10-Q CDNS 04.04.2015
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________ 
FORM 10-Q
_____________________________________  
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 4, 2015
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 000-15867
_____________________________________ 
CADENCE DESIGN SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
_____________________________________ 
Delaware
 
00-0000000
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
2655 Seely Avenue, Building 5, San Jose, California
 
95134
(Address of Principal Executive Offices)
 
(Zip Code)
(408) 943-1234
Registrant’s Telephone Number, including Area Code
_____________________________________ 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
x
 
Accelerated filer
 
o
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
On April 4, 2015, approximately 292,673,000 shares of the registrant’s common stock, $0.01 par value, were outstanding.



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











PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
 
As of
 
April 4,
2015
 
January 3,
2015
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
887,736

 
$
932,161

Short-term investments
92,640

 
90,445

Receivables, net
133,924

 
122,492

Inventories
54,450

 
56,394

2015 notes hedges
429,847

 
523,930

Prepaid expenses and other
135,047

 
126,313

Total current assets
1,733,644

 
1,851,735

Property, plant and equipment, net of accumulated depreciation of $560,774 and $552,551, respectively
225,556

 
230,112

Goodwill
553,942

 
553,767

Acquired intangibles, net of accumulated amortization of $169,013 and $154,814, respectively
344,450

 
360,932

Long-term receivables
3,619

 
3,644

Other assets
201,354

 
209,366

Total assets
$
3,062,565

 
$
3,209,556

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Convertible notes
$
293,667

 
$
342,499

2015 notes embedded conversion derivative
429,847

 
523,930

Accounts payable and accrued liabilities
178,474

 
225,375

Current portion of deferred revenue
324,448

 
301,287

Total current liabilities
1,226,436

 
1,393,091

Long-term liabilities:
 
 
 
Long-term portion of deferred revenue
48,418

 
54,726

Long-term debt
348,705

 
348,676

Other long-term liabilities
75,816

 
79,489

Total long-term liabilities
472,939

 
482,891

Commitments and contingencies (Note 11)


 


Stockholders’ equity:
 
 
 
Common stock and capital in excess of par value
1,869,104

 
1,851,427

Treasury stock, at cost
(219,578
)
 
(203,792
)
Accumulated deficit
(290,149
)
 
(326,408
)
Accumulated other comprehensive income
3,813

 
12,347

Total stockholders’ equity
1,363,190

 
1,333,574

Total liabilities and stockholders’ equity
$
3,062,565

 
$
3,209,556


See notes to condensed consolidated financial statements.



CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
April 4,
2015
 
March 29,
2014
Revenue:
 
 
 
Product and maintenance
$
383,637

 
$
357,350

Services
27,729

 
21,200

Total revenue
411,366

 
378,550

Costs and expenses:
 
 
 
Cost of product and maintenance
42,059

 
42,197

Cost of services
18,526

 
14,902

Marketing and sales
100,268

 
98,323

Research and development
162,996

 
146,466

General and administrative
27,642

 
28,744

Amortization of acquired intangibles
6,231

 
5,210

Restructuring and other charges
4,359

 
396

Total costs and expenses
362,081

 
336,238

Income from operations
49,285

 
42,312

Interest expense
(11,754
)
 
(7,268
)
Other income, net
4,781

 
3,382

Income before provision for income taxes
42,312

 
38,426

Provision for income taxes
6,053

 
5,356

Net income
$
36,259

 
$
33,070

Net income per share – basic
$
0.13

 
$
0.12

Net income per share – diluted
$
0.12

 
$
0.11

Weighted average common shares outstanding – basic
284,523

 
281,615

Weighted average common shares outstanding – diluted
311,847

 
301,034











See notes to condensed consolidated financial statements.



CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended
 
April 4,
2015
 
March 29,
2014
Net income
$
36,259

 
$
33,070

Other comprehensive income (loss), net of tax effects:
 
 
 
Foreign currency translation adjustments
(8,890
)
 
4,452

Changes in unrealized holding gains or losses on available-for-sale securities, net of reclassification adjustment for realized gains and losses
65

 
(181
)
Changes in defined benefit plan liabilities
291

 
408

Total other comprehensive income (loss), net of tax effects
(8,534
)
 
4,679

Comprehensive income
$
27,725

 
$
37,749





































See notes to condensed consolidated financial statements.



CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three Months Ended
 
April 4,
2015
 
March 29,
2014
Cash and cash equivalents at beginning of period
$
932,161

 
$
536,260

Cash flows from operating activities:
 
 
 
Net income
36,259

 
33,070

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
29,433

 
26,017

Amortization of debt discount and fees
5,945

 
4,882

Stock-based compensation
21,861

 
18,864

Gain on investments, net
(1,270
)
 
(3,651
)
Deferred income taxes
1,864

 
2,245

Other non-cash items
929

 
2,344

Changes in operating assets and liabilities, net of effect of acquired businesses:
 
 
 
Receivables
(12,450
)
 
(108
)
Inventories
1,682

 
(9,373
)
Prepaid expenses and other
(10,004
)
 
(9,753
)
Other assets
3,627

 
3,157

Accounts payable and accrued liabilities
(44,754
)
 
(29,680
)
Deferred revenue
16,812

 
(5,508
)
Other long-term liabilities
(3,246
)
 
(4,408
)
Net cash provided by operating activities
46,688

 
28,098

Cash flows from investing activities:
 
 
 
Purchases of available-for-sale securities
(33,161
)
 
(47,005
)
Proceeds from the sale of available-for-sale securities
20,551

 
32,586

Proceeds from the maturity of available-for-sale securities
10,350

 
13,905

Proceeds from the sale of long-term investments
1,364

 

Purchases of property, plant and equipment
(7,520
)
 
(6,252
)
Cash paid in business combinations and asset acquisitions, net of cash acquired

 
(27,422
)
Net cash used for investing activities
(8,416
)
 
(34,188
)
Cash flows from financing activities:
 
 
 
Payment of convertible notes
(53,862
)
 

Payment of convertible notes embedded conversion derivative liability
(77,139
)
 

Proceeds from convertible notes hedges
77,139

 

Payment of acquisition-related contingent consideration

 
(1,835
)
Tax effect related to employee stock transactions allocated to equity
6,482

 
1,827

Proceeds from issuance of common stock
24,609

 
23,377

Stock received for payment of employee taxes on vesting of restricted stock
(14,114
)
 
(10,981
)
Payments for repurchases of common stock
(36,797
)
 
(12,517
)
Net cash used for financing activities
(73,682
)
 
(129
)
Effect of exchange rate changes on cash and cash equivalents
(9,015
)
 
2,720

Decrease in cash and cash equivalents
(44,425
)
 
(3,499
)
Cash and cash equivalents at end of period
$
887,736

 
$
532,761

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
125

 
$
112

Cash paid for taxes, net
$
10,868

 
$
5,393






See notes to condensed consolidated financial statements.



CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared by Cadence Design Systems, Inc., or Cadence, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission, or the SEC. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, Cadence believes that the disclosures contained in this Quarterly Report on Form 10-Q comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These condensed consolidated financial statements are meant to be, and should be, read in conjunction with the consolidated financial statements and the Notes thereto included in Cadence’s Annual Report on Form 10-K for the fiscal year ended January 3, 2015. Certain prior period balances have been reclassified to conform to current period presentation.
The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q reflect all adjustments (which include only normal, recurring adjustments and those items discussed in these Notes) that are, in the opinion of management, necessary to state fairly the results of operations, cash flows and financial position for the periods and dates presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year. Management has evaluated subsequent events through the issuance date of the unaudited condensed consolidated financial statements.
Preparation of the condensed consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

NOTE 2. DEBT
Cadence’s outstanding debt as of April 4, 2015 and January 3, 2015 was as follows:
 
April 4, 2015
 
January 3, 2015
 
(In thousands)
 
Principal
 
Unamortized Discount
 
Carrying Value
 
Principal
 
Unamortized Discount
 
Carrying Value
2015 Notes
$
296,137

 
$
(2,470
)
 
$
293,667

 
$
349,999

 
$
(7,500
)
 
$
342,499

2024 Notes
350,000

 
(1,295
)
 
348,705

 
350,000

 
(1,324
)
 
348,676

Revolving credit facility

 

 

 

 

 

Total outstanding debt
$
646,137

 
$
(3,765
)
 
$
642,372

 
$
699,999

 
$
(8,824
)
 
$
691,175

2015 Notes
In June 2010, Cadence issued $350.0 million principal amount of 2.625% Cash Convertible Senior Notes Due 2015, or the 2015 Notes. At maturity, the holders of the 2015 Notes will be entitled to receive the principal amount of the 2015 Notes plus accrued interest. The holders of the 2015 Notes may elect to convert their 2015 Notes to cash through the second trading day immediately preceding the maturity date, as specified in the table below under “Early conversion conditions” and “Conversion immediately preceding maturity.” If a holder of the 2015 Notes elects to convert its notes prior to maturity, that note holder will be entitled to receive cash equal to the principal amount of the notes converted plus any additional conversion value as described in the table below under the heading “Conversion feature.” As of April 4, 2015, a total of $53.9 million principal value of the 2015 Notes had been tendered for early conversion and settled. The remaining principal amount of the 2015 Notes, which was $296.1 million as of April 4, 2015, will be settled during the second quarter of fiscal 2015.

5


Cadence entered into hedge transactions, or the 2015 Notes Hedges, in connection with the issuance of the 2015 Notes. The purpose of the 2015 Notes Hedges was to limit Cadence’s exposure to the additional cash payments above the principal amount of the 2015 Notes that may be due to the holders. As a result of the 2015 Notes Hedges, Cadence’s maximum expected cash exposure upon conversion or maturity of the 2015 Notes is the remaining principal balance of the notes and accrued interest. In June 2010, Cadence also sold warrants in separate transactions, or the 2015 Warrants. As a result of the 2015 Warrants, Cadence experiences dilution to its diluted earnings per share when its average closing stock price exceeds $10.78 for any fiscal quarter. To the extent that Cadence’s stock price exceeds $10.78 at expiration of the 2015 Warrants, Cadence will issue shares to net settle the 2015 Warrants.
A summary of key terms of the 2015 Notes is as follows:
 
 
2015 Notes
 
 
(In thousands, except percentages and per share amounts)
 
 
Outstanding principal maturity value – at April 4, 2015
 
$296,137
 
 
Contractual interest rate
 
2.625%
 
 
Contractual maturity date
 
June 1, 2015
 
 
Initial conversion rate
 
132.5205 shares of common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $7.55 per share of Cadence common stock.
 
 
Conversion feature (in addition to principal amount payable in cash)
 
Cash to the extent Cadence’s stock price exceeds approximately $7.55 per share, calculated based on the applicable conversion rate multiplied by the volume weighted average price of Cadence common stock over a specified period.
 
 
Early conversion conditions (or the Early Conversion Conditions)
 
• Closing stock price greater than $9.81 for at least 20 of the last 30 trading days in a fiscal quarter (convertible only for subsequent quarter);
 
• Specified corporate transactions; or
 
• Note trading price falls below a calculated minimum.
 
 
Conversion immediately preceding maturity
 
From March 1, 2015 until the second trading day immediately preceding the maturity date, holders may elect to convert their 2015 Notes into cash as described above under “Conversion feature.”
 
 
Redemption at Cadence’s option prior to maturity
 
None.
 
 
 
Fundamental change put right
 
Upon certain fundamental corporate changes prior to maturity, the 2015 Note holders could require Cadence to repurchase their notes for cash equal to the principal amount of the notes plus accrued interest.
 
 
Make-whole premium
 
Upon certain fundamental changes prior to maturity, if Cadence’s stock price were between $6.16 and $40.00 per share at that time, the holders of the notes would be entitled to an increase to the conversion rate. This is referred to as a “make-whole premium.”
 
 
Financial covenants
 
None.
As of April 4, 2015, the if-converted value of the 2015 Notes to the note holders of approximately $726.0 million exceeded the principal amount of $296.1 million. The fair value of the 2015 Notes was $726.5 million as of April 4, 2015 and $873.9 million as of January 3, 2015.

6


2015 Notes Embedded Conversion Derivative
The conversion feature of the 2015 Notes, or the 2015 Notes Embedded Conversion Derivative, requires bifurcation from the 2015 Notes and is accounted for as a derivative liability. The fair value of the 2015 Notes Embedded Conversion Derivative at the time of issuance of the 2015 Notes was $76.6 million and was recorded as original issuance debt discount for purposes of accounting for the debt component of the 2015 Notes. This discount is amortized as interest expense using the effective interest method over the term of the 2015 Notes. The 2015 Notes Embedded Conversion Derivative is carried on the condensed consolidated balance sheet at its estimated fair value. The fair value was $429.8 million as of April 4, 2015 and $523.9 million as of January 3, 2015. During the three months ended April 4, 2015, Cadence paid $77.1 million of conversion value to note holders that elected to convert their 2015 Notes prior to maturity as described above under “Conversion feature.”
2015 Notes Hedges
The 2015 Notes Hedges expire on June 1, 2015, and must be settled in cash. The aggregate cost of the 2015 Notes Hedges was $76.6 million. The 2015 Notes Hedges are accounted for as a derivative asset and are carried on the condensed consolidated balance sheet at their estimated fair value. The fair value of the 2015 Notes Hedges was $429.8 million as of April 4, 2015 and $523.9 million as of January 3, 2015. The 2015 Notes Embedded Conversion Derivative liability and the 2015 Notes Hedges asset are adjusted to fair value each reporting period and unrealized gains and losses are reflected in the condensed consolidated income statements. The 2015 Notes Embedded Conversion Derivative and the 2015 Notes Hedges are designed to have similar fair values. Accordingly, the changes in the fair values of these instruments offset during the three months ended April 4, 2015 and March 29, 2014 and did not have a net impact on the condensed consolidated income statements for the respective periods. During the three months ended April 4, 2015, Cadence received proceeds of $77.1 million from the 2015 Notes Hedges that fully offset the conversion value associated with the 2015 Notes Embedded Conversion Derivative that was paid by Cadence to note holders that elected to convert their notes prior to maturity.
The classification of the 2015 Notes Embedded Conversion Derivative liability and the 2015 Notes Hedges asset as current on the condensed consolidated balance sheet corresponds with the classification of the 2015 Notes.
2015 Warrants
In June 2010, Cadence sold the 2015 Warrants in separate transactions for the purchase of up to approximately 46.4 million shares of Cadence’s common stock at a strike price of $10.78 per share, for total proceeds of $37.5 million, which was recorded as an increase in stockholders’ equity. The 2015 Warrants expire on various dates from September 2015 through December 2015 and must be settled in net shares of Cadence’s common stock. Upon expiration of the 2015 Warrants, Cadence will issue shares of common stock to the purchasers of the 2015 Warrants that represent the value by which the price of the common stock exceeds the strike price stipulated within the particular warrant agreement.
2015 Notes Interest Expense
The effective interest rate and components of interest expense of the 2015 Notes for the three months ended April 4, 2015 and March 29, 2014 were as follows:
 
Three Months Ended
 
April 4,
2015
 
March 29,
2014
 
(In thousands, except percentages)
Effective interest rate
8.1
%
 
8.1
%
Contractual interest expense
$
1,809

 
$
2,289

Amortization of debt discount
$
5,030

 
$
4,232

2024 Notes
On October 9, 2014, Cadence issued $350.0 million aggregate principal amount of 4.375% Senior Notes due October 15, 2024, or the 2024 Notes. Cadence received net proceeds of $342.4 million from issuance of the 2024 Notes, net of a discount of $1.4 million and issuance costs of $6.2 million. Both the discount and issuance costs will be amortized to interest expense over the term of the 2024 Notes using the effective interest method. Interest is payable in cash semi-annually commencing on April 15, 2015. The 2024 Notes are unsecured and rank equal in right of payment to all of our existing and future senior indebtedness.

7


Cadence may redeem the 2024 Notes, in whole or in part, at a redemption price equal to the greater of (a) 100% of the principal amount of the notes to be redeemed and (b) the sum of the present values of the remaining scheduled payments of principal and interest, plus any accrued and unpaid interest, as more particularly described in the indentures governing the 2024 Notes.
The indentures governing the 2024 Notes include customary representations, warranties and restrictive covenants, including, but not limited to, restrictions on our ability to grant liens on assets, enter into sale and lease-back transactions, or merge, consolidate or sell assets, and also includes customary events of default.
Revolving Credit Facility
Cadence maintains a senior unsecured revolving credit facility with a group of lenders led by Bank of America, N.A., as administrative agent. The credit facility provides for borrowings up to $250.0 million, with the right to request increased capacity up to an additional $150.0 million upon the receipt of lender commitments, for total maximum borrowings of $400.0 million. The credit facility, as amended, expires on September 19, 2019 and has no subsidiary guarantors. Any outstanding loans drawn under the credit facility are due at maturity on September 19, 2019. Outstanding borrowings may be paid at any time prior to maturity.
Interest accrues on borrowings under the credit facility at either LIBOR plus a margin between 1.25% and 2.0% per annum or at the base rate plus a margin between 0.25% and 1.0% per annum. The interest rate applied to borrowings is determined by Cadence’s consolidated leverage ratio as specified by the credit facility agreement. Interest is payable quarterly. A commitment fee ranging from 0.20% to 0.35% is assessed on the daily average undrawn portion of revolving commitments.
The credit facility contains customary negative covenants that, among other things, restrict Cadence’s ability to incur additional indebtedness, grant liens, make certain investments (including acquisitions), dispose of certain assets and make certain payments, including share repurchases and dividends. In addition, the credit facility contains financial covenants that require Cadence to maintain a leverage ratio not to exceed 2.75 to 1, and a minimum interest coverage ratio of 3 to 1.
As of April 4, 2015 and January 3, 2015, Cadence had no outstanding balance under the revolving credit facility and was in compliance with all financial covenants.

NOTE 3. CASH, CASH EQUIVALENTS AND INVESTMENTS
Cadence’s cash, cash equivalents and short-term investments at fair value as of April 4, 2015 and January 3, 2015 were as follows:
 
As of
 
April 4,
2015
 
January 3,
2015
 
(In thousands)
Cash and cash equivalents
$
887,736

 
$
932,161

Short-term investments
92,640

 
90,445

Cash, cash equivalents and short-term investments
$
980,376

 
$
1,022,606


8


Cash and Cash Equivalents
Cadence considers all highly liquid investments with original maturities of three months or less on the date of purchase to be cash equivalents. The amortized cost of Cadence’s cash equivalents approximates fair value. The following table summarizes Cadence’s cash and cash equivalents at fair value as of April 4, 2015 and January 3, 2015:
 
As of
 
April 4,
2015
 
January 3,
2015
 
(In thousands)
Cash and interest bearing deposits
$
209,310

 
$
203,665

Money market funds
678,426

 
728,496

Total cash and cash equivalents
$
887,736

 
$
932,161

Short-Term Investments
The following tables summarize Cadence’s short-term investments as of April 4, 2015 and January 3, 2015:
 
As of April 4, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Corporate debt securities
$
33,513

 
$
17

 
$
(9
)
 
$
33,521

Bank certificates of deposit
18,300

 
7

 

 
18,307

United States Treasury securities
26,563

 
66

 

 
26,629

United States government agency securities
8,159

 
2

 
(1
)
 
8,160

Commercial paper
4,181

 
18

 

 
4,199

Marketable debt securities
90,716

 
110

 
(10
)
 
90,816

Marketable equity securities
1,817

 
7

 

 
1,824

Total short-term investments
$
92,533

 
$
117

 
$
(10
)
 
$
92,640

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

 
$
6

 
$
(31
)
 
$
34,894

Bank certificates of deposit
21,900

 
10

 

 
21,910

United States Treasury securities
19,375

 
12

 
(13
)
 
19,374

United States government agency securities
9,209

 
3

 
(4
)
 
9,208

Commercial paper
3,184

 
4

 
(2
)
 
3,186

Marketable debt securities
88,587

 
35

 
(50
)
 
88,572

Marketable equity securities
1,817

 
56

 

 
1,873

Total short-term investments
$
90,404

 
$
91

 
$
(50
)
 
$
90,445

As of April 4, 2015, no securities held by Cadence had been in an unrealized loss position for more than 11 months.

9


The amortized cost and estimated fair value of marketable debt securities included in short-term investments as of April 4, 2015, by contractual maturity, are shown in the table below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.
 
Amortized
Cost
 
Fair
Value
 
(In thousands)
Due in less than one year
$
61,860

 
$
61,899

Due in one to three years
28,856

 
28,917

Total marketable debt securities included in short-term investments
$
90,716

 
$
90,816

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

NOTE 4. FAIR VALUE
Inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Cadence’s market assumptions. These two types of inputs have created the following fair value hierarchy:
Level 1 – Quoted prices for identical instruments in active markets;
Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
This hierarchy requires Cadence to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. Cadence recognizes transfers between levels of the hierarchy based on the fair values of the respective financial instruments at the end of the reporting period in which the transfer occurred. There were no transfers between levels of the fair value hierarchy during the three months ended April 4, 2015.
On a quarterly basis, Cadence measures at fair value certain financial assets and liabilities. The fair value of financial assets and liabilities was determined using the following levels of inputs as of April 4, 2015 and January 3, 2015:
 
Fair Value Measurements as of April 4, 2015:
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
678,426

 
$
678,426

 
$

 
$

Short-term investments:

 
 
 
 
 
 
Corporate debt securities
33,521

 

 
33,521

 

Bank certificates of deposit
18,307

 

 
18,307

 

United States Treasury securities
26,629

 
26,629

 

 

United States government agency securities
8,160

 
8,160

 

 

Commercial paper
4,199

 

 
4,199

 

Marketable equity securities
1,824

 
1,824

 

 

Trading securities held in Non-Qualified Deferred Compensation, or NQDC, trust
23,365

 
23,365

 

 

2015 Notes Hedges
429,847

 

 
429,847

 

Foreign currency exchange contracts
3,081

 

 
3,081

 

Total Assets
$
1,227,359

 
$
738,404

 
$
488,955

 
$

 
 
 
 
 
 
 
 

10


  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Liabilities
 
2015 Notes Embedded Conversion Derivative
429,847

 

 
429,847

 

Total Liabilities
$
429,847

 
$

 
$
429,847

 
$

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


 
 
 
 
 
 
Money market funds
$
728,496

 
$
728,496

 
$

 
$

Short-term investments:
 
 
 
 
 
 
 
Corporate debt securities
34,894

 

 
34,894

 

Bank certificates of deposit
21,910

 

 
21,910

 

United States Treasury securities
19,374

 
19,374

 

 

United States government agency securities
9,208

 
9,208

 

 

Commercial paper
3,186

 

 
3,186

 

Marketable equity securities
1,873

 
1,873

 

 

Trading securities held in NQDC trust
27,034

 
27,034

 

 

2015 Notes Hedges
523,930

 

 
523,930

 

Total Assets
$
1,369,905

 
$
785,985

 
$
583,920

 
$

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

 

 
523,930

 

Foreign currency exchange contracts
3,163

 

 
3,163

 

Total Liabilities
$
527,093

 
$

 
$
527,093

 
$


NOTE 5. RECEIVABLES, NET
Cadence’s current and long-term receivables balances as of April 4, 2015 and January 3, 2015 were as follows:
 
As of
 
April 4,
2015
 
January 3,
2015
 
(In thousands)
Accounts receivable
$
84,358

 
$
79,410

Unbilled accounts receivable
49,566

 
43,082

Long-term receivables
3,619

 
3,644

Total receivables
$
137,543

 
$
126,136

Less allowance for doubtful accounts

 

Total receivables, net
$
137,543

 
$
126,136

Cadence’s customers are primarily concentrated within the semiconductor and electronics systems industries. As of April 4, 2015 and January 3, 2015, no one customer accounted for 10% or more of Cadence’s total receivables. As of April 4, 2015 and January 3, 2015, Cadence’s receivables attributable to the ten customers with the largest balances were approximately 42% and 47% of Cadence's total receivables, respectively.


11


NOTE 6. GOODWILL AND ACQUIRED INTANGIBLES
Goodwill
The changes in the carrying amount of goodwill during the three months ended April 4, 2015 were as follows:
 
Gross Carrying
Amount
 
(In thousands)
Balance as of January 3, 2015
$
553,767

Effect of foreign currency translation
175

Balance as of April 4, 2015
$
553,942

Acquired Intangibles, Net
Acquired intangibles as of April 4, 2015 were as follows, excluding intangibles that were fully amortized as of January 3, 2015:
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Acquired
Intangibles, Net
 
(In thousands)
Existing technology
$
328,119

 
$
(94,617
)
 
$
233,502

Agreements and relationships
173,625

 
(69,979
)
 
103,646

Tradenames, trademarks and patents
10,119

 
(4,417
)
 
5,702

Total acquired intangibles with definite lives
511,863

 
(169,013
)
 
342,850

In-process technology
1,600

 

 
1,600

Total acquired intangibles
$
513,463

 
$
(169,013
)
 
$
344,450

In-process technology as of April 4, 2015 consisted of acquired projects that, if completed, will contribute to Cadence’s ability to offer additional software solutions to its customers. As of April 4, 2015, these projects were expected to be complete in six to nine months. During the three months ended April 4, 2015, there were no transfers from in-process technology to existing technology.
Acquired intangibles as of January 3, 2015 were as follows, excluding intangibles that were fully amortized as of December 28, 2013:
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Acquired
Intangibles, Net
 
(In thousands)
Existing technology
$
328,325

 
$
(84,822
)
 
$
243,503

Agreements and relationships
175,202

 
(65,512
)
 
109,690

Tradenames, trademarks and patents
10,619

 
(4,480
)
 
6,139

Total acquired intangibles with definite lives
514,146

 
(154,814
)
 
359,332

In-process technology
1,600

 

 
1,600

Total acquired intangibles
$
515,746

 
$
(154,814
)
 
$
360,932

Amortization expense from existing technology and maintenance agreements is included in cost of product and maintenance. Amortization of acquired intangibles for the three months ended April 4, 2015 and March 29, 2014 was as follows:
 
Three Months Ended
 
April 4,
2015
 
March 29,
2014
 
(In thousands)
Cost of product and maintenance
$
10,173

 
$
7,576

Amortization of acquired intangibles
6,231

 
5,210

Total amortization of acquired intangibles
$
16,404

 
$
12,786


12


Estimated amortization expense for intangible assets with definite lives for the following five fiscal years and thereafter is as follows:
 
(In thousands)
2015 – remaining period
$
47,804

2016
57,292

2017
52,584

2018
48,925

2019
42,939

Thereafter
93,306

Total estimated amortization expense
$
342,850



NOTE 7. STOCK-BASED COMPENSATION
Stock-based compensation expense is reflected in Cadence’s condensed consolidated income statements for the three months ended April 4, 2015 and March 29, 2014 as follows:
 
Three Months Ended
 
April 4,
2015
 
March 29,
2014
 
(In thousands)
Cost of product and maintenance
$
569

 
$
482

Cost of services
832

 
703

Marketing and sales
5,447

 
4,596

Research and development
11,377

 
9,667

General and administrative
3,636

 
3,416

Total stock-based compensation expense
$
21,861

 
$
18,864

Cadence had total unrecognized compensation expense, net of estimated forfeitures, related to stock option and restricted stock grants of $129.8 million as of April 4, 2015, which will be recognized over the remaining vesting period. The remaining weighted-average vesting period of unvested awards is 2.0 years.

NOTE 8. RESTRUCTURING AND OTHER CHARGES
Cadence has initiated various restructuring plans in an effort to better align its resources with its business strategy. These restructuring plans have primarily been comprised of severance payments and termination benefits related to headcount reductions, estimated lease losses related to facilities vacated under the restructuring plans and charges related to assets abandoned as part of the restructuring plans. During the three months ended April 4, 2015, Cadence initiated a restructuring plan, or the 2015 Restructuring Plan, and recorded restructuring and other charges of approximately $4.6 million related to severance payments and termination benefits. As of April 4, 2015, total liabilities related to the 2015 Restructuring Plan were $4.1 million. Cadence expects to make cash payments for severance and related benefits for the 2015 Restructuring Plan through the second quarter of fiscal 2016.

13


The following table presents activity relating to Cadence’s restructuring plans during the three months ended April 4, 2015:
 
Severance
and
Benefits
 
Excess
Facilities
 
Other
 
Total
 
(In thousands)
Balance, January 3, 2015
$
4,462

 
$
1,267

 
$
481

 
$
6,210

Restructuring and other charges (credits):
 
 
 
 
 
 
 
2015 Restructuring Plan
4,612

 

 

 
4,612

Prior restructuring plans
(337
)
 
84

 

 
(253
)
Cash payments
(3,742
)
 
(207
)
 

 
(3,949
)
Effect of foreign currency translation
(13
)
 
(72
)
 

 
(85
)
Balance, April 4, 2015
$
4,982

 
$
1,072

 
$
481

 
$
6,535


The remaining accrual for Cadence’s restructuring plans is recorded in the condensed consolidated balance sheet as follows:
 
As of
 
April 4, 2015
 
(In thousands)
Accounts payable and accrued liabilities
$
6,008

Other long-term liabilities
527

Total liabilities
$
6,535


NOTE 9. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income during the period by the weighted average number of shares of common stock outstanding during that period, less unvested restricted stock awards. Diluted net income per share is impacted by equity instruments considered to be potential common shares, if dilutive, computed using the treasury stock method of accounting.
The calculations for basic and diluted net income per share for the three months ended April 4, 2015 and March 29, 2014 are as follows:
 
Three Months Ended
 
April 4,
2015
 
March 29,
2014
 
(In thousands, except per share amounts)
Net income
$
36,259

 
$
33,070

Weighted average common shares used to calculate basic net income per share
284,523

 
281,615

2015 Warrants
18,910

 
12,576

Stock-based awards
8,414

 
6,843

Weighted average common shares used to calculate diluted net income per share
311,847

 
301,034

Net income per share - basic
$
0.13

 
$
0.12

Net income per share - diluted
$
0.12

 
$
0.11


14


The following table presents shares of Cadence’s common stock outstanding for the three months ended April 4, 2015 and March 29, 2014 that were excluded from the computation of diluted net income per share because the effect of including these shares in the computation of diluted net income per share would have been anti-dilutive:
 
Three Months Ended
 
April 4,
2015
 
March 29,
2014
 
(In thousands)
2013 Warrants*

 
1,518

Options to purchase shares of common stock
1,113

 
4,634

Non-vested shares of restricted stock
13

 
11

Total potential common shares excluded
1,126

 
6,163

____________
* These warrants expired on various dates from February 2014 through April 2014.

NOTE 10. STOCK REPURCHASE PROGRAMS
In February 2008, Cadence's Board of Directors authorized Cadence to repurchase shares of its common stock in the open market with a value of up to $500.0 million in the aggregate. In August 2008, Cadence's Board of Directors authorized Cadence to repurchase shares of its common stock in the open market with a value of up to an additional $500.0 million in the aggregate. As of April 4, 2015, $677.5 million remained under these authorizations.
In July 2014, Cadence's Board of Directors approved a two-year plan to repurchase shares of Cadence common stock of up to an aggregate of $300.0 million under the 2008 authorizations. In April 2015, Cadence's Board of Directors replaced the aggregate $300.0 million stock repurchase plan with a new two-year plan to repurchase shares of Cadence common stock of up to an aggregate of $450.0 million under the 2008 authorizations, beginning in the second quarter of fiscal 2015.
The shares repurchased under Cadence’s 2008 authorizations and the total cost of repurchased shares, including commissions, during the three months ended April 4, 2015 and March 29, 2014 were as follows:
 
Three Months Ended
 
April 4,
2015
 
March 29,
2014
 
(In thousands)
Shares repurchased
2,001

 
827

Total cost of repurchased shares
$
36,797

 
$
12,517



NOTE 11. CONTINGENCIES
Legal Proceedings
From time to time, Cadence is involved in various disputes and litigation that arise in the ordinary course of business. These include disputes and lawsuits related to intellectual property, indemnification obligations, mergers and acquisitions, licensing, contracts, distribution arrangements and employee relations matters. At least quarterly, Cadence reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount or the range of loss can be estimated, Cadence accrues a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on Cadence’s judgments using the best information available at the time. As additional information becomes available, Cadence reassesses the potential liability related to pending claims and litigation matters and may revise estimates.

15


Other Contingencies
Cadence provides its customers with a warranty on sales of hardware products, generally for a 90-day period. Cadence did not incur any significant costs related to warranty obligations during the three months ended April 4, 2015 or March 29, 2014.
Cadence’s product license and services agreements typically include a limited indemnification provision for claims from third parties relating to Cadence’s intellectual property. If the potential loss from any indemnification claim is considered probable and the amount or the range of loss can be estimated, Cadence accrues a liability for the estimated loss. The indemnification is generally limited to the amount paid by the customer. Cadence did not incur any significant losses from indemnification claims during the three months ended April 4, 2015 or March 29, 2014.

NOTE 12. OTHER COMPREHENSIVE INCOME
Cadence’s other comprehensive income is comprised of foreign currency translation gains and losses, changes in defined benefit plan liabilities, and changes in unrealized holding gains and losses on available-for-sale securities net of reclassifications for realized gains and losses, as presented in Cadence’s condensed consolidated statements of comprehensive income.
Accumulated other comprehensive income was comprised of the following as of April 4, 2015, and January 3, 2015:
 
As of
 
April 4,
2015
 
January 3,
2015
 
(In thousands)
Foreign currency translation gain
$
6,817

 
$
15,707

Changes in defined benefit plan liabilities
(3,110
)
 
(3,401
)
Unrealized holding gains on available-for-sale securities
106

 
41

Total accumulated other comprehensive income
$
3,813

 
$
12,347

For the three months ended April 4, 2015 and March 29, 2014 there were no significant amounts reclassified from accumulated other comprehensive income to net income.

NOTE 13. SEGMENT REPORTING
Segment reporting is based on the “management approach,” following the method that management organizes the company’s reportable segments for which separate financial information is made available to, and evaluated regularly by, the chief operating decision maker in allocating resources and in assessing performance. Cadence’s chief operating decision maker is its President and Chief Executive Officer, or CEO, who reviews Cadence’s consolidated results as one operating segment. In making operating decisions, the CEO primarily considers consolidated financial information, accompanied by disaggregated information about revenues by geographic region.
Outside the United States, Cadence markets and supports its products and services primarily through its subsidiaries. Revenue is attributed to geography based upon the country in which the product is used or services are delivered. Long-lived assets are attributed to geography based on the country where the assets are located.

16


The following table presents a summary of revenue by geography for the three months ended April 4, 2015 and March 29, 2014:
 
Three Months Ended
 
April 4,
2015
 
March 29,
2014
 
(In thousands)
Americas:
 
 
 
United States
$
187,207

 
$
163,121

Other Americas
5,414

 
5,784

Total Americas
192,621

 
168,905

Asia
98,782

 
87,223

Europe, Middle East and Africa
78,570

 
77,532

Japan
41,393

 
44,890

Total
$
411,366

 
$
378,550

The following table presents a summary of long-lived assets by geography as of April 4, 2015 and January 3, 2015: 
 
As of
 
April 4,
2015
 
January 3,
2015
 
(In thousands)
Americas:
 
 
 
United States
$
195,358

 
$
200,760

Other Americas
470

 
578

Total Americas
195,828

 
201,338

Asia
21,284

 
22,145

Europe, Middle East and Africa
7,859

 
5,951

Japan
585

 
678

Total
$
225,556

 
$
230,112



17




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q, or this Quarterly Report, and in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 3, 2015. This Quarterly Report contains statements that are not historical in nature, are predictive, or that depend upon or refer to future events or conditions or contain forward-looking statements. Statements including, but not limited to, statements regarding the extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of our products, statements regarding our reliance on third parties and other statements using words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “plans,” “projects,” “should,” “will” and “would,” and words of similar import and the negatives thereof, constitute forward-looking statements. These statements are predictions based upon our current expectations about future events. Actual results could vary materially as a result of certain factors, including, but not limited to, those expressed in these statements. We refer you to the “Risk Factors,” “Results of Operations,” “Disclosures About Market Risk,” and “Liquidity and Capital Resources” sections contained in this Quarterly Report, and the risks discussed in our other Securities Exchange Commission, or SEC, filings, which identify important risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements.
We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. We do not intend, and undertake no obligation, to update these forward-looking statements.
Overview
We develop system design enablement, or SDE, solutions that our customers use to design whole electronics systems and increasingly small and complex integrated circuits, or ICs, and electronic devices. Our solutions are designed to help our customers reduce the time to bring an electronics system, IC or electronic device to market and to reduce their design, development and manufacturing costs. Our SDE product offerings include electronic design automation, or EDA, software, emulation and prototyping hardware, and two categories of intellectual property, or IP, commonly referred to as verification IP, or VIP, and design IP. We provide maintenance for our software, emulation hardware, and IP product offerings. We also provide engineering services related to methodology, education, hosted design solutions and design services for advanced ICs and development of custom IP. These services help our customers manage and accelerate their electronics product development processes.
Our customers include electronics systems and semiconductor companies, internet service providers and other technology companies that deliver a wide range of electronics products in a number of market segments, such as mobile and consumer devices, communications, cloud and data center infrastructure, personal computers, automotive systems, medical systems, and other devices. The renewal of many of our customer contracts and our customers’ decisions to make new purchases from us are dependent upon our customers’ commencement of new design projects. As a result, our business is significantly influenced by our customers’ business outlook and investment in new designs and products.
Our future performance depends on our ability to innovate, commercialize newly developed solutions and enhance and maintain our current products. We must keep pace with our customers’ technical developments, satisfy industry standards and meet our customers’ increasingly demanding performance, productivity, quality and predictability requirements. We expect to continue to invest in research and development and customer and partner relationships.
We combine our products and technologies into categories related to major design activities:
Functional Verification, including Emulation Hardware;
Digital IC Design and Signoff;
Custom IC Design;
System Interconnect and Analysis; and
IP.
The products and technologies included in these categories are combined with ready-to-use packages of technologies assembled from our broad portfolio of IP and other associated components that provide comprehensive solutions for low power, mixed signal and designs at smaller geometries referred to as advanced process nodes, as well as popular designs based on design IP owned and licensed by other companies. These solutions are marketed to users who specialize in areas such as system design and verification, functional verification, logic design, digital implementation, custom IC design and verification, printed circuit board, or PCB, IC package and system-in-package design and analysis.

18


For additional information about our products, see the discussion in Item 1, “Business,” under the heading “Products and Product Strategy,” in our Annual Report on Form 10-K for the fiscal year ended January 3, 2015.
We have identified certain items that management uses as performance indicators to manage our business, including revenue, certain elements of operating expenses and cash flow from operations, and we describe these items further below under the headings “Results of Operations” and “Liquidity and Capital Resources.”
Critical Accounting Estimates
In preparing our condensed consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income and net income, as well as on the value of certain assets and liabilities on our condensed consolidated balance sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. At least quarterly, we evaluate our assumptions, judgments and estimates, and make changes as deemed necessary. Historically, our assumptions, judgments and estimates relative to our critical accounting estimates have not differed materially from actual results. For further information about our critical accounting estimates, see the discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Estimates” in our Annual Report on Form 10-K for the fiscal year ended January 3, 2015.
New Accounting Standards
In May 2014, the Financial Accounting Standards Board, or FASB, issued a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under United States generally accepted accounting principles. The original effective date would require us to apply the new standard in the first quarter of fiscal 2017; however, in April 2015, the FASB agreed to propose a one-year deferral of the effective date. If the proposed deferral is approved, the new standard will become effective for us in the first quarter of fiscal 2018 and permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
In April 2015, the FASB issued a new standard requiring debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The new standard will become effective for us in the first quarter of fiscal 2016 and requires retrospective application. Adoption of this standard will not have a material impact on our financial position.
We periodically review new accounting standards. Although some of the accounting standards that have been issued may be applicable to us, we have not identified any other new accounting standards that would have a significant impact on our consolidated financial statements.

Results of Operations
Financial results for the three months ended April 4, 2015, as compared to the three months ended March 29, 2014, reflect increases in:
our product and maintenance revenue, primarily because of increased business levels;
employee-related costs, primarily consisting of costs related to hiring additional employees, increased compensation for existing employees and incremental costs related to employees added from our fiscal 2014 acquisitions;
stock-based compensation;
restructuring charges due to restructuring activities initiated during the three months ended April 4, 2015; and
amortization of acquired intangibles resulting from our fiscal 2014 acquisitions.
Revenue
We primarily generate revenue from licensing our software and IP, selling or leasing our emulation hardware technology, providing maintenance for our software, emulation hardware and IP, providing engineering services and earning royalties generated from the use of our IP. The timing of our revenue is significantly affected by the mix of software, emulation hardware and IP products in the bookings executed in any given period and whether the revenue for such bookings is recognized in a recurring manner over multiple periods or up front, upon completion of delivery.

19


We seek to achieve a consistent revenue mix such that approximately 90% of our revenue is recurring in nature, and the remainder of the resulting revenue is recognized up front, upon completion of delivery. Recurring revenue includes revenue from our license arrangements where revenue is recognized over multiple periods, services, royalties from certain IP arrangements, maintenance on perpetual software licenses and emulation hardware, and our operating leases of emulation hardware. Upfront revenue is primarily generated by our sales of emulation hardware and perpetual software licenses. Our ability to achieve this mix in any single fiscal period may be impacted primarily by hardware sales.
For an additional description of the impact of emulation hardware sales on the timing of revenue recognition, see the discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Estimates – Revenue Recognition” in our Annual Report on Form 10-K for the fiscal year ended January 3, 2015.
Revenue by Period
The following table shows our revenue for the three months ended April 4, 2015 and March 29, 2014 and the change in revenue between periods:
 
Three Months Ended
 
Change
 
April 4,
2015
 
March 29,
2014
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance
$
383.7

 
$
357.4

 
$
26.3

 
7
%
Services
27.7

 
21.2

 
6.5

 
31
%
Total revenue
$
411.4

 
$
378.6

 
$
32.8

 
9
%
Product and maintenance revenue increased during the three months ended April 4, 2015, as compared to the three months ended March 29, 2014, primarily because of increased business levels and incremental revenue recognized from our fiscal 2014 acquisitions. Services revenue also increased during the three months ended April 4, 2015 due to increased demand for our customized IP offerings. Services revenue may fluctuate from period to period based on demand for, and our resources to fulfill, our services and customized IP offerings.
No one customer accounted for 10% or more of total revenue during the three months ended April 4, 2015 or March 29, 2014.
Revenue by Product Group
The following table shows the percentage of revenue contributed by each of our five product groups for the past five consecutive quarters:
 
Three Months Ended
 
March 29,
2014
 
June 28,
2014
 
September 27,
2014
 
January 3,
2015
 
April 4,
2015
Functional Verification, including Emulation Hardware
23
%
 
21
%
 
23
%
 
21
%
 
23
%
Digital IC Design and Signoff
30
%
 
30
%
 
29
%
 
28
%
 
28
%
Custom IC Design
27
%
 
28
%
 
27
%
 
28
%
 
27
%
System Interconnect and Analysis
10
%
 
11
%
 
10
%
 
11
%
 
11
%
IP
10
%
 
10
%
 
11
%
 
12
%
 
11
%
Total
100
%
 
100
%
 
100
%
 
100
%
 
100
%
As described in Note 2 in the notes to consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended January 3, 2015, certain of our licensing arrangements allow customers the ability to remix among software products. Additionally, we have arrangements with customers that include a combination of our products, with the actual product selection and number of licensed users to be determined at a later date. For these arrangements, we estimate the allocation of the revenue to product groups based upon the expected usage of our products. The actual usage of our products by these customers may differ and, if that proves to be the case, the revenue allocation in the table above would differ.
 

20


Revenue by Geography
 
Three Months Ended
 
Change
 
April 4,
2015
 
March 29,
2014
 
Amount
 
Percentage
 
(In millions, except percentages)
United States
$
187.2

 
$
163.1

 
$
24.1

 
15
 %
Other Americas
5.4

 
5.8

 
(0.4
)
 
(7
)%
Asia
98.8

 
87.2

 
11.6

 
13
 %
Europe, Middle East and Africa
78.6

 
77.5

 
1.1

 
1
 %
Japan
41.4

 
45.0

 
(3.6
)
 
(8
)%
Total revenue
$
411.4

 
$
378.6

 
$
32.8

 
9
 %
Most of our revenue is transacted in the United States dollar. However, certain revenue transactions are denominated in foreign currencies, primarily the Japanese yen. We recognize reduced revenue from those contracts in periods when the Japanese yen weakens in value against the United States dollar and additional revenue from those contracts in periods when the Japanese yen strengthens against the United States dollar. For an additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see the discussion under Item 3, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”
Revenue for Asia increased during the three months ended April 4, 2015, as compared to the three months ended March 29, 2014, primarily due to increases in revenue from our software business. For the primary factors contributing to our increase in revenue in other geographies, excluding Japan, see the general description under “Revenue by Period,” above.
Revenue for Japan decreased during the three months ended April 4, 2015, as compared to the three months ended March 29, 2014, primarily due to continued depreciation of the Japanese yen as well as difficult business conditions facing our Japanese customers.
For the primary factors contributing to our increase in revenue in other geographies, see the general description under “Revenue by Period,” above.
Revenue by Geography as a Percent of Total Revenue
 
Three Months Ended
 
April 4,
2015
 
March 29,
2014
United States
46
%
 
43
%
Other Americas
1
%
 
2
%
Asia
24
%
 
23
%
Europe, Middle East and Africa
19
%
 
20
%
Japan
10
%
 
12
%
Total
100
%
 
100
%
Cost of Revenue
 
Three Months Ended
 
Change
 
April 4,
2015
 
March 29,
2014
 
Amount
 
Percentage
 
(In millions, except percentages)
Cost of product and maintenance
$
42.1

 
$
42.2

 
$
(0.1
)
 
 %
Cost of services
18.5

 
14.9

 
3.6

 
24
 %


21


Cost of Product and Maintenance
Cost of product and maintenance includes costs associated with the sale and lease of our emulation hardware and licensing of our software and IP products, certain employee salary, benefits and other employee-related costs, cost of our customer support services, amortization of technology-related and maintenance-related acquired intangibles, as well as the costs of technical documentation and royalties payable to third-party vendors. Costs associated with our emulation hardware products include materials, assembly, applicable reserves and overhead. These additional hardware manufacturing costs make our cost of emulation hardware product higher, as a percentage of revenue, than our cost of software and IP products.
A summary of cost of product and maintenance is as follows:
 
Three Months Ended
 
Change
 
April 4,
2015
 
March 29,
2014
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance-related costs
$
31.9

 
$
34.6

 
$
(2.7
)
 
(8
)%
Amortization of acquired intangibles
10.2

 
7.6

 
2.6

 
34
 %
Total cost of product and maintenance
$
42.1

 
$
42.2

 
$
(0.1
)
 
 %
Cost of product and maintenance depends primarily upon our emulation hardware product sales and gross margins in any given period. Employee salary, benefits and other employee-related costs, and 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 also impact cost of product and maintenance.
The changes in product and maintenance-related costs for the three months ended April 4, 2015, as compared to the three months ended March 29, 2014, were due to the following:
 
Change
 
(In millions)
Emulation hardware costs
$
(4.5
)
Other items
1.8

 
$
(2.7
)
Emulation hardware costs decreased during the three months ended April 4, 2015, as compared to the three months ended March 29, 2014, due to a lower volume of emulation hardware products sold. Gross margins on our emulation hardware products may fluctuate based on customer pricing strategies, product competition and product life cycle.
Amortization of acquired intangibles included in cost of product and maintenance increased during the three months ended April 4, 2015, as compared to the three months ended March 29, 2014, primarily due to the increase in amortization of intangible assets associated with our fiscal 2014 acquisitions. We expect amortization of acquired intangibles to increase for the remainder of fiscal 2015, as compared to the same period in fiscal 2014, primarily due to amortization of intangible assets recorded in connection with our fiscal 2014 acquisitions. For an additional description of our expected amortization of intangible assets, see Note 6 in the notes to condensed consolidated financial statements.
Cost of Services
Cost of services primarily includes employee salary, benefits and other employee-related costs to perform work on revenue-generating projects, costs to maintain the infrastructure necessary to manage a services organization, and provisions for contract losses, if any. Cost of services will fluctuate from period to period based on our utilization of design services engineers on revenue-generating projects or on internal development projects.
Cost of services increased $3.6 million during the three months ended April 4, 2015, as compared to the three months ended March 29, 2014, primarily due to an overall increase in the resources required to meet the demand for our service offerings.
Operating Expenses
Our operating expenses include marketing and sales, research and development and general and administrative expenses. Factors that cause our operating expenses to fluctuate include changes in the number of employees due to hiring and acquisitions, foreign exchange rates, stock-based compensation and the impact of our variable compensation programs that are driven by overall operating results.

22


Our employee salary and other compensation-related costs included in marketing and sales and research and development increased during the three months ended April 4, 2015, as compared to the three months ended March 29, 2014, primarily due to our investment in research and development and sales activities, and incremental costs related to employees added from our fiscal 2014 acquisitions.
Stock-based compensation included in operating expenses increased by approximately $3.0 million during the three months ended April 4, 2015, as compared to the three months ended March 29, 2014, primarily because of higher grant-date fair values of stock awards.
Many of our operating expenses are transacted in various foreign currencies. We recognize lower expenses in periods when the United States dollar strengthens in value against other currencies and we recognize higher expenses when the United States dollar weakens against other currencies. During the three months ended April 4, 2015, as compared to the three months ended March 29, 2014, we experienced a favorable impact on expenses as a result of the strengthening value of the United States dollar against other currencies, including the European Union euro and the Japanese yen. For an additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see the discussion in Item 3, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”
Our operating expenses for the three months ended April 4, 2015 and March 29, 2014 were as follows:
 
Three Months Ended
 
Change
 
April 4,
2015
 
March 29,
2014
 
Amount
 
Percentage
 
(In millions, except percentages)
Marketing and sales
$
100.3

 
$
98.3

 
$
2.0

 
2
 %
Research and development
163.0

 
146.5

 
16.5

 
11
 %
General and administrative
27.6

 
28.7

 
(1.1
)
 
(4
)%
Total operating expenses
$
290.9

 
$
273.5

 
$
17.4

 
6
 %
Our operating expenses, as a percentage of total revenue, for the three months ended April 4, 2015 and March 29, 2014 were as follows:
 
Three Months Ended
 
April 4,
2015
 
March 29,
2014
Marketing and sales
24
%
 
26
%
Research and development
40
%
 
39
%
General and administrative
7
%
 
8
%
Total operating expenses
71
%
 
73
%
 Marketing and Sales
The changes in marketing and sales expense for the three months ended April 4, 2015, as compared to the three months ended March 29, 2014, were due to the following:
 
Change
 
(In millions)
Salary, benefits and other employee-related costs
$
1.1

Other items
0.9

 
$
2.0


23


Research and Development
 The changes in research and development expense for the three months ended April 4, 2015, as compared to the three months ended March 29, 2014, were due to the following:
 
Change
 
(In millions)
Materials and other pre-production costs
$
5.2

Facilities and other infrastructure costs
4.2

Salary, benefits and other employee-related costs
2.2

Stock-based compensation
1.7

Professional services
1.4

Software license and maintenance costs
1.4

Other items
0.4

 
$
16.5

General and Administrative
The changes in general and administrative expense for the three months ended April 4, 2015, as compared to the three months ended March 29, 2014, were due to the following:
 
Change
 
(In millions)
Professional services
$
(1.4
)
Other items
0.3

 
$
(1.1
)

Amortization of Acquired Intangibles
 
Three Months Ended
 
Change
 
April 4,
2015
 
March 29,
2014
 
Amount
 
Percentage
 
(In millions, except percentages)
Amortization of acquired intangibles
$
6.2

 
$
5.2

 
$
1.0

 
19
%
The increase in amortization of acquired intangibles during the three months ended April 4, 2015, as compared to the three months ended March 29, 2014, resulted from increased amortization of intangible assets related to our fiscal 2014 acquisitions, which was partially offset by certain acquired intangibles becoming fully amortized.
We expect amortization of acquired intangibles to increase during the remainder of fiscal 2015, as compared to the same period in fiscal 2014, due to the amortization of intangible assets recorded in connection with our fiscal 2014 acquisitions. For an additional description of our expected amortization of intangible assets, see Note 6 in the notes to condensed consolidated financial statements.

24


Restructuring and other charges
We have initiated various restructuring plans to better align our resources with our business strategy, including a restructuring plan we initiated during the three months ended April 4, 2015, or the 2015 Restructuring Plan. For an additional description of the 2015 Restructuring Plan, see Note 8 in the notes to condensed consolidated financial statements.
We recorded restructuring and other charges during the three months ended April 4, 2015 of $4.6 million related to the 2015 Restructuring Plan, which consisted of severance and related benefits.
Interest Expense
 
Three Months Ended
 
April 4,
2015
 
March 29,
2014
 
(In millions)
Contractual interest expense:
 
 
 
2015 Notes
$
1.8

 
$
2.3

2024 Notes
3.8

 

Revolving credit facility
0.1

 

Amortization of debt discount:
 
 
 
2015 Notes
5.0

 
4.2

Amortization of deferred financing costs:
 
 
 
2015 Notes
0.7

 
0.6

2024 Notes
0.1

 

Other
0.3

 
0.2

Total interest expense
$
11.8

 
$
7.3

Income Taxes
The following table presents the provision for income taxes and the effective tax rate for the three months ended April 4, 2015 and March 29, 2014:
 
Three Months Ended
 
April 4,
2015
 
March 29,
2014
 
(In millions, except percentages)
Provision for income taxes
$
6.1

 
$
5.4

Effective tax rate
14.3
%
 
13.9
%
Our provision for income taxes for the three months ended April 4, 2015 primarily resulted from federal, state and foreign income taxes on our anticipated fiscal 2015 income. Our foreign earnings are generally subject to lower statutory tax rates than our United States earnings. In addition, our provision for income taxes for the three months ended April 4, 2015 does not include the potential tax benefit of the United States federal research tax credit, which expired in December 2014. We estimate our annual effective tax rate for fiscal 2015 to be approximately 13%. Our estimate excludes tax effects of certain stock compensation, potential acquisitions, and other items that we cannot anticipate with certainty, including the previously expired United States federal research tax credit.
Our provision for income taxes for the three months ended March 29, 2014 primarily resulted from federal, state and foreign income taxes on our then anticipated fiscal 2014 income. In addition, our provision for income taxes for the three months ended March 29, 2014 did not include the potential tax benefit of the United States federal research tax credit, which had expired in December 2013.

25


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 statute 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 or if we were to repatriate certain foreign earnings on which United States taxes have not been previously accrued.
For further discussion regarding our income taxes, see Note 6 in the notes to consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended January 3, 2015.

Liquidity and Capital Resources
 
As of
 
 
 
April 4,
2015
 
January 3,
2015
 
Change
 
(In millions)
Cash, cash equivalents and short-term investments
$
980.4

 
$
1,022.6

 
$
(42.2
)
Net working capital
$
507.2

 
$
458.6

 
$
48.6

Cash, Cash Equivalents and Short-term Investments
As of April 4, 2015, our principal sources of liquidity consisted of $980.4 million of cash, cash equivalents and short-term investments, as compared to $1,022.6 million as of January 3, 2015.
Our primary sources of cash, cash equivalents and short-term investments during the three months ended April 4, 2015 were customer payments for products, maintenance and services, proceeds from convertible notes hedges, 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 the three months ended April 4, 2015 were payments relating to salaries, benefits, other employee-related costs and operating expenses, payments of convertible notes embedded conversion derivative liabilities, payments of convertible notes, repurchases of our common stock, tax payments, purchases of property, plant and equipment and payments related to our recent restructuring plans.
Approximately 52% of our cash, cash equivalents and short-term investments were held by our foreign subsidiaries as of April 4, 2015. After the repayment of the 2015 Notes during the second quarter of fiscal 2015, the proportion of our cash and cash equivalents held by our foreign subsidiaries will increase. Our intent is to indefinitely reinvest our earnings from certain foreign operations. We do not anticipate we will need to repatriate dividends from foreign operations that are indefinitely reinvested in order to fund our domestic operations. In the event that dividends from foreign operations that are currently indefinitely reinvested are needed to fund United States liquidity, we could be required to accrue and pay additional taxes in order to repatriate these funds. For further discussion regarding our income taxes see Note 6 in the notes to consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended January 3, 2015.
We maintain an investment portfolio of approximately $100 million in marketable debt securities, including corporate debt securities, United States Treasury securities, United States government agency securities, bank certificates of deposit and commercial paper. Our investments in marketable debt securities are classified as available-for-sale and are included in short-term investments as of April 4, 2015. Our investments are made in accordance with our cash investment policy, which governs the amounts and types of investments we hold in our portfolio. Our investment portfolio could be affected by various risks and uncertainties including credit risk, interest rate risk and general market risk, as outlined in Part II, Item 1A, “Risk Factors.”
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 servicing the maturity or conversion of our 2015 Notes, acquisitions, if any, and share repurchases for at least the next 12 months.

26


Net Working Capital
Net working capital is comprised of current assets less current liabilities, as shown on our condensed consolidated balance sheets. The increase in our net working capital as of April 4, 2015, as compared to January 3, 2015, is primarily due to decreases in current liabilities related to the 2015 Notes and accounts payable and other accrued liabilities, offset by a decrease in cash and cash equivalents.
Cash Flows from Operating Activities
 
Three Months Ended
 
 
 
April 4,
2015
 
March 29,
2014
 
Change
 
(In millions)
Cash provided by operating activities
$
46.7

 
$
28.1

 
$
18.6

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 license agreements. The increase in cash flows from operating activities for the three months ended April 4, 2015, as compared to the three months ended March 29, 2014, was primarily due to the timing of cash receipts from customers and disbursements made to vendors.
We expect that cash flows from operating activities will fluctuate in future periods due to a number of factors, including our operating results, tax payments and the timing of our billings, collections and disbursements.
Cash Flows from Investing Activities
 
Three Months Ended
 
 
 
April 4,
2015
 
March 29,
2014
 
Change
 
(In millions)
Cash used for investing activities
$
(8.4
)
 
$
(34.2
)
 
$
25.8

The decrease in cash flows used for investing activities during the three months ended April 4, 2015, as compared to to the three months ended March 29, 2014, was primarily due to the decrease in cash paid for business combinations, partially offset by an increase in cash paid for purchases of property, plant and equipment. 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
 
Three Months Ended
 
 
 
April 4,
2015
 
March 29,
2014
 
Change
 
(In millions)
Cash used for financing activities
$
(73.7
)
 
$
(0.1
)
 
$
(73.6
)
During the three months ended April 4, 2015, we used approximately $53.9 million of cash and cash equivalents to settle the principal value of the 2015 Notes tendered for early conversion. In addition, we used approximately $36.8 million of cash and cash equivalents to repurchase shares of our common stock.
We will settle the remaining principal value of the 2015 Notes during the second quarter of fiscal 2015. For an additional description of the 2015 notes, see Note 2 in the notes to condensed consolidated financial statements. We expect to continue to repurchase our common stock during fiscal 2015. For an additional description of our share repurchase programs and repurchase authorizations, see Note 10 in the notes to condensed consolidated financial statements.

27


Other Factors Affecting Liquidity and Capital Resources
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 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 commencing on April 15, 2015. 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.
Revolving Credit Facility
We maintain a senior unsecured revolving credit facility with a group of lenders led by Bank of America, N.A., as administrative agent. The credit facility provides for borrowings up to $250.0 million, with the right to request increased capacity up to an additional $150.0 million upon the receipt of lender commitments, for total maximum borrowings of $400.0 million. The credit facility, as amended, expires on September 19, 2019 and has no subsidiary guarantors. Any outstanding loans drawn under the credit facility are due at maturity on September 19, 2019. Outstanding borrowings may be paid at any time prior to maturity.
Convertible Notes
As of April 4, 2015, we had convertible notes outstanding with a net liability value of $293.7 million that mature on June 1, 2015. The total cash payable upon the early conversion of these notes, as determined by the indenture of each security, will be their principal amount plus any additional conversion value that would be due upon conversion.
We will owe additional cash to the note holders upon early conversion if our stock price exceeds $7.55 per share. We entered into hedges with counterparties to limit our exposure to the additional cash payments above the principal amount of the 2015 Notes that may be due to the holders upon conversion. In separate transactions, we sold the 2015 Warrants with a strike price of $10.78 per share. Although our incremental cash payout exposure above the conversion price is limited by the 2015 Notes Hedges to the outstanding principal value of the 2015 Notes and accrued interest, we will experience dilution to our stock upon settlement of the 2015 Warrants and to our diluted earnings per share from the outstanding 2015 Warrants to the extent our average closing stock price exceeds $10.78 in any fiscal quarter until the 2015 Warrants are settled.
Additionally, holders may elect to convert their 2015 Notes into cash at any time through the second trading day immediately preceding the maturity date. If the holders of our 2015 Notes elect to convert their notes into cash prior to maturity, we are required to pay the note holders cash equal to the principal amount of the notes converted plus any additional conversion value associated with the conversion feature. We will receive cash from the counterparties to the 2015 Notes Hedges for the value of the conversion feature upon settlement of the notes tendered. As of April 4, 2015, a total of $53.9 million principal value of the 2015 Notes had been tendered for early conversion and settled.
We expect that our current cash balance, cash generated from our operating activities and access to our revolving credit facility will be sufficient to service the maturity or conversion of our 2015 Notes. For an additional description of the 2015 Notes, the conversion terms thereof and the hedge and warrants transactions, see Note 2 in the notes to condensed consolidated financial statements.




28


Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
A material portion of our revenue, expenses and business activities are transacted in the United States dollar. In certain foreign countries where we price our products and services in U.S. dollars, the decrease in value of the local currency relative to the U.S. dollar 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 certain markets.
In certain countries where we invoice customers in the local currency, Japan in particular, 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, except for our operations in Japan because we receive some cash payments and make most expense payments in Japanese yen.
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 April 4, 2015. 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 mature before or during May 2015.
 
Notional
Principal
 
Weighted
Average
Contract
Rate
 
(In millions)
 
 
Forward Contracts:
 
 
 
European Union euro
$
51.4

 
0.94

Japanese yen
24.6

 
120.45

Chinese renminbi
22.5

 
6.25

Israeli shekel
18.0

 
4.01

Taiwan dollar
11.7

 
31.39

Canadian dollar
9.5

 
1.28

Indian rupee
5.7

 
62.86

Other
15.1

 
 N/A

Total
$
158.5

 
 
Estimated fair value
$
3.1

 
 
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.


29


Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our portfolio of marketable debt securities, our portfolio of cash and cash equivalents and outstanding balances drawn on our revolving credit facility, if any.
We are exposed to interest rate fluctuations in many of the world’s leading industrialized countries, but the fair value of our marketable debt securities and our interest income and expense is most sensitive to fluctuations in the general level of United States interest rates. Changes in United States interest rates affect the interest earned on our marketable debt securities and cash and cash equivalents, any unrealized and realized gains or losses on our marketable debt securities and the costs associated with foreign currency hedges.
Our short-term investments as of April 4, 2015 include $90.8 million of marketable debt securities that may decline in value if market interest rates rise. Such variability in market interest rates may result in a negative impact on the results of our investment activities. As of April 4, 2015, an increase in the market rates of interest of 1% would result in a decrease in the fair values of our marketable debt securities by approximately $0.8 million.
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 April 4, 2015.
Interest rates under our revolving credit facility are variable, so interest expense for periods when the credit facility is utilized could be adversely affected by changes in interest rates. Interest rates under our revolving credit facility 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 April 4, 2015, we had no outstanding balance under our revolving credit facility. For an additional description of this revolving credit facility, see Note 2 in the notes to condensed consolidated financial statements.
Equity Price Risk
Convertible Notes
Our 2015 Notes include conversion and settlement provisions that are based on the price of our common stock during a period of 35 consecutive trading days. In addition, the hedges and warrants associated with these convertible notes also include settlement provisions that are based on the price of our common stock. The amount of cash we may be required to pay at the time converted notes are settled is determined by the price of our common stock. The amount of cash that we may receive from hedge counterparties in connection with the related hedges and the number of shares that we may be required to provide warrant counterparties in connection with the related warrants are also determined by the price of our common stock.
Upon the expiration of our 2015 Warrants, which will occur on various dates from September 2015 through December 2015, we will issue shares of common stock to the purchasers of the warrants to the extent our stock price exceeds the warrant strike price of $10.78 at that time. The following table shows the number of shares that we would issue to 2015 Warrant counterparties at expiration of the warrants, assuming various closing prices of our stock on the dates of warrant expiration:
 
 
Shares
 
(In millions)
$13.00
7.9

$14.00
10.7

$15.00
13.0

$16.00
15.1

$17.00
17.0

$18.00
18.6

$19.00
20.1

$20.00
21.4

$21.00
22.6

$22.00
23.7


Prior to the expiration of the 2015 Warrants, for purposes of calculating diluted earnings per share, our diluted weighted-average shares outstanding will increase when our average closing stock price for a quarter exceeds $10.78.

30


For an additional description of our 2015 Notes, see Note 2 in our notes to condensed consolidated financial statements and “Liquidity and Capital Resources – Other Factors Affecting Liquidity and Capital Resources,” under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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 investments in companies with technologies that are potentially strategically important to us. See Note 9 in the notes to consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended January 3, 2015, for an additional description of these investments. Our non-marketable investments had a carrying value of $5.5 million as of April 4, 2015, and $6.1 million as of January 3, 2015.

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, under the supervision and with the participation of our management, including our Chief Executive Officer, or CEO, and our Chief Financial Officer, or 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 April 4, 2015.
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 Quarterly Report on Form 10-Q. 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 April 4, 2015, 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 April 4, 2015 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.

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PART II. OTHER INFORMATION

Item 1. 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 assess 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 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
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.
While we cannot predict global economic conditions, uncertainty about future 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 EDA 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 emulation 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 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 result in recurring revenue.

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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 the introduction of three dimensional transistors, such as fin-based, multigate transistors, or 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 challenges of advanced node design are leading 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 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;
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 Field-Programmable Gate Array, or 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, including EDA.
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. Our emulation 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.
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 hardware and IP products.
We have recorded net losses in the past and may record net losses in the future. Various factors affect our operating results, and some of them are not within our control. Our operating results for any period are also affected by the timing of revenue recognition, particularly for our emulation hardware and IP products.
A substantial portion of the product revenue related to our emulation hardware business is recognized upon delivery, and our forecasted revenue results are based, in part, on our expectations of emulation hardware to be delivered in a particular quarter. Therefore, changes in emulation hardware 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.
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.

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Revenue related to our emulation hardware and IP products is inherently difficult to predict because sales of our emulation 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 emulation hardware or IP products in those projects and the availability of our emulation hardware or IP products for delivery. Therefore, our emulation 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 emulation hardware or IP products or our hardware suppliers. Moreover, the emulation 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.
Our software license mix is such that a substantial proportion of licenses require ratable revenue recognition, and we expect the license mix, combined with the modest growth in spending by our customers in the semiconductor sector, may make it difficult for us to rapidly increase our revenue in future fiscal periods. The timing of our revenue recognition may be deferred until payments become due and payable from customers with nonlinear payment terms or as cash is collected from customers with low credit ratings.
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 the macroeconomic environment weakens, and 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 I, Item 2, “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 depend on sole suppliers for certain hardware components, making us vulnerable to supply disruption and price fluctuation.
We depend on sole suppliers for certain hardware components. Our reliance on sole suppliers 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 disruption, including delay in delivery of components by our suppliers or the bankruptcy or shutdown of our suppliers, could delay our production process and prevent us from delivering completed emulation hardware products to customers or from supplying new evaluation units to customers, which could have a negative impact on our revenue and operating results.
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. During fiscal 2014 and fiscal 2013, we acquired multiple businesses in order to expand our IP business and other product offerings. Our future revenue growth and expansion of our IP business is heavily dependent on our successful integration of these and other 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 seriously harmed:
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 integrate and manage acquired products and businesses effectively;
the failure to 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;
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;

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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;
customer dissatisfaction with existing license agreements with us, possibly dissuading customers from licensing or buying products acquired by us after the expiration date of the existing license; or
the failure to understand, compete and operate effectively in markets where we have limited experience.
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 performance of the acquired companies, businesses or the employees who joined us with the acquired companies or businesses. 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.
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 as the migration to advanced process nodes and the introduction of FinFETs. 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, or if the achievement of these benefits is delayed, our revenue and operating results may be adversely affected.
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 hardware systems products;
the challenges of developing (or acquiring externally developed) technology solutions, including emulation hardware and IP offerings, that are adequate and competitive in meeting the rapidly evolving requirements of next-generation design challenges;
the significant number of current and potential competitors in the EDA industry and the low cost of entry;
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 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.

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We compete in EDA most frequently with Synopsys, Inc. and Mentor Graphics Corporation, but also with numerous other EDA providers (such as Ansys, Inc., Atrenta, Inc., ATopTech, Inc., Zuken Ltd. and many others offering “point solutions”), with manufacturers of electronic devices that have developed, acquired or have the capability to develop their own EDA products, and with numerous electronics design and consulting companies. In the area of design IP, we compete with Synopsys, Inc., CEVA, Inc. and numerous other IP companies.
Competitive pressures may require us to change ou