain the prices that we can charge for our products. If we cannot offset price reductions with a corresponding increase in the number of sales or with lower spending, then the reduced revenues resulting from lower prices could have an adverse effect on our results of operations.
Our System Design Enablement strategy requires the development or acquisition of products and expertise in new areas of technology. Our inability to develop or acquire these capabilities could impede our ability to address the technical requirements in technology segments which are expected to contribute to our growth.
Our SDE strategy is meant to increase our business among electronic systems companies, which are now designing their own ICs. SDE is also meant to increase our business among semiconductor companies, which are increasing their contribution to the end products into which their ICs are incorporated. Part of this strategy involves addressing the needs of new categories of electronic systems, including machine learning, augmented reality, virtual reality, internet-of-things and autonomous vehicle sub-systems, where increased investment is expected by our customers. Each of these categories requires technologies and expertise that are application-specific. If we are unable to develop or acquire the application-specific technologies and expertise necessary to address the requirements of these categories, it could impede our ability to expand our business in these categories and ultimately affect our future growth.
We have experienced varied operating results, and our operating results for any particular fiscal period are affected by the timing of revenue recognition, particularly for our emulation and prototyping hardware and IP products.
Various factors affect our operating results, and some of them are not within our control. Our operating results for any period are affected by the timing of revenue recognition, particularly for our emulation and prototyping hardware and IP products. In addition, we have recorded net losses in the past and may record net losses in the future.
A substantial portion of the product revenue related to our hardware business and some of our IP offerings is recognized upon delivery, and our forecasted revenue results are based, in part, on our expectations of hardware and IP to be delivered in a particular quarter. Therefore, changes in hardware and IP bookings or deliveries relative to expectations will have a more immediate impact on our revenue than changes in software or services bookings, for which revenue is generally recognized over time.

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In recent years, we made significant investments to expand our IP offerings through, among other things, research and development and acquisitions. As we continue to expand our IP offerings, a portion of the revenue related to our IP bookings will be deferred until we complete and deliver the licensed IP to our customers. As a result, costs related to the research and development of the IP may be incurred prior to the recognition of the related revenue.
Revenue related to our hardware and IP products is inherently difficult to predict because sales of our hardware and IP products depend on the commencement of new projects for the design and development of complex ICs and systems by our customers, our customers’ willingness to expend capital to deploy our hardware or IP products in those projects and the availability of our hardware or IP products for delivery. Therefore, our hardware or IP sales may be delayed or may decrease if our customers delay or cancel projects because their spending is constrained or if there are problems or delays with the supply or delivery of our hardware or IP products or our hardware suppliers. Moreover, the hardware and IP markets are highly competitive, and our customers may choose to purchase a competitor’s hardware or IP product based on cost, performance or other factors. These factors may result in lower revenue, which would have an adverse effect on our business, results of operations or cash flows.
A substantial proportion of our licenses yield revenue recognized over time, which may make it difficult for us to rapidly increase our revenue in future fiscal periods.
We plan our operating expenses based on forecasted revenue, expected business needs and other factors. These expenses and the effect of long-term commitments are relatively fixed in the short term. Bookings and the related revenue are harder to forecast in a difficult economic environment. If we experience a shortfall in bookings, our operating results could differ from our expectations because we may not be able to quickly reduce our expenses in response to short-term business changes.
The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting Estimates” under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”). Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that may lead us to change our methods, estimates and judgments. Changes in those methods, estimates and judgments could significantly affect our results of operations.
Historical results of operations should not be viewed as reliable indicators of our future performance. If our revenue, operating results or business outlook for future periods fall short of the levels expected by us, securities analysts or investors, the trading price of our common stock could decline.
We have invested and expect to continue to invest in research and development efforts for new and existing products and technologies and technical sales support. Such investments may affect our operating results, and, if the return on these investments is lower or develops more slowly than we expect, our revenue and operating results may suffer.
We have invested and expect to continue to invest in research and development for new and existing products, technologies and services in response to our customers’ increasing technological requirements. Such investments may be in related areas, such as technical sales support. These investments may involve significant time, risks and uncertainties, including the risk that the expenses associated with these investments may affect our margins and operating results and that such investments may not generate sufficient revenues to offset liabilities assumed and expenses associated with these new investments. We believe that we must continue to invest a significant amount of time and resources in our research and development efforts and technical sales support to maintain and improve our competitive position. If we do not achieve the benefits anticipated from these investments, if the achievement of these benefits is delayed, or if customers reduce or slow the need to upgrade or enhance their EDA products and design flows, our revenue and operating results may be adversely affected.
We have acquired and expect to acquire other companies and businesses and may not realize the expected benefits of these acquisitions.
We have acquired and expect to acquire other companies and businesses in order to expand our product offerings. Our future revenue growth and expansion of our business is dependent on our successful integration of our acquisitions. We may incur significant costs in connection with potential transactions, including acquisitions that are not consummated. Potential and completed acquisitions involve a number of risks. If any of the following acquisition-related risks occur, our business, operating results or financial condition could be adversely impacted:
the failure to realize anticipated benefits such as cost savings and revenue enhancements;
overlapping customers and product sets that impact our ability to maintain revenue at historical rates;
the failure to understand, compete and operate effectively in markets where we have limited experience;
the failure to integrate and manage acquired products and businesses effectively;
the failure to integrate and retain key employees of the acquired company or business;
difficulties in combining previously separate companies or businesses into a single unit;
the substantial diversion of management’s attention from day-to-day business when evaluating and negotiating these transactions and integrating an acquired company or business;

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the discovery, after completion of the acquisition, of unanticipated liabilities assumed from the acquired company, business or assets, such that we cannot realize the anticipated value of the acquisition;
difficulties related to integrating the products of an acquired company or business in, for example, distribution, engineering, licensing models or customer support areas;
unanticipated costs; or
unwillingness of customers of the acquired business to continue licensing or buying products from us following the acquisition.
In a number of our completed acquisitions, we have agreed to make future payments, either in the form of employee retention bonuses or contingent purchase price payments, based on the achievement of specified milestones. The performance goals pursuant to which these future payments may be made generally relate to the achievement by the acquired company or business, or by the employees who joined us with the acquired company or business, of certain specified bookings, revenue, run rate, product proliferation, product development or employee retention goals during a specified period following completion of the applicable acquisition. The specific performance goal levels and amounts and timing of employee bonuses or contingent purchase price payments vary with each acquisition. We may continue to use contingent purchase price payments in connection with acquisitions in the future and while we expect to derive value from an acquisition in excess of such contingent payment obligations, we may be required to make certain contingent payments without deriving the anticipated value.
Future acquisitions may involve issuances of stock as full or partial payment of the purchase price for the acquired company or business, grants of restricted stock, restricted stock units or stock options to employees of the acquired companies or businesses (which may be dilutive to existing stockholders), expenditure of substantial cash resources or the incurrence of a material amount of debt. These arrangements may impact our liquidity, financial position and results of operations or increase dilution of our stockholders’ equity interests in the company.
The competition in our industries is substantial, and we may not be able to continue to successfully compete in our industries.
The EDA industry, the commercial electronics engineering services industry and the IP industry are highly competitive. If we fail to compete successfully in these industries, it could seriously harm our business, operating results or financial condition. To compete in these industries, we must identify and develop or acquire innovative and cost-competitive EDA products, integrate them into platforms and market them in a timely manner. We may not be able to compete successfully in these industries. Factors that could affect our ability to compete successfully include:
the development by others of competitive EDA products or platforms and engineering services, possibly resulting in a shift of customer preferences away from our products and services and significantly decreased revenue;
aggressive pricing competition by some of our competitors may cause us to lose our competitive position, which could result in lower revenues or profitability and could adversely impact our ability to realize the revenue and profitability forecasts for our software or emulation and prototyping hardware systems products;
the challenges of advanced node design may lead some customers to work with more mature, less risky manufacturing processes that may reduce their need to upgrade or enhance their EDA products and design flows;
the challenges of developing (or acquiring externally developed) technology solutions, including hardware and IP offerings, that are adequate and competitive in meeting the rapidly evolving requirements of next-generation design challenges;
intense competition to attract acquisition targets, possibly making it more difficult for us to acquire companies or technologies at an acceptable price, or at all;
the low cost of entry in EDA;
the combination of our EDA competitors or collaboration among many EDA companies to deliver more comprehensive offerings than they could individually; and
decisions by electronics manufacturers to perform engineering services or IP development internally, rather than purchase these services from outside vendors due to budget constraints or excess engineering capacity.
We compete most frequently with Synopsys, Inc. and Mentor Graphics Corporation, which was acquired by Siemens AG in 2017, and also with numerous other EDA providers, manufacturers of electronic devices that have developed, acquired or have the capability to develop their own EDA products, electronics design and consulting companies, and other IP companies.These include Altium Limited, Ansys, Inc., CEVA, Inc., Keysight Technologies, Inc. and Zuken Ltd.

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The effect of foreign exchange rate fluctuations may adversely impact our revenue, expenses, cash flows and financial condition.
We have significant operations outside the United States. Our revenue from international operations as a percentage of total revenue was approximately 58% during fiscal 2017 and 54% during both fiscal 2016 and fiscal 2015. We expect that revenue from our international operations will continue to account for a significant portion of our total revenue. We also transact business in various foreign currencies, although the majority of our revenue contracts worldwide are denominated in U.S. dollars. Volatility of currencies in countries where we conduct business, most notably the U.S. dollar, Chinese renminbi, Japanese yen, European Union euro, British pound and Indian rupee have had and may in the future have an effect on our revenue or operating results.
Fluctuations in the rate of exchange between the U.S. dollar and the currencies of other countries where we conduct business could seriously affect our business, operating results or financial condition. For example, when a foreign currency declines in value relative to the U.S. dollar, it takes more of the foreign currency to purchase the same amount of U.S. dollars than before the change. If we price our products and services in the foreign currency, we receive fewer U.S. dollars than we did before the change. If we price our products and services in U.S. dollars, the decrease in value of the local currency results in an increase in the price for our products and services compared to those products of our competitors that are priced in local currency. This could result in our prices being uncompetitive in markets where business is transacted in the local currency. On the other hand, when a foreign currency increases in value relative to the U.S. dollar, it takes more U.S. dollars to purchase the same amount of the foreign currency. As we use the foreign currency to fund payroll costs and other operating expenses in our international operations, this results in an increase in operating expenses. Approximately 30% of our total costs and expenses are transacted in foreign currencies. Our attempts to reduce the effect of foreign currency fluctuations may be unsuccessful, and significant exchange rate movements may adversely impact our results of operations as expressed in U.S. dollars.
Our operating results could be adversely affected by an increase in our effective tax rate as a result of tax law changes, outcomes of current or future tax examinations, or by material differences between our forecasted and actual effective tax rates.
Our operations are subject to income and transaction taxes in the United States and in multiple foreign jurisdictions, with a significant amount of our foreign earnings generated by our subsidiaries organized in Ireland and Hungary. Any significant change in our future effective tax rates could adversely impact our results of operations for future periods. Our future effective tax rates could be adversely affected by the following:
changes in tax laws or the interpretation of such tax laws in the United States, Ireland, Hungary, the United Kingdom, China, Republic of Korea, Japan, India or other international locations where we have operations;
earnings being lower than anticipated in countries where we are taxed at lower rates as compared to the United States federal and state statutory tax rates;
an increase in expenses not deductible for tax purposes;
changes in tax benefits from stock-based compensation;
changes in the valuation allowance against our deferred tax assets;
changes in judgment from the evaluation of new information that results in a recognition, derecognition or change in measurement of a tax position taken in a prior period;
increases to interest or penalty expenses classified in the financial statements as income taxes;
new accounting standards or interpretations of such standards; or
results of examinations by the Internal Revenue Service (“IRS”), state, and foreign tax or other governmental authorities.
The IRS and other tax authorities regularly examine our income tax returns and other non-income tax returns, such as payroll, sales, use, value-added, net worth or franchise, property, goods and services, consumption, import, stamp, and excise taxes, in both the United States and foreign jurisdictions. The calculation of our provision for income taxes and our accruals for other taxes requires us to use significant judgment and involves dealing with uncertainties in the application of complex tax laws and regulations. In determining the adequacy of our provision for income taxes, we regularly assess the potential settlement outcomes resulting from income tax examinations. However, the final outcome of tax examinations, including the total amount payable or the timing of any such payments upon resolution of these issues, cannot be estimated with certainty. In addition, we cannot be certain that such amount will not be materially different from the amount that is reflected in our historical income tax provisions and accruals for other taxes. Should the IRS or other tax authorities assess additional taxes, penalties or interest as a result of a current or a future examination, we may be required to record charges to operations in future periods that could have a material impact on our results of operations, financial position or cash flows in the applicable period or periods.

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Forecasts of our annual effective tax rate are complex and subject to uncertainty because our income tax position for each year combines the effects of estimating our annual income or loss, the mix of profits and losses earned by us and our subsidiaries in tax jurisdictions with a broad range of income tax rates, as well as benefits from available deferred tax assets, the impact of various accounting rules, our interpretations of changes in tax laws and results of tax audits. Forecasts of our annual effective tax rate do not include the anticipation of future tax law changes. In addition, we account for certain tax benefits from stock-based compensation in the period the stock compensation is settled, which may cause increased variability in our quarterly effective tax rates. If there were a material difference between forecasted and actual tax rates, it could have a material impact on our results of operations.
Tax laws, regulations, and compliance practices are evolving and may have a material adverse effect on our results of operations, cash flows and financial position.
The U.S. Tax Cuts and Jobs Act (the “Tax Act”) was enacted in December 2017, and significantly affected U.S. tax law by changing how the U.S. imposes income tax on multinational corporations. The U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we will apply the law and impact our results of operations.
The Tax Act requires complex computations not previously required by U.S. tax law. As such, the application of certain accounting guidance is currently evolving. Further, compliance with the Tax Act and the accounting for certain provisions require accumulation of information not previously required or regularly produced. As a result, we have provided a provisional estimate on the effect of the Tax Act in our financial statements. As additional interpretative guidance is issued by the applicable authorities, we will continue our analysis on the application of the Tax Act and will revise our current estimates in future periods. The revisions to our current estimates could materially affect our results of operations, cash flow and financial position. For further discussion regarding our income taxes, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “New Accounting Standards” and Note 6 in the notes to consolidated financial statements.
Tax laws, regulations, and administrative practices in various jurisdictions are evolving and may be subject to significant changes due to economic, political, and other conditions. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. Governments are increasingly focused on ways to increase tax revenues, particularly from multinational corporations, which may lead to an increase in audit activity and harsher positions taken by tax authorities. We are currently subject to tax audits in various jurisdictions, including Germany, India, Israel and certain states within the United States, and these jurisdictions may assess additional tax liabilities against us.
The Organisation for Economic Co-operation and Development (“OECD”), an international association of 34 countries, including the United States, released the final reports from its Base Erosion and Profit Shifting (“BEPS”) Action Plans, which aim to standardize and modernize global tax policies. The BEPS Action Plans propose revisions to numerous tax rules, including country-by-country reporting, permanent establishment, hybrid entities and instruments, transfer pricing, and tax treaties. The BEPS Action Plans have been or are being enacted by countries where we have operations. The European Commission (“EC”) has conducted investigations in multiple countries focusing on whether local country tax rulings provide preferential tax treatment that violates European Union state aid rules and concluded that certain countries, including Ireland, have provided illegal state aid in certain cases. The EC and OECD have also been evaluating new rules on the taxation of the digital economy companies. In addition, Taiwan, Italy and the United Kingdom have recently introduced new rulings or proposals to tax digital transactions. These developments in tax laws and regulations, and compliance with these rules, could have a material adverse effect on our operating results, financial position and cash flows.
Our stock price has been subject to fluctuations and may continue to be subject to fluctuations.
The market price of our common stock has experienced fluctuations and may fluctuate or decline in the future, and as a result you could lose the value of your investment. The market price of our common stock may be affected by a number of factors, including:
quarterly or annual operating or financial results or forecasts that fail to meet or are inconsistent with earlier projections or the expectations of our securities analysts or investors;
changes in our forecasted bookings, revenue, earnings or operating cash flow estimates;
an increase in our debt or other liabilities;
market conditions in the IC, electronics systems and semiconductor industries;
announcements of a restructuring plan;
changes in management;
repurchases of shares of our common stock or changes to plans to repurchase shares of our common stock;
a gain or loss of a significant customer or market segment share;
litigation; and

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announcements of new products or acquisitions of new technologies by us, our competitors or our customers.
In addition, equity markets in general, and the equities of technology companies in particular, have experienced and may experience in the future, extreme price and volume fluctuations due to, among other factors, the actions of market participants or other actions outside of our control. Such price and volume fluctuations may adversely affect the market price of our common stock for reasons unrelated to our business or operating results.
Our future revenue is dependent in part upon our installed customer base continuing to license or buy products and purchase services.
Our installed customer base has traditionally generated additional new license, service and maintenance revenues. In future periods, customers may not necessarily license or buy additional products or contract for additional services or maintenance. Our customers, many of which are large semiconductor and systems companies, often have significant bargaining power in negotiations with us. Customer consolidation can reduce the total level of purchases of our software, hardware, IP and services, and in some cases, increase customers’ bargaining power in negotiations with their suppliers, including us.
We could suffer serious harm to our business because of the infringement of our intellectual property rights by third parties or because of our infringement of the intellectual property rights of third parties.
There are numerous patents relating to our business and ecosystem. New patents are being issued at a rapid rate and are owned by EDA companies as well as entities and individuals outside the EDA industry, including parties whose income is primarily derived from infringement-related licensing and litigation. It is not always practicable to determine in advance whether a product or any of its components infringes the patent rights of others. As a result, from time to time, we may be compelled to respond to or prosecute intellectual property infringement claims to protect our rights or defend a customer’s rights.
Intellectual property infringement claims, including contractual defense reimbursement obligations related to third-party claims against our customers, regardless of merit, could consume valuable management time, result in costly litigation or cause product shipment delays, all of which could seriously harm our business, operating results or financial condition. The risk of infringement and related indemnification claims associated with design IP products that are incorporated into a customer product broadly used by consumers may be higher than the risk associated with our software products. In settling these claims, we may be required to enter into royalty or licensing agreements with the third parties claiming infringement. These royalty or licensing agreements, if available, may not have terms favorable to us. Being compelled to enter into a license agreement with unfavorable terms could seriously harm our business, operating results or financial condition. Any potential intellectual property litigation could compel us to do one or more of the following:
pay damages (including the potential for treble damages), license fees or royalties (including royalties for past periods) to the party claiming infringement;
stop licensing products or providing services that use the challenged intellectual property;
obtain a license from the owner of the infringed intellectual property to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; or
redesign the challenged technology, which could be time consuming and costly, or impossible.
If we were compelled to take any of these actions, our business or operating results may suffer.

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If our security measures are breached, and an unauthorized party obtains access to customer data, financial data or assets or our proprietary business information, our information systems may be perceived as being unsecure, which could harm our business and reputation.
Our products and services involve the storage and transmission of our proprietary information and that of our customers. We have offices throughout the world, including key research and development facilities outside of the United States. Our operations are dependent upon the connectivity of our operations throughout the world. Despite our security measures, our information technology and infrastructure may be vulnerable to cyber attacks by unauthorized third parties (which may include nation-states and individuals sponsored by them) or breaches due to employee error, malfeasance or other disruptions, which could result in unauthorized disclosure of sensitive information and could significantly interfere with our business operations. Computer hackers may attempt to gain unauthorized access through a variety of methods (such as the use of viruses, malware, ransomware, phishing, denial of service attacks and other cyber attacks) and corrupt the processes of the products and services that we provide. We may also be a target of malicious attackers who attempt to gain access to our network or data centers or those of our customers or end users; steal proprietary information related to our business, products, services or infrastructure; steal financial data or assets or interrupt our systems and services or those of our customers or others. Breaches of our security measures could expose us to a risk of loss or misuse of this information, loss of financial assets, litigation and potential liability. Because techniques used to obtain unauthorized access or to sabotage information systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. In addition, if we select a vendor that uses cyber storage of information as part of their service or product offerings, despite our attempts to validate the security of such services, our proprietary information may be misappropriated by third parties. In the event of an actual or perceived breach of our security, or the security of one of our vendors, the market perception of the effectiveness of our security measures could be harmed and we could suffer damage to our reputation or our business, or lose existing customers and our ability to obtain new customers, or suffer harm to our financial condition.
Risks associated with our international operations could adversely impact our financial condition.
A significant amount of our revenue is derived from our international operations, and we have offices throughout the world, including key research and development facilities outside of the United States. Our international operations may be subject to a number of risks, including:
shifts in political, trade or other policies resulting from the results of certain elections or votes, such as changes in policies pursued by the United States, and the United Kingdom’s withdrawal from the European Union;
the adoption or expansion of government trade restrictions, including tariffs and other trade barriers;
limitations on repatriation of earnings;
limitations on the conversion of foreign currencies;
reduced protection of intellectual property rights in some countries;
performance of national economies;
longer collection periods for receivables and greater difficulty in collecting accounts receivable;
difficulties in managing foreign operations;
political and economic instability;
unexpected changes in regulatory requirements;
inability to continue to offer competitive compensation in certain growing regions;
differing employment practices and labor issues;
United States’ and other governments’ licensing requirements for exports, which may lengthen the sales cycle or restrict or prohibit the sale or licensing of certain products; and
variations in costs or expenses associated with our international operations, including as a result of changes in foreign tax laws or devaluation of the U.S. dollar relative to other foreign currencies.
Some of our international research and development and other facilities are in parts of the world where there may be a greater risk of business interruption as a result of political instability, terrorist acts or military conflicts than businesses located domestically. Furthermore, this potential harm is exacerbated because damage to or disruptions at our international research and development facilities could have a more significant adverse effect on our ability to develop new or improve existing products than other businesses that may only have sales offices or other less critical operations abroad. We are not insured for losses or interruptions caused by acts of war. Furthermore, our operations are dependent upon the connectivity of our operations throughout the world. Activities that interfere with our international connectivity or operations, such as cyber hacking, the introduction of a virus into our computer systems, natural disasters, civil unrest or terrorism, could significantly interfere with our business operations.
In addition, internal controls, policies and procedures and employee training and compliance programs that we have implemented to deter prohibited practices may not prevent our employees, contractors or agents from violating or circumventing our policies and the laws and regulations applicable to our worldwide operations.

16


We depend upon our management team and key employees, and our failure to attract, train, motivate and retain management and key employees may make us less competitive and therefore harm our results of operations.
Our business depends upon the continued services, efforts and abilities of our senior management and other key employees. Competition for highly skilled executive officers and employees can be intense, particularly in geographic areas recognized as high technology centers such as the Silicon Valley area, where our principal offices are located, and in other locations where we maintain facilities. In addition, competition for qualified personnel, including software engineers, in the EDA, commercial electronics engineering services and IP industries has intensified. Further, increased uncertainty regarding social, political and immigration policies in the United States and abroad may make it difficult to recruit employees with adequate experience. We may also experience increased compensation costs that are not offset by either improved productivity or higher sales. We may not be successful in recruiting new personnel and in retaining and motivating existing personnel. From time to time, there may be changes in our management team resulting from the hiring and departure of executive officers, and as a result, we may experience disruption to our business that may harm our operating results and our relationships with our employees, customers and suppliers may be adversely affected.
To attract, retain and motivate individuals with the requisite expertise, we may be required to grant large numbers of stock options or other stock-based incentive awards, which may be dilutive to existing stockholders and increase compensation expense, and pay significant base salaries and cash bonuses, which could harm our operating results. The high cost of training new employees, not fully utilizing these employees, or losing trained employees to competing employers could also reduce our operating margins and harm our business or operating results.
In addition, applicable rules and regulations require stockholder approval for new equity compensation plans and significant amendments to existing equity compensation plans (including increases in shares available for issuance under such plans), and prohibit publicly-traded companies from giving a proxy to vote on equity compensation plans unless the beneficial owner of the shares has given voting instructions. These rules and regulations could make it more difficult for us to grant equity compensation to employees in the future. To the extent that these regulations make it more difficult or expensive to grant equity compensation to employees, we may incur increased compensation costs or find it difficult to attract, retain and motivate employees, which could materially and adversely affect our business.
We rely on our proprietary technology, as well as software and other intellectual property rights licensed to us by third parties, and we cannot assure you that the precautions taken to protect our rights will be adequate or that we will continue to be able to adequately secure such intellectual property rights from third parties.
Our success depends, in part, upon our proprietary technology. We generally rely on patents, copyrights, trademarks, trade secrets, licenses and restrictive agreements to establish and protect our proprietary rights in technology and products. Despite the precautions we may take to protect our intellectual property, third parties have tried in the past, and may try in the future, to challenge, invalidate or circumvent these safeguards. Our patents and other intellectual property rights may not provide us with sufficient competitive advantages. Patents may not be issued on any of our pending applications and our issued patents may not be sufficiently broad to protect our technology. Furthermore, the laws of foreign countries may not protect our proprietary rights in those countries to the same extent as applicable law protects these rights in the United States. The protection of our intellectual property may require the expenditure of significant financial and managerial resources. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights, or deter or prevent third parties from infringing or misappropriating our proprietary rights.
Many of our products include software or other intellectual property licensed from third parties. We may have to seek new or renew existing licenses for such software and other intellectual property in the future. Our engineering services business holds licenses to certain software and other intellectual property owned by third parties, including that of our competitors. Our failure to obtain software, other intellectual property licenses or other intellectual property rights that are necessary or helpful for our business on favorable terms, or our need to engage in litigation over these licenses or rights, could seriously harm our business, operating results or financial condition.

17


We have substantial cash requirements in the United States, but a significant portion of our cash is held and generated outside of the United States, and if our cash available in the United States and the cash available under our revolving credit facility are insufficient to meet our operating expenses and debt repayment obligations in the United States, then we may be required to raise cash in ways that could negatively affect our financial condition, results of operations and the market price of our common stock.
We have significant operations outside the United States. As of December 30, 2017, approximately 80% of our cash, cash equivalents and short-term investments balance was held by subsidiaries outside the United States, with the remainder of the balance held by us or our subsidiaries in the United States. We believe that the combination of our U.S. cash, cash equivalents, future U.S. operating cash flows, cash available under our revolving credit facility and other cash that may be accessible to us on attractive terms are sufficient to meet our ongoing U.S. operating expenses and debt repayment obligations. While the Tax Act may have reduced the tax impact of repatriation of foreign earnings, there are still administrative processes associated with repatriation of foreign earnings that could affect the timing of returning cash to the U.S. from non-U.S. jurisdictions. Accordingly, if our U.S. cash were insufficient to meet our future funding obligations in the United States, we could be required to seek funding sources on less attractive terms, which could negatively impact our results of operations, financial position and the market price of our common stock.
Litigation could adversely affect our financial condition or operations.
We currently are, and in the future may be, involved in various disputes and litigation that arise in the ordinary course of business. These include disputes and lawsuits related to intellectual property, including customer indemnification, mergers and acquisitions, licensing, contracts, distribution arrangements and employee relations matters. For information regarding the litigation matters in which we are currently engaged, please refer to the discussion under Part I, Item 3, “Legal Proceedings” and Note 11 in the notes to consolidated financial statements. We cannot provide any assurances that the final outcome of these lawsuits or any other proceedings that may arise in the future will not have a material adverse effect on our business, operating results, financial condition or cash flows. Litigation can be time consuming and expensive and could divert management’s time and attention from our business, which could have a material adverse effect on our revenues and operating results.
Errors or defects in our products and services could expose us to liability and harm our business.
Our customers use our products and services in designing and developing products that involve a high degree of technological complexity, each of which has its own specifications. Because of the complexity of the systems and products with which we work, some of our products and designs can be adequately tested only when put to full use in the marketplace. As a result, our customers or their end users may discover errors or defects in our software or the systems we design, or the products or systems incorporating our design and intellectual property may not operate as expected. Errors or defects could result in:
loss of customers;
loss of market share;
damage to our reputation;
failure to attract new customers or achieve market acceptance;
diversion of development resources to resolve the problem;
loss of or delay in revenue or payments;
increased service costs; and
liability for damages.
Our operating results and revenue could be adversely affected by customer payment delays, customer bankruptcies and defaults or modifications of licenses.
Occasionally, our customers file for bankruptcy or request to modify license terms. If our customers experience adversity in their business, they may delay or default on their payment obligations to us, file for bankruptcy or modify or cancel plans to license our products. For instance, if our customers are not successful in generating sufficient cash or are precluded from securing financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us, although these obligations are generally not cancelable. Our customers’ inability to fulfill payment obligations, in turn, may adversely affect our revenue and cash flow. Additionally, our customers have, in the past, sought, and may, in the future, seek, to renegotiate pre-existing contractual commitments. Payment defaults by our customers or significant reductions in existing contractual commitments could have a material adverse effect on our financial condition and operating results.

18


The long sales cycle of our products and services may cause our operating results to fluctuate unexpectedly.
Generally, we have a long sales cycle that can extend up to six months or longer. The complexity and expense associated with our products and services generally require a lengthy customer education, evaluation and approval process. Consequently, we may incur substantial expenses and devote significant management effort and expense to develop potential relationships that do not result in agreements or revenue and may prevent us from pursuing other opportunities.
In addition, sales of our products and services have been and may in the future be delayed if customers delay approval or commencement of projects because of:
the timing of customers’ competitive evaluation processes; or
customers’ budgetary constraints and budget cycles.
Long sales cycles for hardware products subject us to a number of significant risks over which we have limited control, including insufficient, excess or obsolete inventory, variations in inventory valuation and fluctuations in quarterly operating results.
Our reported financial results may be adversely affected by changes in United States generally accepted accounting principles, and we may incur significant costs to adjust our accounting systems and processes to comply with significant changes.
United States generally accepted accounting principles (“U.S. GAAP”) are subject to interpretation by the Financial Accounting Standards Board (“FASB”), the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. We are also subject to evolving rules and regulations of the countries in which we do business. Changes to accounting standards may result in different accounting principles under U.S. GAAP that could have a significant effect on our reported financial results for us in areas including, but not limited to, principles for recognizing revenue and accounting for leases. For information regarding new accounting standards, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “New Accounting Standards.”
In addition, we have in the past and may in the future need to significantly change our customer contracts, accounting systems and processes when we adopt future or proposed changes in accounting principles noted above. The cost and effect of these changes may negatively impact our results of operations during the periods of transition.
Our restructuring plans may not result in the benefits we have anticipated, possibly having a negative effect on our future operating results.
In recent fiscal years, we have initiated restructuring plans in an effort to reallocate or decrease costs by reducing our workforce and by consolidating facilities. We incur substantial costs to implement restructuring plans, and our restructuring activities may subject us to litigation risks and expenses. Our past restructuring plans do not provide any assurance that additional restructuring plans will not be required or implemented in the future. In addition, our restructuring plans may have other consequences, such as attrition beyond our planned reduction in workforce, a negative effect on employee morale and productivity or our ability to attract highly skilled employees. Our competitors may also use our restructuring plans to seek to gain a competitive advantage over us. As a result, our restructuring plans may affect our revenue and other operating results in the future.
We depend on sole suppliers for certain hardware components and contract manufacturers for production of our emulation and prototyping hardware products, making us vulnerable to supply disruption and price fluctuation.
We depend on sole suppliers for certain hardware components and contract manufacturers for production of our emulation and prototyping hardware products. Our reliance on sole suppliers and contract manufacturers could result in product delivery problems and delays and reduced control over product pricing and quality. Though we prefer to have multiple sources to procure certain key components, in some cases it is not practical or feasible to do so. We may suffer a disruption in the supply of certain hardware components if we are unable to purchase sufficient components on a timely basis or at all for any reason. Any supply or manufacturing disruption, including delay in delivery of components by our suppliers or products by our manufacturers, or the bankruptcy or shutdown of our suppliers or manufacturers, could delay our production process and prevent us from delivering completed hardware products to customers or from supplying new evaluation units to customers, which could have a negative impact on our revenue and operating results.
Failure to obtain export licenses could harm our business by rendering us unable to ship products and transfer our technology outside of the United States.
We must comply with regulations of the United States and of certain other countries in shipping our products and transferring our technology outside the United States and to foreign nationals. Any significant future difficulty in complying with these regulations could harm our business, operating results or financial condition.

19


If we become subject to unfair hiring claims, we could be prevented from hiring needed employees, incur liability for damages and incur substantial costs in defending ourselves.
When companies in our industry lose employees to competitors, they frequently claim that these competitors have engaged in unfair hiring practices or that the employment of these persons would involve the disclosure or use of trade secrets. These claims could prevent us from hiring employees or cause us to incur liability for damages. We could also incur substantial costs in defending ourselves or our employees against these claims, regardless of their merits. Defending ourselves from these claims could also divert the attention of our management away from our operations.
Anti-takeover defenses in our certificate of incorporation and bylaws and certain provisions under Delaware law could prevent an acquisition of our company or limit the price that investors might be willing to pay for our common stock.
Our certificate of incorporation and bylaws and certain provisions of the Delaware General Corporation Law that apply to us could make it difficult for another company to acquire control of our company. For example:
Our certificate of incorporation allows our Board of Directors to issue, at any time and without stockholder approval, preferred stock with such terms as it may determine. No shares of preferred stock are currently outstanding. However, the rights of holders of any of our preferred stock that may be issued in the future may be superior to the rights of holders of our common stock.
Section 203 of the Delaware General Corporation Law generally prohibits a Delaware corporation from engaging in any business combination with a person owning 15% or more of its voting stock, or who is affiliated with the corporation and owned 15% or more of its voting stock at any time within three years prior to the proposed business combination, for a period of three years from the date the person became a 15% owner, unless specified conditions are met.
All or any one of these factors could limit the price that certain investors would be willing to pay for shares of our common stock and could allow our Board of Directors to resist, delay or prevent an acquisition of our company, even if a proposed transaction were favored by a majority of our independent stockholders.
The investment of our cash is subject to risks that may cause losses and affect the liquidity of these investments.
Our investments include various money market funds and may include other investments as well. Weakened financial markets have at times adversely impacted the general credit, liquidity, market prices and interest rates for these and other types of investments. Additionally, changes in monetary policy by the Federal Open Market Committee or other relevant regulators and concerns about the rising U.S. government debt level may cause a decrease in the purchasing power of the U.S. dollar and adversely affect our investment portfolio. The financial market and monetary risks associated with our investment portfolio may have a material adverse effect on our financial condition, liquidity, results of operations or cash flows.
We are subject to evolving corporate governance and public disclosure regulations that impact compliance costs and risks of noncompliance.
We are subject to changing rules and regulations promulgated by a number of governmental and self-regulatory organizations, including the SEC, Nasdaq, and the FASB. These rules and regulations continue to evolve in scope and complexity, and many new requirements have been created in response to laws enacted by the U.S. and foreign governments, making compliance more difficult and uncertain. The increase in costs to comply with such evolving rules and regulations, as well as any risk of noncompliance, could adversely impact us.
Conflict minerals regulations may cause us to continue to incur additional expenses and may adversely impact our ability to conduct our business. 
In August 2012, the SEC adopted new rules establishing disclosure and reporting requirements regarding the use of certain minerals referred to as “conflict minerals” in products. These rules require us to determine, disclose and report whether or not such minerals in our products originate from the Democratic Republic of the Congo or adjoining countries. We have incurred, and expect to continue to incur, costs to comply with these rules, including costs associated with conducting due diligence on our supply chain and fulfilling our reporting requirements, and we may incur costs related to changes to our products, processes or sources of supply. In addition, these rules could affect the availability of certain minerals used in the manufacture of our emulation and prototyping hardware products and IP boards (the “Covered Products”), and thus impact our ability to source, at competitive prices, certain materials that are used in the Covered Products. Finally, our customers may prefer to purchase products from vendors who claim that all minerals in their products are conflict-free, and our revenues may be harmed or we may face reputational challenges if we are unable to verify that our Covered Products are conflict-free.

20


Our business is subject to the risk of earthquakes and other natural disasters.
Our corporate headquarters, including certain of our research and development operations and certain of our distribution facilities, is located in the Silicon Valley area of Northern California, a region known to experience seismic activity. If significant seismic activity were to occur, our operations may be interrupted, which could adversely impact our business and results of operations.
Our other offices in the United States and in other countries around the world may be adversely impacted by natural disasters. If a natural disaster occurs at or near any of our offices, our operations may be interrupted, which could adversely impact our business and results of operations. If a natural disaster impacts a significant number of our customers, our business and results of operations could be adversely impacted.
Risks Related to Our Securities and Indebtedness
Our debt obligations expose us to risks that could adversely affect our business, operating results or financial condition, and could prevent us from fulfilling our obligations under such indebtedness.
As of December 30, 2017, we had total outstanding indebtedness of $729.4 million. We also had the ability to borrow an additional $265.0 million under our revolving credit facility, with the right to request increased capacity up to an additional $250.0 million upon the receipt of lender commitments, for total maximum borrowings of $600.0 million under our revolving credit facility. Subject to the limits contained in the credit agreement governing our revolving credit facility, the indenture that governs the 4.375% Senior Notes due 2024 (the “2024 Notes”) and our other debt instruments, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, share repurchases or for other purposes. If we do so, the risks related to our high level of debt could intensify. Specifically, our high level of debt could have important consequences, including the following:
making it more difficult for us to satisfy our obligations to service our debt as described above;
limiting our ability to obtain additional financing to fund future working capital, capital expenditures,
acquisitions or other general corporate requirements;
requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other
purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures,
acquisitions and other general corporate purposes;
utilizing large portions of our U.S. cash to service our debt obligations because those payments are made in the United States, which may require us to repatriate cash from outside the United States;
increasing our vulnerability to general adverse economic and industry conditions;
exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under
our revolving credit facility, are at variable rates of interest;
limiting our flexibility in planning for and reacting to changes in the industry in which we compete;
placing us at a disadvantage compared to other, less leveraged competitors and competitors that have greater access to capital resources;
limiting our interest deductions for US income tax purposes; and
increasing our cost of borrowing.
At the option of the holders of our outstanding notes, we may, under certain circumstances, be required to repurchase such notes.
Under the terms of our 2024 Notes, we may be required to repurchase for cash such notes prior to their maturity in connection with the occurrence of certain significant corporate events. Specifically, we are required to offer to repurchase such notes upon a “change of control triggering event” (as defined in the indenture related to such notes), such as a change of control accompanied by certain downgrades in the credit ratings of such notes. The repayment obligations under such notes may have the effect of discouraging, delaying or preventing a takeover of our company. If we were required to pay the 2024 Notes prior to their scheduled maturity, it could have a significant negative impact on our cash and liquidity and could impact our ability to invest financial resources in other strategic initiatives.
The terms of the agreements governing our revolving credit facility and 2019 Term Loan and the indenture governing our 2024 Notes restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
The agreements governing our revolving credit facility and 2019 Term Loan contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to:
pay dividends or make other distributions or repurchase or redeem capital stock;

21


prepay, redeem or repurchase certain debt;
issue certain preferred stock or similar equity securities;
make certain investments;
incur liens;
incur additional indebtedness and guarantee indebtedness;
enter into sale and leaseback transactions;
enter into transactions with affiliates;
alter the businesses we conduct;
enter into agreements restricting our subsidiaries’ ability to pay dividends; and
consolidate, merge or sell all or substantially all of our assets.
In addition, the restrictive covenants in the agreements governing our revolving credit facility and 2019 Term Loan require us to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we may be unable to meet them.
A breach of the covenants or restrictions under the agreements governing our revolving credit facility and 2019 Term Loan could result in an event of default under the applicable indebtedness. Such a default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the credit agreement governing our revolving credit facility would permit the lenders under our revolving credit facility to terminate all commitments to extend further credit under that facility. In the event our lenders or note holders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. As a result of these restrictions, we may be:
limited in how we conduct our business;
unable to raise additional debt or equity financing to operate during general economic or business downturns; or
unable to compete effectively or to take advantage of new business opportunities.
The indenture governing our 2024 Notes also contains certain restrictive covenants that impose operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to incur liens and to enter into sale and leaseback transactions.
These restrictions may affect our ability to grow in accordance with our strategy. In addition, our financial results, our substantial indebtedness and our credit ratings could adversely affect the availability and terms of our financing.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. The agreements governing our revolving credit facility and 2019 Term Loan restrict our ability to dispose of assets and use the proceeds from those dispositions and may also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.
In addition, we conduct a substantial portion of our operations through our subsidiaries, none of which are currently guarantors of our indebtedness. Accordingly, repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Unless they become guarantors of our indebtedness, our subsidiaries do not have any obligation to pay amounts due on our indebtedness or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity, and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the agreements governing our revolving credit facility and 2019 Term Loan limit the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.

22


Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations and our ability to satisfy our debt obligations.
If we cannot make scheduled payments on our debt, we will be in default and holders of our debt could declare all outstanding principal and interest to be due and payable, the lenders under our revolving credit facility could terminate their commitments to loan money and we could be forced into bankruptcy or liquidation. In addition, a material default on our indebtedness could suspend our eligibility to register securities using certain registration statement forms under SEC guidelines that permit incorporation by reference of substantial information regarding us, potentially hindering our ability to raise capital through the issuance of our securities and increasing our costs of registration.
Despite our current level of indebtedness, we and our subsidiaries may incur substantially more debt. This could further exacerbate the risks to our financial condition described above.
We and our subsidiaries may incur significant additional indebtedness in the future. Although the agreements governing our revolving credit facility and 2019 Term Loan contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. If we incur any additional indebtedness that ranks equally with the 2024 Notes, then subject to any collateral arrangements we may enter into, the holders of that debt will be entitled to share ratably in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding up of our company.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under our revolving credit facility and 2019 Term Loan are at variable rates of interest and expose us to interest rate risk. If interest rates were to increase, our debt service obligations on our variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease. Assuming all loans were fully drawn, we were to fully exercise our right to increase borrowing capacity under our revolving credit facility and we made no prepayments on our 2019 Term Loan, each quarter point change in interest rates would result in a $2.3 million change in annual interest expense on our indebtedness under our revolving credit facility and 2019 Term Loan. In the future, we may enter into interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk.
Various factors could increase our future borrowing costs or reduce our access to capital, including a lowering or withdrawal of the ratings assigned to our 2024 Notes by rating agencies.
We may in the future seek additional financing for a variety of reasons, and our future borrowing costs and access to capital could be affected by factors including the condition of the debt and equity markets, the condition of the economy generally, prevailing interest rates, our level of indebtedness and our business and financial condition. In addition, the 2024 Notes currently have an investment grade rating, and any rating assigned could be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of the 2024 Notes. Any future lowering of the ratings of the 2024 Notes likely would make it more difficult or more expensive for us to obtain additional debt financing.

Item 1B. Unresolved Staff Comments
None.

Item 2. Properties
We own land and buildings at our headquarters located in San Jose, California. We also own buildings in India. As of December 30, 2017, the total square footage of our owned buildings was approximately 1,010,000.
We lease additional facilities in the United States and various other countries. We may sublease certain of these facilities where space is not fully utilized.
We believe that these facilities are adequate for our current needs and that suitable additional or substitute space will be available as needed to accommodate any expansion of our operations.


23


Item 3. Legal Proceedings
From time to time, we are 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, we review 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, we accrue 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 our judgments using the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation matters and may revise estimates.
 
Item 4. Mine Safety Disclosures
Not applicable.



24


PART II.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Market Price
Our common stock is traded on the Nasdaq Global Select Market under the symbol CDNS. To date, we have not paid any cash dividends on our common stock and currently do not have plans to pay cash dividends in the foreseeable future. As described in Note 3 of the notes to consolidated financial statements, our revolving credit facility restricts certain payments, including dividends and share repurchases. As of February 3, 2018, we had 550 registered stockholders and 46,483 beneficial owners of our common stock.
The following table sets forth the high and low sales prices for our common stock for each fiscal quarter in the two-year period ended December 30, 2017:
2017
High
 
Low
    Fourth Quarter
$
45.64

 
$
39.60

    Third Quarter
39.49

 
32.85

    Second Quarter
35.69

 
30.81

    First Quarter
32.19

 
25.24

 
 
 
 
2016
 
 
 
    Fourth Quarter
$
28.00

 
$
24.15

    Third Quarter
26.24

 
23.83

    Second Quarter
25.49

 
22.79

    First Quarter
23.75

 
18.32



25


Stockholder Return Performance Graph
The following graph compares the cumulative 5-year total stockholder return on our common stock relative to the cumulative total return of the Nasdaq Composite Index, the S&P 400 Information Technology Index, the S&P 500 Index and the S&P Information Technology Index. The graph assumes that the value of the investment in our common stock and in each index on December 29, 2012 (including reinvestment of dividends) was $100 and tracks it each year thereafter on the last day of our fiscal year through December 30, 2017 and, for each index, on the last day of the calendar year. Cadence was added to the S&P 500 Index on September 18, 2017 and was previously part of the S&P 400 Information Technology Index. Cadence is, therefore, providing information on both indices and the S&P Information Technology Index, and will discontinue presenting the S&P 400 Information Technology Index in future stock performance graphs.
a5yearperformancegraph17.jpg
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12/29/2012

 
12/28/2013

 
1/3/2015

 
1/2/2016

 
12/31/2016

 
12/30/2017

 
 
 
 
 
 
 
 
 
 
 
 
 
Cadence Design Systems, Inc.
 
$
100.00

 
$
103.65

 
$
140.10

 
$
154.84

 
$
187.65

 
$
311.16

Nasdaq Composite
 
100.00

 
141.63

 
162.09

 
173.33

 
187.19

 
242.29

S&P 500
 
100.00

 
132.39

 
150.51

 
152.59

 
170.84

 
208.14

S&P Information Technology
 
100.00

 
128.43

 
154.26

 
163.40

 
186.03

 
258.28

S&P 400 Information Technology
 
100.00

 
135.54

 
138.00

 
143.58

 
166.73

 
207.62


The stock price performance included in this graph is not necessarily indicative of future stock price performance.

26


Issuer Purchases of Equity Securities
In January 2017, Cadence’s Board of Directors authorized the repurchase of shares of Cadence common stock with a value of up to $525.0 million in the aggregate. The actual timing and amount of repurchases are subject to business and market conditions, corporate and regulatory requirements, acquisition opportunities and other factors. As of December 30, 2017, approximately $425 million remained available under this authorization.
The following table presents repurchases made under our current authorization and shares surrendered by employees to satisfy income tax withholding obligations during the three months ended December 30, 2017:
Period
Total Number
of Shares
Purchased (1)
 
Average
Price Paid
Per Share (2)
 
Total Number of
Shares Purchased
as Part of
Publicly Announced
Plan or Program
 
Maximum Dollar
Value of Shares 
Authorized for Repurchase Under
Publicly Announced
Plan or Program (1)
(In millions)
October 1, 2017 – November 4, 2017
476,890

 
$
41.66

 
452,793

 
$
456.1

November 5, 2017 – December 2, 2017
368,293

 
$
44.48

 
350,145

 
$
440.6

December 3, 2017 – December 30, 2017
378,759

 
$
43.18

 
360,988

 
$
425.0

Total
1,223,942

 
$
42.98

 
1,163,926

 
 
_________________

(1)  
Shares purchased that were not part of our publicly announced repurchase programs represent employee surrender of shares of restricted stock to satisfy employee income tax withholding obligations due upon vesting, and do not reduce the dollar value that may yet be purchased under our publicly announced repurchase programs.
(2)  
The weighted average price paid per share of common stock does not include the cost of commissions.



27


Item 6. Selected Financial Data-Unaudited
The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the notes thereto and the information contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Historical results are not necessarily indicative of future results. The notes below the table are provided for comparability purposes due to adoptions of accounting pronouncements or to describe significant transactions that may not occur frequently.
 
2017
 
2016
 
2015
 
2014
 
2013
 
(In millions, except per share amounts)
Revenue
$
1,943.0

 
$
1,816.1

 
$
1,702.1

 
$
1,580.9

 
$
1,460.1

Income from operations
324.0

 
244.9

 
285.4

 
206.6

 
189.0

Net income(1) (2)
204.1

 
203.1

 
252.4

 
158.9

 
164.2

Net income per share-diluted (1) (2)
0.73

 
0.70

 
0.81

 
0.52

 
0.56

Total assets
2,418.7

 
2,096.9

 
2,345.5

 
3,209.6

 
2,428.6

Debt (3)
729.4

 
693.5

 
343.3

 
691.2

 
324.8

Stockholders’ equity (4) (5)
989.2

 
741.8

 
1,376.1

 
1,333.6

 
1,156.1

_________________
(1) During fiscal 2013, we recorded a $33.7 million benefit for income taxes from the release of an uncertain tax position, including related interest and penalties, and a $5.9 million tax benefit from the retroactive enactment of the fiscal 2012 United States federal research tax credit.
(2) During fiscal 2017, we recorded a provisional income tax expense of $96.8 million related to the income tax effects of the Tax Act.
(3) During fiscal 2015, we settled the outstanding principal amount of the 2015 Notes. In connection with the 2015 Notes we 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.
(4) During fiscal 2016, we repurchased shares of our common stock for a total cost of $960.3 million.
(5) We have never declared or paid any cash dividends on our common stock.



28



Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K and with Part I, Item 1A, “Risk Factors.” Please refer to the cautionary language at the beginning of Part I of this Annual Report on Form 10-K regarding forward-looking statements.

Business Overview
We continue to focus on executing our system design enablement strategy to deliver the tools necessary for our customers to develop complete and functional electronic products. Our growing core electronic design automation business is at the heart of our strategy and is complemented by our business in intellectual property, system interconnect and analysis, system level design and hardware-software development.
Our business serves customers that are driven by end-user demand for electronics systems, integrated circuits and devices that are smaller, use less power and provide more functionality. 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 offer innovative solutions to help our customers meet these demands and our future performance depends on our ability to innovate, commercialize newly developed solutions and enhance and maintain our current products. Our acquisitions may increase the speed at which we can deliver innovative solutions to our customers.
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.”

Results of Operations
Financial results for fiscal 2017, as compared to fiscal 2016 and 2015, reflect the following:
increased product and maintenance revenue resulting from overall growth in our software and IP business, particularly in Asia and Europe;
continued investment in research and development activities focused on creating and enhancing our products to maintain the pace of innovation required by our customers; and
provisional tax effects from the enactment of the Tax Act.
Our fiscal years are 52- or 53-week periods ending on the Saturday closest to December 31. Fiscal 2017, 2016 and 2015 were each 52-week fiscal years.
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 over multiple periods or up front, upon completion of delivery. Our revenue may also be affected by our ability to bring to market newly developed or acquired technology. During fiscal 2017, we acquired technology that is not expected to generate significant incremental revenue during fiscal 2018. For an additional description of our acquisitions, see Note 7 in the notes to consolidated financial statements.
Approximately 90% of our revenue is recognized over time, and the remainder of the resulting revenue is recognized up front, upon completion of delivery. Revenue recognized over time includes revenue from our time-based software arrangements, certain IP license arrangements where revenue is recognized over multiple periods, services, royalties from certain IP arrangements, maintenance on perpetual software licenses and hardware, and operating leases of hardware. Upfront revenue is primarily generated by our sales of emulation and prototyping hardware and perpetual software and certain IP licenses. Our ability to maintain 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 under the heading “Critical Accounting Estimates – Revenue Recognition.”
Beginning in the first quarter of fiscal 2018, we will recognize revenue based on the revenue recognition requirements of Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606).” Under the new standard, we will continue to recognize revenue over time for our software arrangements, and the timing of revenue recognition for our hardware and professional services is expected to remain substantially unchanged. For additional information on the impact the new accounting standard will have on our revenue, see the discussion under the heading “New Accounting Standards.”

29


We believe our reported revenue and the amount of revenue recognized in future periods will depend on, among other things, the:
competitiveness of our technology; and
size, duration, timing, terms and type of:
contract renewals with existing customers;
additional sales to existing customers; and
sales to new customers.
Revenue by Year
The following table shows our revenue for fiscal 2017, 2016 and 2015 and the change in revenue between years:
 
 
 
 
 
Change
 
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
 
(In millions, except percentages)
Product and maintenance
$
1,814.0

 
$
1,683.8

 
$
1,578.9

 
$
130.2

 
8
 %
 
$
104.9

 
7
%
Services
129.0

 
132.3

 
123.2

 
(3.3
)
 
(2
)%
 
9.1

 
7
%
Total revenue
$
1,943.0

 
$
1,816.1

 
$
1,702.1

 
$
126.9

 
7
 %
 
$
114.0

 
7
%
Product and maintenance revenue increased during fiscal 2017, as compared to fiscal 2016, primarily because of growth in our software and IP businesses, partially offset by lower revenue from emulation and prototyping hardware. Product and maintenance revenue increased during fiscal 2016, as compared to fiscal 2015, primarily because of an increase in revenue from our Palladium Z1 enterprise emulation system and our digital IC product offerings, offset by a reduction in revenue from our IP offerings.
Services revenue may fluctuate from period to period based on demand for, and our available resources to fulfill, our services and IP offerings.
No one customer accounted for 10% or more of total revenue during fiscal 2017, 2016 or 2015.
Revenue by Product Group
The following table shows the percentage of product and related maintenance revenue contributed by each of our five product groups and services during fiscal 2017, 2016 and 2015:
 
2017
 
2016
 
2015
Functional Verification, including Emulation and Prototyping Hardware
22
%
 
25
%
 
23
%
Digital IC Design and Signoff
29
%
 
29
%
 
28
%
Custom IC Design
27
%
 
25
%
 
26
%
System Interconnect and Analysis
10
%
 
10
%
 
11
%
IP
12
%
 
11
%
 
12
%
Total
100
%
 
100
%
 
100
%
Revenue by product group fluctuates from period to period based on demand for, and our available resources to deliver and support our products and services. As described in Note 2 in the notes to consolidated financial statements, 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.

30


Revenue by Geography
 
 
 
 
 
Change
 
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
 
(In millions, except percentages)
United States
$
829.4

 
$
832.6

 
$
782.4

 
$
(3.2
)
 
 %
 
$
50.2

 
6
 %
Other Americas
35.1

 
31.3

 
26.0

 
3.8

 
12
 %
 
5.3
 
20
 %
Asia
526.2

 
445.5

 
413.6

 
80.7

 
18
 %
 
31.9
 
8
 %
Europe, Middle East and Africa
385.7

 
346.7

 
316.7

 
39.0

 
11
 %
 
30.0
 
9
 %
Japan
166.6

 
160.0

 
163.4

 
6.6

 
4
 %
 
(3.4
)
 
(2
)%
Total revenue
$
1,943.0

 
$
1,816.1

 
$
1,702.1

 
$
126.9

 
7
 %
 
$
114.0

 
7
 %
Revenue for the United States decreased during fiscal 2017, as compared to fiscal 2016, primarily due to lower revenue from emulation and prototyping hardware and services, partially offset by growth in revenue from software and IP. For the primary factors contributing to the increase in revenue for Other Americas, Asia, and Europe, Middle East and Africa and Japan during fiscal 2017, as compared to fiscal 2016, see the general description under “Revenue by Year” above.
For the primary factors contributing to the increase in revenue for the United States, Other Americas, Asia, and Europe, Middle East and Africa during fiscal 2016, as compared to fiscal 2015, see the general description under “Revenue by Year” above. Revenue for Japan decreased during fiscal 2016, as compared to fiscal 2015, primarily due to difficult business conditions facing our Japanese customers.
Revenue by Geography as a Percent of Total Revenue
 
2017
 
2016
 
2015
United States
42
%
 
46
%
 
46
%
Other Americas
2
%
 
2
%
 
1
%
Asia
27
%
 
25
%
 
24
%
Europe, Middle East and Africa
20
%
 
19
%
 
19
%
Japan
9
%
 
8
%
 
10
%
Total
100
%
 
100
%
 
100
%
Revenue by geography fluctuates from period to period based on demand for, and our available resources to deliver and support, our products and services.
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 consolidated financial statements, see the discussion under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”
Cost of Revenue
 
 
 
 
 
 
Change
 
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
 
(In millions, except percentages)
Product and maintenance
$
156.7

 
$
183.3

 
$
155.7

 
$
(26.6
)
 
(15
)%
 
$
27.6

 
18
 %
Services
80.7

 
73.2

 
82.8

 
7.5

 
10
 %
 
(9.6
)
 
(12
)%
Total cost of revenue
$
237.4

 
$
256.5

 
$
238.5

 
$
(19.1
)
 
(7
)%
 
$
18.0

 
8
 %


31


The following table shows cost of revenue as a percentage of related revenue for fiscal 2017, 2016 and 2015:
 
 
2017
 
2016
 
2015
Product and maintenance
9
%
 
11
%
 
10
%
Services
63
%
 
55
%
 
67
%
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, testing, applicable reserves and overhead. These hardware manufacturing costs make our cost of emulation and prototyping hardware products higher, as a percentage of revenue, than our cost of software and IP products.

A summary of cost of product and maintenance for fiscal 2017, 2016 and 2015 is as follows:
 
 
 
 
 
 
 
 
Change
 
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
 
(In millions, except percentages)
Product and maintenance-related costs
$
114.9

 
$
140.9

 
$
115.2

 
$
(26.0
)
 
(18
)%
 
$
25.7

 
22
%
Amortization of acquired intangibles
41.8

 
42.4

 
40.5

 
(0.6
)
 
(1
)%
 
1.9

 
5
%
Total cost of product and maintenance
$
156.7

 
$
183.3

 
$
155.7

 
$
(26.6
)
 
(15
)%
 
$
27.6

 
18
%
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 were due to the following:
 
Change
 
2017 vs. 2016
 
2016 vs. 2015
 
(In millions)
Emulation and prototyping hardware costs
$
(22.9
)
 
$
28.0

Other items
(3.1
)
 
(2.3
)
 
$
(26.0
)
 
$
25.7

Costs of emulation and prototyping hardware decreased during fiscal 2017, as compared to fiscal 2016, primarily due to lower revenue for emulation and prototyping hardware. Gross margins on our hardware products will fluctuate based on product life cycle, product competition, product mix and pricing strategies. Emulation and prototyping hardware costs increased during fiscal 2016, as compared to fiscal 2015, primarily due to higher emulation hardware volume and an increase in charges for reserves on inventory during fiscal 2016 as we approached the end of the product life cycle of Palladium XP, a previous generation of our Palladium hardware platform.
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 fiscal 2017, as compared to fiscal 2016, and decreased during fiscal 2016, as compared to fiscal 2015, primarily due to variation in the number of personnel dedicated to deliver and support our services and custom IP offerings.

32


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.
Stock-based compensation included in our operating expenses increased during fiscal 2017, as compared to fiscal 2016, and during fiscal 2016, as compared to fiscal 2015, primarily because successive increases in the price of our common stock have resulted in higher grant-date fair values for the mix of stock awards expensed in each period.
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 consolidated financial statements, see the discussion in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”
Our operating expenses for fiscal 2017, 2016 and 2015 were as follows:
 
 
 
 
 
 
 
Change
 
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
 
(In millions, except percentages)
Marketing and sales
$
419.2

 
$
395.2

 
$
402.4

 
$
24.0

 
6
%
 
$
(7.2
)
 
(2
)%
Research and development
804.2

 
735.3

 
637.6

 
68.9

 
9
%
 
97.7

 
15
 %
General and administrative
134.2

 
125.1

 
110.0

 
9.1

 
7
%
 
15.1

 
14
 %
 
$
1,357.6

 
$
1,255.6

 
$
1,150.0

 
$
102.0

 
8
%
 
$
105.6

 
9
 %
Our operating expenses, as a percentage of total revenue, for fiscal 2017, 2016 and 2015 were as follows:
 
2017
 
2016
 
2015
Marketing and sales
22
%
 
22
%
 
24
%
Research and development
41
%
 
40
%
 
38
%
General and administrative
7
%
 
7
%
 
6
%
Operating expenses
70
%
 
69
%
 
68
%
 
Marketing and Sales
The changes in marketing and sales expense were due to the following:
 
Change
 
2017 vs. 2016
 
2016 vs. 2015
 
(In millions)
Salary, benefits and other employee-related costs
$
18.5

 
$
(6.3
)
Facilities and other infrastructure costs
4.8

 
0.4

Stock-based compensation
4.1

 
1.0

Professional services
(1.6
)
 
(2.7
)
Other items
(1.8
)
 
0.4

 
$
24.0

 
$
(7.2
)
Costs included in marketing and sales increased during fiscal 2017, as compared to fiscal 2016, primarily due to additional headcount in fiscal 2017 and an increase in incentive compensation. Costs included in marketing and sales decreased during fiscal 2016, as compared to fiscal 2015, primarily due to year-over-year headcount reductions within our sales organization.

33


Research and Development
 The changes in research and development expense were due to the following:
 
Change
 
2017 vs. 2016
 
2016 vs. 2015
 
(In millions)
Salary, benefits and other employee-related costs
$
44.4

 
$
75.7

Stock-based compensation
13.2

 
14.3

Facilities and other infrastructure costs
9.8

 
9.9

Professional services
3.2

 
(0.7
)
Materials and other pre-production costs
0.3

 
(6.7
)
Travel and professional development
(1.4
)
 
3.2

Other items
(0.6
)
 
2.0

 
$
68.9

 
$
97.7

We must invest significantly in product research and development to keep pace with the latest manufacturing technology. The demand for new IC manufacturing technology directly impacts the demand for our newest products and we must keep pace with our customers’ technical developments, satisfy industry standards and meet our customers’ increasingly demanding performance, productivity, quality and predictability requirements. Costs included in research and development increased during fiscal 2017, as compared to fiscal 2016, and during fiscal 2016, as compared to fiscal 2015, primarily due to incremental investments in research and development as a result of additional hiring.
General and Administrative
The changes in general and administrative expense were due to the following:
 
Change
 
2017 vs. 2016
 
2016 vs. 2015
 
(In millions)
Professional services
$
4.4

 
$
0.5

Salary, benefits and other employee-related costs
3.3

 
4.4

Stock-based compensation
3.0

 
2.6

Bad debt expense
2.3

 
0.2

Acquisition-related costs
(4.9
)
 
4.9

Other items
1.0

 
2.5

 
$
9.1

 
$
15.1

General and administrative costs increased during fiscal 2017, as compared to fiscal 2016, primarily due to an increase in accounting and tax services and an increase in employee salaries and benefits. General and administrative costs increased during fiscal 2016, as compared to fiscal 2015, primarily due to increased headcount and merit adjustments for existing employees and costs associated with our fiscal 2016 acquisitions.
Amortization of Acquired Intangibles

 
 
 
 
 
 
 
Change
 
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
 
(In millions, except percentages)
Amortization of acquired intangibles
$
14.7

 
$
18.1

 
$
23.7

 
$
(3.4
)
 
(19
)%
 
$
(5.6
)
 
(24
)%


34


The changes in amortization of acquired intangibles were due to the following:
 
Change
 
2017 vs. 2016
 
2016 vs. 2015
 
(In millions)
Increase due to additions of acquired intangibles
$
0.3

 
$
1.0

Decrease due to completed amortization of acquired intangibles
(3.7
)
 
(6.6
)
 
$
(3.4
)
 
$
(5.6
)
Restructuring and Other Charges
We have initiated several restructuring plans in recent years to better align our resources with our business strategy. Because the restructuring charges and related benefits are derived from management’s estimates made during the formulation of the restructuring plans, based on then-currently available information, our restructuring plans may not achieve the benefits anticipated on the timetable or at the level contemplated. Demand for our products and services and, ultimately, our future financial performance, is difficult to predict with any degree of certainty. Accordingly, additional actions, including further restructuring of our operations, may be required in the future.
The following table presents restructuring and other charges (credits), net for our restructuring plans:


Severance
and
Benefits
 
Excess
Facilities
 
Other
 
Total
 
(In millions)
Fiscal 2017
$
9.0

 
$
0.4

 
$

 
$
9.4

Fiscal 2016
$
40.4

 
$
0.6

 
$

 
$
41.0

Fiscal 2015
$
3.6

 
$
1.1

 
$
(0.2
)
 
$
4.5

For an additional description of our restructuring plans, see Note 11 in the notes to consolidated financial statements.
Interest Expense
Interest expense for fiscal 2017, 2016 and 2015 was comprised of the following:
 
2017
 
2016
 
2015
 
(In millions)
Contractual cash interest expense:
 
 
 
 
 
2015 Notes
$

 
$

 
$
3.0

2019 Term Loan
7.6

 
5.6

 

2024 Notes
15.3

 
15.3

 
15.3

Revolving credit facility
1.3

 
1.6

 
0.5

Amortization of debt discount:
 
 
 
 
 
2015 Notes

 

 
8.5

2019 Term Loan
0.2

 
0.2

 

2024 Notes
0.7

 
0.6

 
0.6

Other
0.6

 
0.4

 
0.4

Total interest expense
$
25.7

 
$
23.7

 
$
28.3

For an additional description of our debt arrangements, see Note 3 in the notes to consolidated financial statements.


35


Income Taxes
The following table presents the provision for income taxes and the effective tax rate for fiscal 2017, 2016 and 2015:
 
2017
 
2016
 
2015
 
(In millions, except percentages)
Provision for income taxes
$
110.9

 
$
34.1

 
$
15.2

Effective tax rate
35.2
%
 
14.4
%
 
5.7
%
The Tax Act included several provisions that affected us significantly, such as a one-time, mandatory transition tax on our previously untaxed foreign earnings (the “transition tax”) and a reduction in the federal corporation income tax rate to 21% as of January 1, 2018.
Because the Tax Act requires complex computations that require accumulation of information not previously required or regularly produced, and because certain tax and accounting effects are currently uncertain, we were unable to complete our accounting for the Tax Act in fiscal 2017. We recorded provisional amounts for the changes to the tax law for which a reasonable estimate could be determined. If a reasonable estimate could not be made, we continued to apply the tax rules in effect prior to the Tax Act. We expect to refine our provisional amounts and to complete our accounting for the Tax Act during fiscal 2018 as we obtain, prepare and analyze additional information that we expect to be available during fiscal 2018. For further discussion regarding our accounting for the Tax Act, see Note 6 in the notes to the consolidated financial statements.
Our provision for income taxes for the fiscal year ended December 30, 2017 is primarily attributable to income tax effects of the Tax Act. The provisional amount related to the transition tax was $67.2 million and the provisional amount related to the re-measurement of our U.S. deferred tax assets and liabilities for the U.S. tax rate reduction was $25.2 million. Our provision for income taxes for the fiscal year ended December 30, 2017 included $32.0 million of tax benefit related to stock-based compensation that vested or settled during the period.
Our provision for income taxes for the fiscal year ended December 31, 2016 is primarily attributable to federal, state and foreign income taxes on our fiscal 2016 income and includes the tax benefit resulting from the permanent reinstatement of the United States research tax credit in December 2015. During fiscal 2016, we adopted a new accounting standard related to the accounting for stock-based compensation that requires all income tax effects of stock-based awards to be recognized in our consolidated income statement as the awards vest or are settled. We adopted the accounting standard on a prospective basis and prior fiscal periods were not restated. Our provision for income taxes for the fiscal year ended December 31, 2016 includes $17.2 million of tax benefit related to stock-based compensation that vested or settled during the period.
Our provision for income taxes for the fiscal year ended January 2, 2016 was primarily attributable to federal, state and foreign income taxes on our fiscal 2015 income, which was partially offset by $13.8 million of tax benefit related to the effective settlement of a tax examination of a foreign subsidiary. Our provision for income taxes included a tax benefit of $10.1 million resulting from the enactment of the United States research tax credit in December 2015.
Our future effective tax rates may be materially impacted by tax amounts associated with our foreign earnings at rates different from the United States federal statutory rate, research credits, the tax impact of stock-based compensation, accounting for uncertain tax positions, business combinations, closure of statutes of limitations or settlement of tax audits, changes in valuation allowance and changes in tax law. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and Hungary. Our future effective tax rates may be adversely affected if our earnings were to be lower in countries where we have lower statutory tax rates. We currently expect that our fiscal 2018 effective tax rate will be approximately 13%. We expect that our quarterly effective tax rates will vary from our fiscal 2018 effective tax rate as a result of recognizing the income tax effects of stock-based awards in the quarterly periods that the awards vest or are settled and other items that we cannot anticipate. We may also revise our fiscal 2018 effective tax rate as a result of further analyzing the implications of the Tax Act and as we complete the accounting for the Tax Act. For additional discussion about how our effective tax rate could be affected by various risks, see Part I, Item 1A, “Risk Factors.” For further discussion regarding our income taxes, see Note 6 in the notes to consolidated financial statements.


36


Liquidity and Capital Resources
 
As of
 
Change
 
December 30,
2017
 
December 31,
2016
 
January 2, 2016
 
2017 vs. 2016
 
2016 vs. 2015
 
(In millions)
Cash, cash equivalents and short-term investments
$
692.5

 
$
468.3

 
$
711.2

 
$
224.2

 
$
(242.9
)
Net working capital
$
337.6

 
$
116.5

 
$
427.9

 
$
221.1

 
$
(311.4
)
Cash, Cash Equivalents and Short-term Investments
As of December 30, 2017, our principal sources of liquidity consisted of $692.5 million of cash, cash equivalents and short-term investments, as compared to $468.3 million as of December 31, 2016.
Our primary sources of cash, cash equivalents and short-term investments during fiscal 2017 were cash generated from operations, proceeds from borrowings under our revolving credit facility, proceeds from the exercise of stock options and proceeds from stock purchases under our employee stock purchase plan.
Our primary uses of cash, cash equivalents and short-term investments during fiscal 2017 were payments related to salaries and benefits, operating expenses, acquisitions, repurchases of our common stock, payments on our revolving credit facility, purchases of property, plant and equipment, and tax payments.
Approximately 80% of our cash, cash equivalents and short-term investments were held by our foreign subsidiaries as of December 30, 2017. We expect that current cash, cash equivalents and short-term investment balances, cash flows that are generated from operations and cash borrowings available under our revolving credit facility will be sufficient to meet our domestic and international working capital needs, and other capital and liquidity requirements, including acquisitions and share repurchases for at least the next 12 months.
Net Working Capital
Net working capital is comprised of current assets less current liabilities, as shown on our consolidated balance sheets. The increase in our net working capital as of December 30, 2017, as compared to December 31, 2016, is primarily due to a net increase in cash and cash equivalents.
Cash Flows from Operating Activities
Cash flows from operating activities during fiscal 2017, 2016 and 2015 were as follows:
 
 
 
Change
 
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
 
(In millions)
Cash provided by operating activities
$
470.7

 
$
444.9

 
$
378.2

 
$
25.8

 
$
66.7

Cash flows from operating activities include net income, adjusted for certain non-cash items, as well as changes in the balances of certain assets and liabilities. Our cash flows from operating activities are significantly influenced by business levels and the payment terms set forth in our customer agreements. The increase in cash flows from operating activities during fiscal 2017, as compared to fiscal 2016, and fiscal 2016, as compared to fiscal 2015, was primarily due to the timing of cash receipts from customers and disbursements made to vendors and improved profitability.
We expect that cash flows from operating activities will fluctuate in future periods due to a number of factors, including our operating results, the timing of our billings, collections, disbursements and tax payments.

37


Cash Flows from Investing Activities
Cash flows provided by (used for) investing activities during fiscal 2017, 2016 and 2015 were as follows:
 
 
 
Change
 
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
 
(In millions)
Cash provided by (used for) investing activities
$
(191.2
)
 
$
1.4

 
$
(44.5
)
 
$
(192.6
)
 
$
45.9

The increase in cash used for investing activities during fiscal 2017, as compared to fiscal 2016, was primarily due to an increase in cash paid for business combinations and a decrease in net proceeds from our investment portfolio. The increase in cash flows provided by investing activities during fiscal 2016, as compared to fiscal 2015, was primarily due to an increase in proceeds resulting from the sale and maturity of available-for-sale securities, partially offset by an increase in cash used for business combinations and asset acquisitions.
We expect to continue our investing activities, including purchasing property, plant and equipment, purchasing intangible assets, business combinations, purchasing software licenses, and making long-term equity investments.
Cash Flows from Financing Activities
Cash flows used for financing activities during fiscal 2017, 2016 and 2015 were as follows:
 
 
 
Change
 
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
 
(In millions)
Cash used for financing activities
$
(70.1
)
 
$
(592.7
)
 
$
(626.3
)
 
$
522.6

 
$
33.6

The decrease in cash used for financing activities during fiscal 2017, as compared to fiscal 2016, was primarily due to a decrease in payments made to repurchase shares of our common stock, partially offset by a net decrease in proceeds from borrowings. The decrease in cash used for financing activities during fiscal 2016, as compared to fiscal 2015, was primarily due to proceeds from the 2019 Term Loan and our revolving credit facility and a decrease in payments made to settle outstanding borrowings, offset by an increase in payments made to repurchase shares of our common stock.
Other Factors Affecting Liquidity and Capital Resources
Tax Act
The Tax Act provides an election to pay the net tax liability for the transition tax in eight annual installments. We have currently estimated a provisional net tax liability of approximately $3 million for the transition tax. The provisional net tax liability is less than the provisional federal income tax expense for the transition tax primarily because we expect to utilize tax credit carryforwards to reduce our transition tax payable. The re-measurement of our deferred tax assets for the U.S. tax rate reduction is a non-cash expense. We currently do not expect the Tax Act to otherwise significantly impact the amount of our cash used to pay income taxes in fiscal 2018. However, we continue to review the impact of the Tax Act on our cash taxes.
The Tax Act provides that we may repatriate earnings from our foreign subsidiaries in fiscal 2018 and future years without additional U.S. federal income taxes. We are currently evaluating our plans for our earnings from foreign subsidiaries. We currently do not expect to indefinitely reinvest our earnings from our foreign subsidiaries although we continue to assess our plans, including the impact of the Tax Act. We are also evaluating our plans for dividends from our foreign subsidiaries in fiscal 2018.

38


Stock Repurchase Program
In January 2017, our Board of Directors authorized the repurchase of shares of our common stock with a value of up to $525.0 million in the aggregate. We expect to repurchase approximately $50 million of our common stock during the first quarter of fiscal 2018. The actual timing and amount of future repurchases are subject to business and market conditions, corporate and regulatory requirements, acquisition opportunities and other factors. As of December 30, 2017, approximately $425 million remained available under this authorization. See Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for additional information.
Revolving Credit Facility
Our senior unsecured revolving credit facility provides for borrowings up to $350.0 million, with the right to request increased capacity up to an additional $250.0 million upon the receipt of lender commitments, for total maximum borrowings of $600.0 million. The credit facility expires on January 28, 2022 and currently has no subsidiary guarantors. Any outstanding loans drawn under the credit facility are due at maturity on January 28, 2022. Outstanding borrowings may be paid at any time prior to maturity. As of December 30, 2017, there were $85.0 million of borrowings outstanding under our revolving credit facility.
2019 Term Loan
In January 2016, we entered into a $300.0 million three-year senior unsecured non-amortizing term loan facility due on January 28, 2019 (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 may be settled at any time if we elect to do so.
2024 Notes
In October 2014, we issued $350.0 million aggregate principal amount of 4.375% Senior Notes due October 15, 2024. We 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. Interest is payable in cash semi-annually. The 2024 Notes are unsecured and rank equal in right of payment to all of our existing and future senior indebtedness. The proceeds from the 2024 Notes are available for general corporate purposes, which may include the retirement of debt, working capital, capital expenditures, acquisitions and strategic transactions.

Contractual Obligations

A summary of our contractual obligations as of December 30, 2017 is as follows:
 
Payments Due by Period
 
Total
 
Less
Than 1 Year
 
1-3 Years
 
3-5 Years
 
More
Than 5 Years
 
(In millions)
Operating lease obligations
$
100.0

 
$
28.1

 
$
33.2

 
$
17.0

 
$
21.7

Purchase obligations (1)
31.8

 
23.9

 
7.2

 
0.3

 
0.4

Long-term debt
650.0

 

 
300.0

 

 
350.0

Revolving credit facility
85.0

 
85.0

 

 

 

Contractual interest payments
121.7

 
27.3

 
32.6

 
31.2

 
30.6

Current income tax payable
3.9

 
3.9

 

 

 

Other long-term contractual obligations (2)
36.6

 

 
13.7

 
11.5

 
11.4

Total
$
1,029.0

 
$
168.2

 
$
386.7

 
$
60.0

 
$
414.1

_________________

(1) 
With respect to purchase obligations that are cancelable by us, this table includes the amount that would have been payable if we had canceled the obligation as of December 30, 2017 or the earliest cancellation date.
(2) 
Included in other long-term contractual obligations are long-term income tax liabilities of $20.7 million related to unrecognized tax benefits. Of the $20.7 million, we estimate $9.4 million will be paid or settled within 1 to 3 years, $9.4 million within 3 to 5 years and $1.9 million in more than 5 years. The remaining portion of other long-term contractual obligations is primarily liabilities associated with defined benefit retirement plans and acquisitions.

39



Off-Balance Sheet Arrangements
As of December 30, 2017, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Critical Accounting Estimates
In preparing our 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 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.
We believe that the assumptions, judgments and estimates involved in the accounting for income taxes, revenue recognition and business combinations have the greatest potential impact on our consolidated financial statements; therefore, we consider these to be our critical accounting estimates. For information on our significant accounting policies, see Note 2 in the notes to consolidated financial statements.
Accounting for Income Taxes
We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating and estimating our provision for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. The Tax Act has many provisions that require additional guidance on specific interpretations of the tax law changes. Our provision for income taxes could be adversely affected by our earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize the related tax benefit, changes in foreign currency exchange rates, entry into new businesses and geographies and changes to our existing businesses, acquisitions and investments, changes in our deferred tax assets and liabilities including changes in our assessment of valuation allowances, changes in the relevant tax laws or interpretations of these tax laws, and developments in current and future tax examinations.
We only recognize the tax benefit of an income tax position if we judge that it is more likely than not that the tax position will be sustained, solely on its technical merits, in a tax audit including resolution of any related appeals or litigation processes. To make this judgment, we must interpret complex and sometimes ambiguous tax laws, regulations and administrative practices. If we judge that an income tax position meets this recognition threshold, then we must measure the amount of the tax benefit to be recognized by estimating the largest amount of tax benefit that has a greater than 50% cumulative probability of being realized upon settlement with a taxing authority that has full knowledge of all of the relevant facts. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible settlement outcomes. We must reevaluate our income tax positions on a quarterly basis to consider factors such as changes in facts or circumstances, changes in tax law, effectively settled issues under audit, the lapse of applicable statute of limitations, and new audit activity. Such a change in recognition or measurement would result in recognition of a tax benefit or an additional charge to the tax provision. For a more detailed description of our unrecognized tax benefits, see Note 6 in the notes to consolidated financial statements.
Revenue Recognition
We begin to recognize revenue when all of the following criteria are met:
we have persuasive evidence of an arrangement with a customer;
delivery has occurred;
the fee for the arrangement is considered to be fixed or determinable at the outset of the arrangement; and
collectibility of the fee is probable.
Significant judgment is involved in the determination of whether the facts and circumstances of an arrangement support that the fee for the arrangement is considered to be fixed or determinable and that collectibility of the fee is probable, and these judgments can affect the amount of revenue that we recognize in a particular reporting period. For contracts that do not include a substantial upfront payment, we consider a fee to be fixed or determinable if the arrangement has payment periods that are less than or equal to the term of the licenses and the payments are collected in equal or nearly equal installments, when evaluated over the entire term of the arrangement. If we no longer were to have a history of collecting under the original contract without providing concessions on time-based licenses, revenue from such licenses would be required to be recognized when payments under the contract become due and payable. Such a change could have a material adverse effect on our results of operations.

40


We must also make judgments when assessing whether a contract amendment to a time-based arrangement (primarily in the context of a license extension or renewal) constitutes a concession. We have established a history of collecting under contracts for which the fee has been assessed as fixed or determinable, without providing concessions on payments, products or services.
Generally, we are able to estimate whether collection is probable, but significant judgment is applied as we assess the creditworthiness of our customers to make this determination. Key external and internal factors are considered in developing our creditworthiness assessment, including public information, historical and current financial statements and past collection history. If our experience were to change, it could have a material adverse effect on our results of operations. If, in our judgment, collection of a fee is not probable, we do not record revenue until the uncertainty is removed, which is generally upon receipt of cash payment.
Revenue associated with our time-based licenses is recognized over the term of the arrangement, commencing upon the later of the effective date of the arrangement or delivery of the first software product. In general, product revenue associated with perpetual licenses where vendor specific objective evidence (“VSOE”) exists for the undelivered maintenance, is recognized up front, upon the later of the effective date of the arrangement or delivery of the software product, provided all other conditions for revenue recognition have been met, and maintenance revenue is recognized ratably over the maintenance term. If certain other criteria are met, revenue for design IP is recognized upon delivery and we accrue the expected costs of maintenance. A relatively small percentage of our revenue from software and IP licenses is recognized on an upfront basis.
Our hardware products generally include the hardware product and its related essential software, and maintenance for the hardware and the essential software. Consideration allocated to the hardware product and the essential software is recognized as revenue at the time of delivery, provided all other conditions for revenue recognition have been met. Consideration allocated to the maintenance is recognized ratably over the maintenance term.
Revenue from services and customized IP arrangements is recognized either on the time and materials method, as work is performed, or on the percentage-of-completion method. If a service contract is considered to be part of a multiple element arrangement (“MEA”) that includes a software contract, revenue is generally recognized over the duration of the software contract. For contracts with fixed or not-to-exceed fees, we estimate on a monthly basis the percentage of completion based on the completion of milestones relating to the arrangement. We have a history of accurately estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect our estimates, including labor rates, utilization and efficiency variances, and specification and testing requirement changes. If different conditions were to prevail such that accurate estimates could not be made, then the use of the completed contract method would be required and the recognition of all revenue and costs would be deferred until the project was completed. Such a change could have a material impact on our results of operations.
If a group of contracts is so closely related that they are, in effect, part of a single arrangement, such arrangements are deemed to be an MEA. We exercise significant judgment to evaluate the relevant facts and circumstances in determining whether the separate contracts should be accounted for individually as distinct arrangements or whether the separate contracts are, in substance, an MEA. Our judgments about whether a group of contracts is an MEA can affect the timing of revenue recognition under those contracts, which could have an effect on our results of operations for the periods involved. For example, a perpetual license agreement that would otherwise result in upfront revenue upon delivery may be deemed part of an MEA when it is executed within close proximity, or in contemplation of, other license agreements with the same customer that require revenue recognition over time, in which event all the revenue is recognized over the longest term of any component of the MEA instead of up front.
For an MEA that includes software and nonsoftware elements, we allocate consideration to all software elements as a group and all nonsoftware elements based on their relative standalone selling prices. Revenue allocated to each deliverable is then recognized when all four criteria are met. In these circumstances, there is a hierarchy to determine the standalone selling price to be used for allocating consideration to the deliverables as follows:
VSOE of fair value;
Third-party evidence of selling price (“TPE”); and
Best estimate of the selling price (“BESP”).
We calculate the BESP of our hardware products based on our pricing practices, including the historical average prices charged for comparable hardware products, because VSOE or TPE cannot be established. Our process for determining BESP for our software deliverables without VSOE or TPE takes into account multiple factors that vary depending upon the unique facts and circumstances related to each deliverable. Key external and internal factors considered in developing the BESPs include prices charged by us for similar arrangements, historical pricing practices and the nature of the product. In addition, when developing BESPs, we may consider other factors as appropriate, including the pricing of competitive alternatives if they exist, and product-specific business objectives. We exercise significant judgment to evaluate the relevant facts and circumstances in calculating the BESP of the deliverables in our arrangements.

41


Business Combinations
When we acquire businesses, we allocate the purchase price to the acquired tangible assets and assumed liabilities, including deferred revenue, liabilities associated with the fair value of contingent consideration and acquired identifiable intangible assets. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires us to make significant estimates in determining the fair values of these acquired assets and assumed liabilities, especially with respect to intangible assets and goodwill. These estimates are based on information obtained from management of the acquired companies, our assessment of this information, and historical experience. These estimates can include, but are not limited to, the cash flows that an acquired business is expected to generate in the future, the cash flows that specific assets acquired with that business are expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable, and if different estimates were used, the purchase price for the acquisition could be allocated to the acquired assets and assumed liabilities differently from the allocation that we have made to the acquired assets and assumed liabilities. In addition, unanticipated events and circumstances may occur that may affect the accuracy or validity of such estimates, and if such events occur, we may be required to adjust the value allocated to acquired assets or assumed liabilities.
We also make significant judgments and estimates when we assign useful lives to the definite-lived intangible assets identified as part of our acquisitions. These estimates are inherently uncertain and if we used different estimates, the useful life over which we amortize intangible assets would be different. In addition, unanticipated events and circumstances may occur that may impact the useful life assigned to our intangible assets, which would impact our amortization of intangible assets expense and our results of operations.

New Accounting Standards
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605).” Under Topic 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, Topic 606 requires enhanced disclosures, including disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued several amendments to the standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations.
Topic 606 permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or modified retrospectively with the cumulative effect of applying the guidance as of the date of initial application (the cumulative catch-up transition method). We will adopt the standard using the cumulative catch-up transition method.
Topic 606 is effective for us beginning with the first quarter of fiscal 2018. In preparation for adoption of the standard, we implemented changes to our processes related to revenue recognition and the control activities within them. The most significant impacts of our adoption of Topic 606 are as follows:
Our revenue mix is expected to remain approximately 90% recognizable over time under Topic 606, as it was under Topic 605;
The use of the cumulative catch-up method upon adoption of Topic 606 requires us to evaluate only contracts that were in effect at the beginning of fiscal 2018 as if those contracts had been accounted for under Topic 606 from the beginning of their terms;
We expect approximately 3% of our existing backlog at the beginning of fiscal 2018 will be adjusted through retained earnings upon adoption of Topic 606, and such backlog will not be recognized as revenue in future periods under Topic 606. Because this revenue would have been recognized in prior periods had Topic 606 then been in effect, we will also have related changes to our accounts receivable and deferred revenue balances;
Because of the transition method, revenue generated under Topic 606 is expected to be slightly lower than revenue would have been under Topic 605 in 2018; and
In 2018, the year of adoption, we will report revenue under Topic 606 with supplemental disclosures of what revenue would have been under Topic 605.
We will continue to recognize revenue over time for our time-based software arrangements, which represent a large majority of our total revenue, because the multiple software licenses and related updates in our time-based arrangements constitute a single, combined performance obligation. The timing of revenue recognition for our hardware and professional services is expected to remain substantially unchanged.

42


The adoption of Topic 606 will impact our accounting for MEAs that combine many software-related deliverables, which may include multiple software contracts with varying terms, IP licenses, and/or service elements. Topic 605 requires VSOE to recognize revenue separately for the different undelivered elements. We have not established VSOE under Topic 605, thus the revenue related to these agreements is generally recognized over time beginning with the delivery of the last specified deliverable and ending on the latest end date. Topic 606 requires us to separate the different elements through the use of stand-alone selling prices (“SSPs”), and to recognize the revenue allocated to the different elements as if those elements had been sold on a standalone basis, either up front or over time. Certain IP license agreements will be recognized up front under Topic 606, as opposed to over time under Topic 605. In addition, certain software agreements will be recognized over time under Topic 606, as opposed to up front under Topic 605. Despite these changes, we expect our revenue mix will be similar, such that approximately 90% of our revenue is recognized over time.
More judgments and estimates are required under Topic 606 than are required under Topic 605, including estimating the SSP for each performance obligation identified within our contracts. Due to the complexity of certain contracts, the actual revenue recognition treatment required under the new standard for these arrangements may be dependent on contract-specific terms and vary in some instances.
Under the cumulative catch-up transition method, we have evaluated our contracts that were in effect on the adoption date as if they had been accounted for under Topic 606 from contract inception. Some revenue related to the MEAs and IP arrangements noted above that would have been recognized in future periods under Topic 605 will be recast under Topic 606 as if the revenue had been recognized in prior periods. As this transition method requires that we not adjust historical reported revenue amounts, the revenue that would have been recognized under this method prior to the adoption date will be an adjustment to retained earnings and will not be recognized as revenue in future periods as previously planned. Because of this transition method, approximately 3% of our year-end backlog will be adjusted to retained earnings upon adoption.
Topic 606 also requires the deferral of incremental costs of obtaining a contract with a customer. This requires that we capitalize commission costs that are directly related to obtaining customer contracts and amortize them over the life of the contract. We anticipate the amount of the amortization of capitalized commissions under Topic 606 will be similar to the amount of commissions expense for fiscal 2018 bookings under Topic 605 and will not have a significant impact on our consolidated income statements.
Financial Instruments
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which will impact certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The updated standard becomes effective for us in the first quarter of fiscal 2018. Upon the effective date of the new standard, all equity investments in unconsolidated entities, other than those accounted for using the equity method of accounting, will generally be measured at fair value with the changes in fair value recognized through earnings. There will no longer be an available-for-sale classification for equity investments and therefore, the changes in the fair value of our marketable equity securities will no longer be reported in other comprehensive income (loss).
The updated standard also simplifies the impairment assessment of investments without readily determinable fair values by requiring a qualitative assessment of investments at each reporting period. The new guidance must be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption. We do not anticipate that the adoption of this standard will have a significant impact on our consolidated financial statements or the related disclosures based on our current holdings of equity investments.
Leases
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” requiring, among other things, the recognition of lease liabilities and corresponding right-of-use assets on the balance sheet by lessees for certain lease arrangements that are classified as operating leases under the previous standard. While we are continuing to assess the potential impacts of the standard, we anticipate that the adoption of this standard will have a material impact on our consolidated balance sheets and may require changes to our systems and processes. We currently expect the most significant impact will be the recognition of right-of-use assets and lease liabilities for operating leases. The updated standard will become effective for us in the first quarter of fiscal 2019.

43


Income Tax
In October 2016, the FASB issued ASU 2016-16, “Income taxes (Topic 740): Intra-entity Transfers of Assets Other Than Inventory.” The new guidance requires the recognition of the income tax consequences of an intra-entity asset transfer when the transfer occurs. For intra-entity transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The new standard becomes effective for us in the first quarter of fiscal 2018. The new guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We are currently evaluating the effects that the adoption of this guidance will have on our consolidated financial statements. We anticipate the potential for increased volatility in future effective tax rates from the adoption of this guidance.
In December 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) regarding the accounting for income taxes in the reporting period that includes the date on which the United States enacted the Tax Act. The Tax Act significantly changes existing U.S. tax law and includes numerous provisions that will affect businesses. U.S. GAAP generally requires companies to recognize the effect of tax law changes in the period of enactment. SAB 118 will allow registrants to record provisional amounts for a period of up to one year from the date of enactment when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the changes in tax law. This provisional period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting, but cannot extend beyond December 22, 2018. Because the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretations are expected in the future, we consider the accounting of the transition tax, deferred tax remeasurement, and other items to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. We expect to refine our provisional amounts and to complete our accounting for the Tax Act during fiscal 2018. For further discussion, see Note 6 in the notes to the consolidated financial statements.
Business Combinations
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” that revises the definition of a business as it relates to acquisitions, disposals, goodwill impairments and consolidations. The updated standard becomes effective for us in the first quarter of fiscal 2018, and early adoption is permitted. We do not anticipate that the adoption of this standard will have a significant impact on our consolidated financial statements or the related disclosures.
Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” that eliminates “Step 2” from the goodwill impairment test. The new standard will be effective for us in the first quarter of fiscal 2020, and early adoption is permitted. The new guidance must be applied on a prospective basis. We do not anticipate that the adoption of this standard will have a significant impact on our consolidated financial statements or the related disclosures.
Stock-based Compensation
In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,” that provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The new standard is effective for us in the first quarter of fiscal 2018. The new guidance must be applied on a prospective basis. We do not anticipate that the adoption of this standard will have a significant impact on our consolidated financial statements or the related disclosures.
Income Tax Effects within Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive income,” that allows a reclassification of the income tax effects of the Tax Act on items within accumulated other comprehensive income to retained earnings. The new guidance may be applied at the beginning of the period of adoption or retrospectively to each period in which the effect of the change in federal income tax rate from the Tax Act is recognized. The new standard will be effective for us in the first quarter of fiscal 2019, and early adoption is permitted. We are currently evaluating the effects that the adoption of this guidance will have on our consolidated financial statements and the related disclosures.


44


Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
A material portion of our revenue, expenses and business activities are transacted in the U.S. dollar. In certain foreign countries where we price our products and services in U.S. dollars, a decrease in value of the local currency relative to the U.S. dollar results in an increase in the prices for our products and services compared to those products of our competitors that are priced in local currency. This could result in our prices being uncompetitive in certain markets.
In certain countries where we may invoice customers in the local currency our revenues benefit from a weaker dollar and are adversely affected by a stronger dollar. The opposite impact occurs in countries where we record expenses in local currencies. In those cases, our costs and expenses benefit from a stronger dollar and are adversely affected by a weaker dollar. The fluctuations in our operating expenses outside the United States resulting from volatility in foreign exchange rates are not generally moderated by corresponding fluctuations in revenues from existing contracts.
We enter into foreign currency forward exchange contracts to protect against currency exchange risks associated with existing assets and liabilities. A foreign currency forward exchange contract acts as a hedge by increasing in value when underlying assets decrease in value or underlying liabilities increase in value due to changes in foreign exchange rates. Conversely, a foreign currency forward exchange contract decreases in value when underlying assets increase in value or underlying liabilities decrease in value due to changes in foreign exchange rates. These forward contracts are not designated as accounting hedges, so the unrealized gains and losses are recognized in other income, net, in advance of the actual foreign currency cash flows with the fair value of these forward contracts being recorded as accrued liabilities or other current assets.
We do not use forward contracts for trading purposes. Our forward contracts generally have maturities of 90 days or less. We enter into foreign currency forward exchange contracts based on estimated future asset and liability exposures, and the effectiveness of our hedging program depends on our ability to estimate these future asset and liability exposures. Recognized gains and losses with respect to our current hedging activities will ultimately depend on how accurately we are able to match the amount of foreign currency forward exchange contracts with actual underlying asset and liability exposures.
The following table provides information about our foreign currency forward exchange contracts as of December 30, 2017. The information is provided in United States dollar equivalent amounts. The table presents the notional amounts, at contract exchange rates, and the weighted average contractual foreign currency exchange rates expressed as units of the foreign currency per United States dollar, which in some cases may not be the market convention for quoting a particular currency. All of these forward contracts matured during January 2018.
 
Notional
Principal
 
Weighted
Average
Contract
Rate
 
(In millions)
 
 
Forward Contracts:
 
 
 
European Union euro
$
82.8

 
0.84

British pound
71.3

 
0.74

Japanese yen
57.2

 
113.19

Israeli shekel
26.2

 
3.53

Indian rupee
22.8

 
64.71

South Korean won
18.2

 
1,088.01

Chinese renminbi
7.6

 
6.63

Taiwan dollar
5.3

 
29.96

Other
6.7

 
N/A

Total
$
298.1

 
 
Estimated fair value
$
2.9

 
 
We actively monitor our foreign currency risks, but there is no guarantee that our foreign currency hedging activities will substantially offset the impact of fluctuations in currency exchange rates on our results of operations, cash flows and financial position.


45


Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our portfolio of cash and cash equivalents and balances outstanding on our revolving credit facility, if any, and our 2019 Term Loan. We are exposed to interest rate fluctuations in many of the world’s leading industrialized countries, but our interest income and expense is most sensitive to fluctuations in the general level of United States interest rates. In this regard, changes in United States interest rates affect the interest earned on our cash and cash equivalents and the costs associated with foreign currency hedges.
All highly liquid securities with a maturity of three months or less at the date of purchase are considered to be cash equivalents. Securities with maturities greater than three months are classified as available-for-sale and are considered to be short-term investments. The carrying value of our interest-bearing instruments approximated fair value as of December 30, 2017.
Interest rates under our revolving credit facility and 2019 Term Loan are variable, so interest expense could be adversely affected by changes in interest rates, particularly for periods when we maintain a balance outstanding under the revolving credit facility. Interest rates for our revolving credit facility and 2019 Term Loan can fluctuate based on changes in market interest rates and in an interest rate margin that varies based on our consolidated leverage ratio. As of December 30, 2017, there were $85.0 million borrowings outstanding under our revolving credit facility. For an additional description of the revolving credit facility and 2019 Term Loan, see Note 3 in the notes to consolidated financial statements.
Equity Price Risk
Equity Investments
We have a portfolio of equity investments that includes marketable equity securities and non-marketable investments. Our equity investments are made primarily in connection with our strategic investment program. Under our strategic investment program, from time to time, we make cash investments in companies with technologies that are potentially strategically important to us. See Note 4 in the notes to consolidated financial statements for an additional description of these investments. Our non-marketable investments had a carrying value of $3.0 million as of December 30, 2017, and $3.2 million as of December 31, 2016.

Item 8. Financial Statements and Supplementary Data

The financial statements required by Item 8 are submitted as a separate section of this Annual Report on Form 10-K. See Part IV, Item 15, “Exhibits and Financial Statement Schedules.”

Summary Quarterly Data-Unaudited
 
 
2017
 
2016
 
 
4th
 
3rd
 
2nd
 
1st
 
4th
 
3rd
 
2nd
 
1st
 
 
(In thousands, except per share amounts)
Revenue
 
$
501,722

 
$
485,398

 
$
479,001

 
$
476,911

 
$
468,980

 
$
446,220

 
$
453,021

 
$
447,862

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
 
60,284

 
54,482

 
60,832

 
61,792

 
76,048

 
56,607

 
61,783

 
62,054

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) (1)
 
(14,442
)
 
81,157

 
69,127

 
68,259

 
38,477

 
64,712

 
49,335

 
50,562

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per share - basic (1)
 
(0.05
)
 
0.30

 
0.25

 
0.25

 
0.14

 
0.23

 
0.17

 
0.17

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per share - diluted (1)
 
(0.05
)
 
0.29

 
0.25

 
0.25

 
0.14

 
0.23

 
0.17

 
0.17

_________________
(1)  
During fiscal 2017, we recorded a provisional income tax expense of $96.8 million related to the income tax effects of the Tax Act.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.


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Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 30, 2017.
The evaluation of our disclosure controls and procedures included a review of our processes and the effect on the information generated for use in this Annual Report on Form 10-K. In the course of this evaluation, we sought to identify any material weaknesses in our disclosure controls and procedures, to determine whether we had identified any acts of fraud involving personnel who have a significant role in our disclosure controls and procedures, and to confirm that any necessary corrective action, including process improvements, was taken. This type of evaluation is done every fiscal quarter so that our conclusions concerning the effectiveness of these controls can be reported in our periodic reports filed with the SEC. The overall goals of these evaluation activities are to monitor our disclosure controls and procedures and to make modifications as necessary. We intend to maintain these disclosure controls and procedures, modifying them as circumstances warrant.
Based on their evaluation as of December 30, 2017, our CEO and CFO have concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended December 30, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. Internal control over financial reporting, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of internal control are met. Further, the design of internal control must reflect the fact that there are resource constraints, and the benefits of the control must be considered relative to their costs. While our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Cadence, have been detected.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management assessed the effectiveness of our internal control over financial reporting as of December 30, 2017. In making this assessment, our management used the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Our management has concluded that, as of December 30, 2017, our internal control over financial reporting is effective based on these criteria. Our independent registered public accounting firm, KPMG LLP, has issued an attestation report on our internal control over financial reporting, which is included in Part IV, Item 15, “Exhibits and Financial Statement Schedules.”
Item 9B. Other Information
None.


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PART III.

Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 as to directors is incorporated herein by reference from the sections entitled “Proposal 1 - Election of Directors” and “Other Matters - Section 16(a) Beneficial Ownership Reporting Compliance” in Cadence’s definitive proxy statement for its 2018 Annual Meeting of Stockholders. The executive officers of Cadence are listed at the end of Item 1 of Part I of this Annual Report on Form 10-K.
The information required by Item 10 as to Cadence’s code of ethics is incorporated herein by reference from the section entitled “Corporate Governance - Code of Business Conduct” in Cadence’s definitive proxy statement for its 2018 Annual Meeting of Stockholders.
The information required by Item 10 as to the director nomination process and Cadence’s Audit Committee is incorporated by reference from the section entitled “Cadence’s Board of Directors - Committees of the Board of Directors” in Cadence’s definitive proxy statement for its 2018 Annual Meeting of Stockholders.
Item 11. Executive Compensation
The information required by Item 11 is incorporated herein by reference from the sections entitled “Cadence’s Board of Directors - Compensation of Directors,” “Compensation Committee Report,” “Compensation Committee Interlocks and Insider Participation,” “Compensation of Executive Officers” and “Potential Payments Upon Termination or Change-in-Control and Employment Contracts” in Cadence’s definitive proxy statement for its 2018 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 is incorporated herein by reference from the sections entitled “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in Cadence’s definitive proxy statement for its 2018 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by Item 13 is incorporated herein by reference from the sections entitled “Certain Transactions” and “Cadence’s Board of Directors - Director Independence” in Cadence’s definitive proxy statement for its 2018 Annual Meeting of Stockholders.