10-Q CDNS 03.30.2013
Table of Contents

 
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 March 30, 2013
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
 
77-0148231
(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 March 30, 2013, 282,995,052 shares of the registrant’s common stock, $0.01 par value, were outstanding.


Table of Contents

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.
 
 
 
 


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
 
March 30,
2013
 
December 29,
2012
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
810,152

 
$
726,357

Short-term investments
100,992

 
100,704

Receivables, net of allowances of $0 and $85, respectively
75,253

 
97,821

Inventories
37,016

 
36,163

2015 notes hedges
315,895

 
303,154

Prepaid expenses and other
122,604

 
127,036

Total current assets
1,461,912

 
1,391,235

Property, plant and equipment, net of accumulated depreciation of $626,732 and $635,450, respectively
237,455

 
244,439

Goodwill
232,608

 
233,266

Acquired intangibles, net of accumulated amortization of $104,822 and $104,351, respectively
177,891

 
184,938

Long-term receivables
3,734

 
7,559

Other assets
209,663

 
225,566

Total assets
$
2,323,263

 
$
2,287,003

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Convertible notes
$
452,571

 
$
447,011

2015 notes embedded conversion derivative
315,895

 
303,154

Accounts payable and accrued liabilities
156,606

 
171,318

Current portion of deferred revenue
285,553

 
295,787

Total current liabilities
1,210,625

 
1,217,270

Long-term liabilities:
 
 
 
Long-term portion of deferred revenue
41,432

 
50,529

Other long-term liabilities
51,533

 
104,033

Total long-term liabilities
92,965

 
154,562

Commitments and contingencies (Note 10)


 


Stockholders’ equity:
 
 
 
Common stock and capital in excess of par value
1,727,901

 
1,721,556

Treasury stock, at cost
(175,110
)
 
(200,786
)
Accumulated deficit
(570,940
)
 
(649,549
)
Accumulated other comprehensive income
37,822

 
43,950

Total stockholders’ equity
1,019,673

 
915,171

Total liabilities and stockholders’ equity
$
2,323,263

 
$
2,287,003


See notes to condensed consolidated financial statements.

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Table of Contents

CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
March 30,
2013
 
March 31,
2012
Revenue:
 
 
 
Product and maintenance
$
328,271

 
$
286,288

Service
25,995

 
29,542

Total revenue
354,266

 
315,830

Costs and expenses:
 
 
 
Cost of product and maintenance
29,847

 
27,212

Cost of service
18,344

 
19,374

Marketing and sales
90,402

 
83,795

Research and development
124,084

 
108,594

General and administrative
29,810

 
27,770

Amortization of acquired intangibles
3,791

 
3,786

Restructuring and other charges (credits)
(148
)
 
(51
)
Total costs and expenses
296,130

 
270,480

Income from operations
58,136

 
45,350

Interest expense
(9,262
)
 
(8,537
)
Other income, net
2,175

 
2,434

Income before provision (benefit) for income taxes
51,049

 
39,247

Provision (benefit) for income taxes
(27,560
)
 
8,143

Net income
$
78,609

 
$
31,104

Net income per share – basic
$
0.29

 
$
0.12

Net income per share – diluted
$
0.27

 
$
0.11

Weighted average common shares outstanding – basic
274,936

 
267,940

Weighted average common shares outstanding – diluted
292,151

 
277,733











See notes to condensed consolidated financial statements.

2

Table of Contents

CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended
 
March 30,
2013
 
March 31,
2012
Net income
$
78,609

 
$
31,104

Other comprehensive loss, net of tax effects:
 
 
 
Foreign currency translation loss
(6,162
)
 
(2,466
)
Changes in unrealized holding gains or losses on available-for-sale securities, net of reclassification adjustment for realized gains and losses
(284
)
 
(4
)
Changes in defined benefit plan liabilities
318

 
(29
)
Total other comprehensive loss, net of tax effects
(6,128
)
 
(2,499
)
Comprehensive income
$
72,481

 
$
28,605





































See notes to condensed consolidated financial statements.

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Table of Contents

CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three Months Ended
 
March 30,
2013
 
March 31,
2012
Cash and cash equivalents at beginning of period
$
726,357

 
$
601,602

Cash flows from operating activities:
 
 
 
Net income
78,609

 
31,104

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
21,682

 
21,939

Amortization of debt discount and fees
6,281

 
5,734

Stock-based compensation
13,810

 
11,525

Gain on investments, net
(1,006
)
 
(1,949
)
Deferred income taxes
8,695

 
223

Provisions (recoveries) for losses (gains) on receivables, net
(85
)
 

Other non-cash items
(922
)
 
746

Changes in operating assets and liabilities, net of effect of acquired businesses:
 
 
 
Receivables
23,652

 
60,172

Inventories
(979
)
 
(154
)
Prepaid expenses and other
(1,099
)
 
(5,545
)
Other assets
4,148

 
(577
)
Accounts payable and accrued liabilities
(11,003
)
 
(19,582
)
Deferred revenue
(16,648
)
 
(39,315
)
Other long-term liabilities
(49,799
)
 
(3,612
)
Net cash provided by operating activities
75,336

 
60,709

Cash flows from investing activities:
 
 
 
Purchases of available-for-sale securities
(24,282
)
 

Proceeds from the sale of available-for-sale securities
14,985

 

Proceeds from the maturity of available-for-sale securities
8,700

 

Proceeds from the sale of long-term investments
6,102

 
44

Purchases of property, plant and equipment
(6,569
)
 
(8,201
)
Investment in venture capital partnerships and equity investments

 
(250
)
Cash paid in business combinations and asset acquisitions, net of cash acquired
(757
)
 
(1,041
)
Net cash used for investing activities
(1,821
)
 
(9,448
)
Cash flows from financing activities:
 
 
 
Principal payments on receivable financing
(2,526
)
 

Payment of acquisition-related contingent consideration
(582
)
 
(39
)
Tax effect related to employee stock transactions allocated to equity
5,276

 
2,842

Proceeds from issuance of common stock
21,801

 
12,761

Stock received for payment of employee taxes on vesting of restricted stock
(8,775
)
 
(6,173
)
Net cash provided by financing activities
15,194

 
9,391

Effect of exchange rate changes on cash and cash equivalents
(4,914
)
 
(2,567
)
Increase in cash and cash equivalents
83,795

 
58,085

Cash and cash equivalents at end of period
$
810,152

 
$
659,687

 
 
 
 
Supplemental cash flow information:
 
 
 
Interest paid
$
183

 
$

Income taxes paid (refunded), including foreign withholding tax
$
(21
)
 
$
4,699

Non-cash investing and financing activities:
 
 
 
Available-for-sale securities received from customer
$
209

 
$
15

Receivables related to sales of available-for-sale securities
$

 
$
122




See notes to condensed consolidated financial statements.

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CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared by Cadence Design Systems, Inc., or Cadence, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission, or the SEC. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, Cadence believes that the disclosures contained in this Quarterly Report on Form 10-Q comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These condensed consolidated financial statements are meant to be, and should be, read in conjunction with the consolidated financial statements and the Notes thereto included in Cadence’s Annual Report on Form 10-K for the fiscal year ended December 29, 2012. In the condensed consolidated income statements for the three months ended March 30, 2013, Cadence combined product and maintenance revenue because product and maintenance revenue is generally recognized from agreements that require customers to purchase both the product and associated maintenance in a bundled offering. Cadence reclassified prior period product and maintenance revenue balances to conform to the current period presentation. Certain other prior period balances have also 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.
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 March 30, 2013 and December 29, 2012 was as follows:
 
March 30, 2013
 
December 29, 2012
 
(In thousands)
 
Principal
 
Unamortized Discount
 
Carrying Value
 
Principal
 
Unamortized Discount
 
Carrying Value
2015 Notes
$
350,000

 
$
(37,271
)
 
$
312,729

 
$
350,000

 
$
(41,181
)
 
$
308,819

2013 Notes
144,461

 
(4,797
)
 
139,664

 
144,461

 
(6,447
)
 
138,014

2023 Notes
178

 

 
178

 
178

 

 
178

Revolving line of credit

 

 

 

 

 

Total outstanding debt
$
494,639

 
$
(42,068
)
 
$
452,571

 
$
494,639

 
$
(47,628
)
 
$
447,011

2015 Notes
In June 2010, Cadence issued $350.0 million principal amount of 2.625% Cash Convertible Senior Notes Due 2015, or the 2015 Notes. At maturity, the holders of the 2015 Notes will be entitled to receive the principal amount of the 2015 Notes plus accrued interest. The 2015 Notes are convertible into cash prior to maturity upon the occurrence of certain conditions described in the table below. To the extent that the 2015 Notes are convertible prior to maturity and a holder of the 2015 Notes elects to convert its notes prior to maturity, that note holder will be entitled to receive cash equal to the principal amount of the notes plus any additional conversion value as described in the table below under the heading "Conversion feature."


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Cadence entered into hedge transactions, or the 2015 Notes Hedges, in connection with the issuance of the 2015 Notes. The purpose of the 2015 Notes Hedges was to limit Cadence’s exposure to the additional cash payments above the principal amount of the 2015 Notes that may be due to the holders. As a result of the 2015 Notes Hedges, Cadence’s maximum expected cash exposure upon conversion of the 2015 Notes is the $350.0 million principal balance of the notes. In June 2010, Cadence also sold warrants in separate transactions, or the 2015 Warrants. As a result of the 2015 Warrants, Cadence will experience dilution to its diluted earnings per share if its average closing stock price exceeds $10.78 for any fiscal quarter. To the extent that Cadence’s stock price exceeds $10.78 at expiration of the 2015 Warrants, Cadence will issue shares to net settle the 2015 Warrants.
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 March 30, 2013
 
$350,000
 
 
Contractual interest rate
 
2.625%
 
 
Contractual maturity date
 
June 1, 2015
 
 
Initial conversion rate
 
132.5205 shares of common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $7.55 per share of Cadence common stock.
 
 
Conversion feature (in addition to principal amount payable in cash)
 
Cash to the extent Cadence’s stock price exceeds approximately $7.55 per share, calculated based on the applicable conversion rate multiplied by the volume weighted average price of Cadence common stock over a specified period.
 
 
Early conversion conditions (or the Early Conversion Conditions)
 
• Closing stock price greater than $9.81 for at least 20 of the last 30 trading days in a fiscal quarter (convertible only for subsequent quarter);
 
• Specified corporate transactions; or
 
• Note trading price falls below a calculated minimum.
 
 
Conversion immediately preceding maturity
 
From March 1, 2015 until the second trading day immediately preceding the maturity date, holders may convert their 2015 Notes at any time into cash as described above under “Conversion feature.”
 
 
Redemption at Cadence’s option prior to maturity
 
None.
 
 
 
Fundamental change put right
 
Upon certain fundamental corporate changes prior to maturity, the 2015 Note holders could require Cadence to repurchase their notes for cash equal to the principal amount of the notes plus accrued interest.
 
 
Make-whole premium
 
Upon certain fundamental changes prior to maturity, if Cadence’s stock price were between $6.16 and $40.00 per share at that time, the 2015 Note holders would be entitled to an increase to the conversion rate. This is referred to as a “make-whole premium.”
 
 
Financial covenants
 
None.
Impact of Early Conversion Conditions on Financial Statements
The 2015 Notes are convertible into cash from March 31, 2013 through June 29, 2013 because Cadence’s closing stock price exceeded $9.81 for at least 20 days in the 30-day period prior to March 30, 2013. Accordingly, the net balance of the 2015 Notes of $312.7 million is classified as a current liability on Cadence’s condensed consolidated balance sheet as of March 30, 2013. The classification of the 2015 Notes as current or long-term on the condensed consolidated balance sheet is evaluated at each balance sheet date and may change from time to time depending on whether Cadence’s closing stock price has exceeded $9.81 during the periods specified in the table above under “Early conversion conditions.”

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If one of the 2015 Notes Early Conversion Conditions is met in any future fiscal quarter, Cadence will classify its net liability under the 2015 Notes as a current liability on the condensed consolidated balance sheet as of the end of that fiscal quarter. If none of the 2015 Notes Early Conversion Conditions have been met in a future fiscal quarter prior to the one-year period immediately preceding the maturity date, Cadence will classify its net liability under the 2015 Notes as a long-term liability on the condensed consolidated balance sheet as of the end of that fiscal quarter. If the note holders elect to convert their 2015 Notes prior to maturity, any unamortized discount and transaction fees will be expensed at the time of conversion. If the entire outstanding principal amount had been converted on March 30, 2013 Cadence would have recorded an expense of $42.4 million associated with the conversion, comprised of $37.3 million of unamortized debt discount and $5.1 million of unamortized transaction fees.
As of March 30, 2013, the if-converted value of the 2015 Notes to the note holders of approximately $646.1 million exceeded the principal amount of $350.0 million. The fair value of the 2015 Notes was $657.8 million as of March 30, 2013 and $640.1 million as of December 29, 2012. The 2015 Notes currently trade at a premium to the if-converted value of the notes. As of March 30, 2013, none of the note holders had elected to convert their 2015 Notes.
2015 Notes Embedded Conversion Derivative
The conversion feature of the 2015 Notes, or the 2015 Notes Embedded Conversion Derivative, requires bifurcation from the 2015 Notes and is accounted for as a derivative liability. The fair value of the 2015 Notes Embedded Conversion Derivative at the time of issuance of the 2015 Notes was $76.6 million and was recorded as original debt discount for purposes of accounting for the debt component of the 2015 Notes. This discount is amortized as interest expense using the effective interest method over the term of the 2015 Notes. The 2015 Notes Embedded Conversion Derivative is carried on the condensed consolidated balance sheet at its estimated fair value. The fair value was $315.9 million as of March 30, 2013 and $303.2 million as of December 29, 2012.

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 derivative assets and are carried on the condensed consolidated balance sheet at their estimated fair value. The 2015 Note Hedges fair value was $315.9 million as of March 30, 2013 and $303.2 million as of December 29, 2012. 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 March 30, 2013 and March 31, 2012 and did not have a net impact on the condensed consolidated income statements for the respective periods.
The classification of the 2015 Notes Embedded Conversion Derivative liability and the 2015 Notes Hedges asset as current or long-term on the condensed consolidated balance sheet corresponds with the classification of the 2015 Notes, is evaluated at each balance sheet date and may change from time to time depending on whether the closing stock price Early Conversion Condition is met for a particular quarter.
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. Therefore, 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.

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The effective interest rate and components of interest expense of the 2015 Notes for the three months ended March 30, 2013 and March 31, 2012 were as follows:
     
 
Three Months Ended
 
March 30,
2013
 
March 31,
2012
 
(In thousands, except percentages)
Effective interest rate
8.1
%
 
8.1
%
Contractual interest expense
$
2,289

 
$
2,289

Amortization of debt discount
$
3,910

 
$
3,592

2013 Notes and 2011 Notes
In December 2006, Cadence issued $250.0 million principal amount of 1.500% Convertible Senior Notes Due December 15, 2013, or the 2013 Notes. At the same time, Cadence issued$250.0 million principal amount of 1.375% Convertible Senior Notes Due December 15, 2011, or the 2011 Notes. During 2010, Cadence repurchased a portion of the 2011 Notes and the 2013 Notes. The 2011 Notes matured on December 15, 2011, at which time Cadence paid the remaining balance on the 2011 Notes in full. As of March 30, 2013, the remaining principal maturity value of the 2013 Notes was $144.5 million.
At maturity, the holders of the 2013 Notes will be entitled to receive the principal amount of the 2013 Notes plus accrued interest. The 2013 Notes are convertible into a combination of cash and shares of Cadence common stock upon the occurrence of certain conditions described in the table below. To the extent that the 2013 Notes are convertible prior to maturity and a holder of the 2013 Notes elects to convert its notes prior to maturity, that note holder will be entitled to receive cash for the principal amount of the notes plus shares for any additional conversion value as described in the table below under the heading “Conversion feature.” As of March 30, 2013, the 2013 Notes were not convertible.
Cadence entered into hedge transactions, or the 2013 Notes Hedges and the 2011 Notes Hedges, in connection with the issuance of the 2013 Notes and the 2011 Notes. The 2011 Notes Hedges expired unexercised on December 15, 2011. Pursuant to the 2013 Notes Hedges, Cadence has the option to receive the amount of shares that may be owed to the 2013 Notes holders. The purpose of the 2013 Notes Hedges was to limit Cadence’s exposure to the dilution that may result from the issuance of shares upon conversion of the notes. In December 2006, Cadence also sold warrants in separate transactions, or the 2013 Warrants and the 2011 Warrants. As a result of the 2013 Warrants, Cadence will experience dilution to its diluted earnings per share to the extent its average closing stock price exceeds $31.50 for any fiscal quarter. If Cadence’s stock price is above $31.50 at the expiration of the 2013 Warrants, Cadence will issue shares to settle the 2013 Warrants.

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A summary of key terms of the 2013 Notes is as follows: 
 
  
2013 Notes
 
  
(In thousands, except percentages and per share amounts)
 
 
Principal maturity value – at issuance
 
$250,000
 
 
 
Outstanding principal maturity value – at March 30, 2013
  
$144,461
 
 
Contractual interest rate
  
1.500%
 
 
Contractual maturity date
  
December 15, 2013
 
 
Equity component - included in common stock - at March 30, 2013 and December 29, 2012
 
$63,027
 
 
 
Initial conversion rate
  
47.2813 shares of common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $21.15 per share of Cadence common stock.
 
 
Conversion feature (in addition to principal amount payable in cash)
  
Shares to the extent Cadence’s stock price exceeds $21.15 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 $27.50 for at least 20 of the last 30 trading days in a calendar quarter (convertible only for subsequent quarter);
 
•  Specified corporate transactions; or
 
•  Note trading price falls below calculated minimum.
 
 
Conversion immediately preceding maturity
  
From November 1, 2013, and until the trading day immediately preceding the maturity date, holders may convert their 2013 Notes at any time into cash and Cadence shares as described above under “Conversion feature.”
 
 
Redemption at Cadence’s option prior to maturity
  
None.
 
 
Fundamental change put right
  
Upon a fundamental change prior to maturity, the 2013 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 $18.00 and $60.00 per share at that time, the 2013 Note holders would be entitled to an increase to the conversion rate. This is referred to as a “make-whole premium.”
 
 
Financial covenants
  
None.
Impact of Early Conversion Conditions on Financial Statements
As of March 30, 2013, none of the 2013 Notes Early Conversion Conditions had been met. The 2013 Notes mature on December 15, 2013 and the liability component of the 2013 Notes is classified as a current liability as of March 30, 2013.
As of March 30, 2013, the if-converted value of the 2013 Notes to the note holders did not exceed the principal amount of the 2013 Notes. The total fair value of the 2013 Notes, including the equity component, was $145.0 million as of March 30, 2013 and was $144.1 million as of December 29, 2012.
2013 and 2011 Notes Hedges
The 2011 Notes Hedges expired unexercised on December 15, 2011. The 2013 Notes Hedges expire on December 15, 2013, and must be settled in net shares of Cadence common stock. Therefore, upon expiration of the 2013 Notes Hedges, the counterparties will deliver shares of common stock to Cadence that represent the value, if any, by which the price of the common stock exceeds the price stipulated within the particular hedge agreement. The aggregate cost of the hedges entered into in connection with the 2011 Notes Hedges (which had similar conversion features as the 2013 Notes) and 2013 Notes Hedges was $119.8 million and

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was recorded as a reduction to stockholders’ equity. In connection with the purchase of a portion of the 2013 Notes and 2011 Notes during fiscal 2010, Cadence also sold a portion of the 2013 Notes Hedges and the 2011 Notes Hedges representing options to purchase approximately 9.7 million shares of Cadence’s common stock for proceeds of $0.4 million. The estimated fair value of the remaining 2013 Notes Hedges was $0.3 million as of March 30, 2013 and $0.7 million as of December 29, 2012. Subsequent changes in the fair value of the 2013 Notes Hedges will not be recognized in the condensed consolidated financial statements as long as the instruments remain classified as equity.
2013 and 2011 Warrants
In December 2006, Cadence sold warrants in separate transactions, which consisted of the 2013 Warrants and the 2011 Warrants, for the purchase of up to 23.6 million shares of Cadence’s common stock at a strike price of $31.50 per share for proceeds of $39.4 million, which was recorded as an increase in stockholders’ equity. In connection with the purchase of some of the 2013 Notes and the 2011 Notes during fiscal 2010, Cadence also purchased some of the 2013 Warrants and the 2011 Warrants, reducing the number of shares of Cadence common stock subject to purchase rights by 9.7 million shares at a cost of $0.1 million. The 2011 Warrants expired on various dates from February 2012 through April 2012, reducing the number of shares of Cadence common stock subject to purchase rights by 7.1 million shares. The 2013 Warrants will expire on various dates from February 2014 through April 2014. The 2013 Warrants must be settled in net shares of Cadence’s common stock. Therefore, upon expiration, Cadence will issue shares of common stock to the purchasers of the warrants that represent the value, if any, by which the price of the common stock exceeds the strike price stipulated within the particular warrant agreement.

The effective interest rate and components of interest expense of the 2013 Notes for the three months ended March 30, 2013, and of the 2013 Notes and 2011 Notes for the three months ended March 31, 2012, were as follows:
 
 
Three Months Ended
 
March 30,
2013
 
March 31,
2012
 
(In thousands, except percentages)
Effective interest rate
6.4
%
 
6.4
%
Contractual interest expense
$
540

 
$
540

Amortization of debt discount
$
1,651

 
$
1,539

Zero Coupon Zero Yield Senior Convertible Notes Due 2023
In August 2003, Cadence issued $420.0 million principal amount of its Zero Coupon Zero Yield Senior Convertible Notes Due 2023, or the 2023 Notes. As of March 30, 2013 and December 29, 2012, the remaining balance and the total fair value of the 2023 Notes was $0.2 million.
Credit Facility
In December 2012, Cadence entered into a five-year senior secured 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.
Any outstanding loans drawn under the credit facility are due at maturity in December 2017. Outstanding amounts may be paid at any time prior to maturity. The facility is secured by certain accounts receivable and certain equity interests in Cadence’s subsidiaries.
Interest accrues based on Cadence’s consolidated leverage ratio. Borrowings may be made at LIBOR plus a margin between 1.25% and 2.00% per annum or at the base rate plus a margin between 0.25% and 1.00% per annum, where in each case the margin is determined by reference to a specified leverage ratio. 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 and make certain investments, make acquisitions, dispose of certain assets and make certain restricted payments, including dividends. In addition, the credit facility contains financial covenants that require Cadence to maintain a leverage ratio not to exceed 3 to 1, and a minimum interest coverage ratio of 3 to 1.
Cadence had no outstanding balance on the credit facility and was in compliance with all financial covenants as of March 30, 2013 and December 29, 2012. After quarter-end on April 23, 2013, Cadence borrowed $100.0 million on the line of credit for general working capital purposes.

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NOTE 3. ACQUISITIONS AND ACQUISITION-RELATED CONTINGENT CONSIDERATION
During the first fiscal quarter of 2013, Cadence signed definitive agreements to purchase two different companies. Neither acquisition closed during the quarter due to waiting periods for regulatory approvals.
Cosmic Circuits Private Limited
On February 7, 2013, Cadence entered into an agreement to acquire Cosmic Circuits Private Limited, or Cosmic, a privately held provider of intellectual property used in system-on-chip design and verification based in Bangalore, India, for aggregate consideration of approximately $61.2 million in cash. Lip-Bu Tan, Cadence’s president, chief executive officer and director, is also a member of the board of directors of Cosmic. In addition, a trust for the benefit of the children of Mr. Tan owns approximately 8.5% of Cosmic, and Mr. Tan and his wife serve as co-trustees of the trust. Prior to and during the negotiations of the transaction, Mr. Tan recused himself from the discussions and negotiations between and at Cadence and Cosmic, including any discussions and negotiations related to the consideration provided to Cosmic. A financial advisor provided a fairness opinion to Cadence in connection with the transaction, and the Board of Directors of Cadence reviewed the transaction and concluded that it was in the best interests of Cadence to proceed with such transaction. The completion of the transaction is subject to certain conditions, including regulatory approval.
Tensilica, Inc.
On March 11, 2013, Cadence entered into an agreement to acquire Tensilica, Inc., or Tensilica, a provider of configurable dataplane processing units. On April 22, 2013, after quarter-end, Cadence completed the acquisition of Tensilica. The cash outlay at closing, after taking into account adjustments for certain costs and an estimated $25.0 million of cash held by Tensilica at closing, was approximately $326.4 million. In addition, Cadence assumed certain unvested Tensilica options. Of the net $326.4 million, $5.8 million is conditioned upon certain Tensilica shareholders remaining employees of Cadence over designated retention periods. Cadence will also make payments to certain employees that will be conditioned upon continued employment and certain performance metrics over a three-year period. Cadence is in the process of determining the fair value of the net assets acquired and will include Tensilica’s results of operations in its financial statements with effect from the purchase date.
Acquisition-related Contingent Consideration
One of the fiscal 2011 acquisitions includes contingent consideration payments based on certain future financial measures associated with the acquired technology. This contingent consideration arrangement requires payments of up to $5.0 million if these measures are met during the three-year period subsequent to October 1, 2011. The fair value of the contingent consideration arrangement recorded on the date of the acquisition was $3.5 million. The fair value of the contingent consideration as of March 30, 2013 was $3.5 million.
Cadence may be obligated to make cash payments in connection with its business combinations and asset acquisitions, subject to the satisfaction of certain financial measures. If performance is such that these payments are fully achieved, Cadence may be obligated to pay up to an aggregate of $14.4 million over the next 37 months. Of the $14.4 million, up to $9.0 million would be recorded as operating expenses in the condensed consolidated income statements.

NOTE 4. GOODWILL AND ACQUIRED INTANGIBLES
Goodwill
The changes in the carrying amount of goodwill during the three months ended March 30, 2013 were as follows:
 
 
Gross Carrying
Amount
 
(In thousands)
Balance as of December 29, 2012
$
233,266

Effect of foreign currency translation
(658
)
Balance as of March 30, 2013
$
232,608




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Table of Contents

Acquired Intangibles, Net
Acquired intangibles with definite lives as of March 30, 2013 were as follows, excluding intangibles that were fully amortized as of December 29, 2012:
 
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Acquired
Intangibles, Net
 
(In thousands)
Existing technology
$
112,697

 
$
(33,595
)
 
$
79,102

Agreements and relationships
133,397

 
(39,965
)
 
93,432

Distribution rights
30,100

 
(29,348
)
 
752

Tradenames, trademarks and patents
6,519

 
(1,914
)
 
4,605

Total acquired intangibles
$
282,713

 
$
(104,822
)
 
$
177,891


Acquired intangibles with definite lives as of December 29, 2012 were as follows, excluding intangibles that were fully amortized as of December 31, 2011:
 
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Acquired
Intangibles, Net
 
(In thousands)
Existing technology
$
112,940

 
$
(30,171
)
 
$
82,769

Agreements and relationships
133,764

 
(37,769
)
 
95,995

Distribution rights
30,100

 
(28,595
)
 
1,505

Tradenames, trademarks and patents
12,485

 
(7,816
)
 
4,669

Total acquired intangibles
$
289,289

 
$
(104,351
)
 
$
184,938


Amortization expense from existing technology intangible assets and maintenance agreement intangible assets is included in cost of product and maintenance. Amortization of acquired intangibles for the three months ended March 30, 2013 and March 31, 2012 was as follows:
 
 
Three Months Ended
 
March 30,
2013
 
March 31,
2012
 
(In thousands)
Cost of product and maintenance
$
3,807

 
$
2,899

Amortization of acquired intangibles
3,791

 
3,786

Total amortization of acquired intangibles
$
7,598

 
$
6,685

Estimated amortization expense for the following five fiscal years and thereafter is as follows:
 
 
(In thousands)
2013 – remaining period
$
20,395

2014
25,404

2015
25,057

2016
24,348

2017
23,260

Thereafter
59,427

Total estimated amortization expense
$
177,891




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Table of Contents

NOTE 5. RECEIVABLES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
Cadence’s current and long-term receivables balances as of March 30, 2013 and December 29, 2012 were as follows:
 
 
As of
 
March 30,
2013
 
December 29,
2012
 
(In thousands)
Accounts receivable
$
41,269

 
$
67,259

Installment contract receivables, short-term
33,984

 
30,647

Long-term receivables
3,734

 
7,559

Total receivables
$
78,987

 
$
105,465

Less allowance for doubtful accounts

 
(85
)
Total receivables, net
$
78,987

 
$
105,380

Cadence’s customers are primarily concentrated within the semiconductor, electronics systems and consumer electronics industries. As of March 30, 2013, one customer accounted for approximately 11% of Cadence’s total receivables. As of December 29, 2012, no single customer accounted for 10% of Cadence’s total receivables. As of March 30, 2013, approximately 53% of Cadence’s total receivables were attributable to the ten customers with the largest balances of total receivables. As of December 29, 2012, approximately 47% of Cadence’s total receivables were attributable to the ten customers with the largest balances of total receivables.

NOTE 6. 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 March 30, 2013.


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Table of Contents

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 March 30, 2013 and December 29, 2012:
 
 
Fair Value Measurements as of March 30, 2013:
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
659,218

 
$
659,218

 
$

 
$

Short-term investments:

 
 
 
 
 
 
Corporate debt securities
34,453

 

 
34,453

 

Bank certificates of deposit
24,827

 

 
24,827

 

United States Treasury securities
21,225

 
21,225

 

 

United States government agency securities
14,246

 
14,246

 

 

Commercial paper
4,290

 

 
4,290

 

Marketable equity securities
1,951

 
1,951

 

 

Trading securities held in Non-Qualified Deferred Compensation Plan, or NQDC
19,302

 
19,302

 

 

2015 Notes Hedges
315,895

 

 
315,895

 

Total Assets
$
1,095,407

 
$
715,942

 
$
379,465

 
$

 
 
 
 
 
 
 
 
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Liabilities
 
Acquisition-related contingent consideration
$
3,579

 
$

 
$

 
$
3,579

2015 Notes Embedded Conversion Derivative
315,895

 

 
315,895

 

Foreign currency exchange contracts
$
477

 
$

 
$
477

 
$

Total Liabilities
$
319,951

 
$

 
$
316,372

 
$
3,579

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements as of December 29, 2012:
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets
 
Cash equivalents:


 
 
 
 
 
 
Money market funds
$
566,334

 
$
566,334

 
$

 
$

Short-term investments:
 
 
 
 
 
 
 
Corporate debt securities
31,359

 

 
31,359

 

Bank certificates of deposit
27,826

 

 
27,826

 

United States Treasury securities
23,239

 
23,239

 

 

United States government agency securities
10,258

 
10,258

 

 

Commercial paper
5,783

 

 
5,783

 

Marketable equity securities
2,239

 
2,239

 

 

Trading securities held in Non-Qualified Deferred Compensation Plan, or NQDC
24,329

 
24,329

 

 

2015 Notes Hedges
303,154

 

 
303,154

 

Foreign currency exchange contracts
1,737

 

 
1,737

 

Total Assets
$
996,258

 
$
626,399

 
$
369,859

 
$


14

Table of Contents

 
 
 
 
 
 
 
 
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Liabilities
 
Acquisition-related contingent consideration
$
4,218

 
$

 
$

 
$
4,218

2015 Notes Embedded Conversion Derivative
303,154

 

 
303,154

 

Total Liabilities
$
307,372

 
$

 
$
303,154

 
$
4,218


Level 1 Measurements
Cadence’s cash equivalents held in money market funds, available-for-sale United States Treasury securities, United States government agency securities, marketable equity securities and the trading securities held in Cadence’s NQDC trust are measured at fair value using level 1 inputs.
Level 2 Measurements
The 2015 Notes Hedges and the 2015 Notes Embedded Conversion Derivative are measured at fair value using level 1 and level 2 inputs. These instruments are not actively traded and are valued using an option pricing model that uses observable market data for all inputs, such as implied volatility of Cadence’s common stock, risk-free interest rate and other factors.
Cadence’s available-for-sale corporate debt securities, bank certificates of deposit and commercial paper are measured at fair value using level 2 inputs. Cadence obtains the fair values of its level 2 available-for-sale securities from a professional pricing service and validates the fair values by assessing the pricing methods and inputs and by comparing the fair values to another independent source.
The fair values of Cadence’s 2013 Notes and 2015 Notes, which differ from their carrying values, are influenced by interest rates and Cadence’s stock price and stock price volatility and are determined by prices for the 2013 Notes and 2015 Notes observed in market trading, which are level 2 inputs.
Cadence’s foreign currency exchange contracts are measured at fair value using observable foreign currency exchange rates.
Level 3 Measurements
The liabilities included in level 3 represent the fair value of contingent consideration associated with certain of Cadence’s 2011 and 2010 acquisitions. Cadence makes estimates regarding the fair value of contingent consideration liabilities on the acquisition date and at the end of each reporting period until the contingency is resolved. The fair value of these arrangements is determined by calculating the net present value of the expected payments using significant inputs that are not observable in the market, including revenue projections and discount rates consistent with the level of risk of achievement. The fair value of these contingent consideration arrangements is affected most significantly by the changes in the revenue projections, but is also impacted by the discount rate used to adjust the outcomes to their present values. If the revenue projections increase or decrease, the fair value of the contingent consideration will increase or decrease accordingly, in amounts that will vary based on the timing of the projected revenues, the timing of the expected payments and the discount rate used to calculate the present value of the expected payments. Cadence used discount rates ranging from 11% to 16% to value its contingent consideration liabilities as of March 30, 2013 and December 29, 2012. Cadence believes that its estimates and assumptions are reasonable, but significant judgment is involved.
Changes in the fair value of contingent consideration liabilities subsequent to the acquisition are recorded in general and administrative expense in the condensed consolidated income statements.
The following table summarizes the level 3 activity for the three months ended March 30, 2013:
 
 
(In thousands)
Balance as of December 29, 2012
$
4,218

Payments
(740
)
Adjustments
101

Balance as of March 30, 2013
$
3,579




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Table of Contents

NOTE 7. CASH, CASH EQUIVALENTS AND INVESTMENTS
Cadence’s cash, cash equivalents and short-term investments at fair value as of March 30, 2013 and December 29, 2012 were as follows:
 
As of
 
March 30,
2013
 
December 29,
2012
 
(In thousands)
Cash and cash equivalents
$
810,152

 
$
726,357

Short-term investments
100,992

 
100,704

Cash, cash equivalents and short-term investments
$
911,144

 
$
827,061

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 March 30, 2013 and December 29, 2012:
 
 
As of
 
March 30,
2013
 
December 29,
2012
 
(In thousands)
Cash and interest bearing deposits
$
150,934

 
$
160,023

Money market funds
659,218

 
566,334

Total cash and cash equivalents
$
810,152

 
$
726,357

Short-Term Investments
The following tables summarize Cadence’s short-term investments as of March 30, 2013 and December 29, 2012:
 
 
As of March 30, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Corporate debt securities
$
34,409

 
$
51

 
$
(7
)
 
$
34,453

Bank certificates of deposit
24,800

 
27

 

 
24,827

United States Treasury securities
21,198

 
27

 

 
21,225

United States government agency securities
14,231

 
15

 

 
14,246

Commercial paper
4,283

 
7

 

 
4,290

Marketable debt securities
98,921

 
127

 
(7
)
 
99,041

Marketable equity securities
1,817

 
134

 

 
1,951

Total short-term investments
$
100,738

 
$
261

 
$
(7
)
 
$
100,992



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Table of Contents

 
As of December 29, 2012
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Corporate debt securities
$
31,313

 
$
57

 
$
(11
)
 
$
31,359

Bank certificates of deposit
27,805

 
21

 

 
27,826

United States Treasury securities
23,213

 
26

 

 
23,239

United States government agency securities
10,245

 
13

 

 
10,258

Commercial paper
5,777

 
6

 

 
5,783

Marketable debt securities
98,353

 
123

 
(11
)
 
98,465

Marketable equity securities
1,817

 
422

 

 
2,239

Total short-term investments
$
100,170

 
$
545

 
$
(11
)
 
$
100,704

As of March 30, 2013, any securities held by Cadence with an unrealized loss had been held for less than six months.
The amortized cost and estimated fair value of marketable debt securities included in short-term investments as of March 30, 2013, 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
$
34,718

 
$
34,777

Due in one to three years
64,203

 
64,264

Total marketable debt securities included in short-term investments
$
98,921

 
$
99,041

Non-Marketable Investments
Cadence’s non-marketable investments generally consist of voting preferred stock or convertible debt of privately held companies and are included in other assets on Cadence’s condensed consolidated balance sheets. If Cadence determines that it has the ability to exercise significant influence over the issuer, which may include considering whether the investments are in-substance common stock, the investment is accounted for using the equity method.
Cadence’s non-marketable investments as of March 30, 2013 and December 29, 2012 were as follows:
 
 
As of
 
March 30,
2013
 
December 29,
2012
 
(In thousands)
Cost method
$
3,038

 
$
3,038

Equity method
3,932

 
4,249

Total non-marketable investments
$
6,970

 
$
7,287

Net realized gains on the sale of non-marketable investments during the three months ended March 30, 2013 and March 31, 2012 were as follows:
 
 
Three Months Ended
 
March 30,
2013
 
March 31,
2012
 
(In thousands)
Gains on sale of non-marketable investments
$
1,190

 
$



17

Table of Contents


NOTE 8. 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 March 30, 2013 and March 31, 2012 are as follows:
 
 
Three Months Ended
 
March 30,
2013
 
March 31,
2012
 
(In thousands, except per share amounts)
Net income
$
78,609

 
$
31,104

Weighted average common shares used to calculate basic net income per share
274,936

 
267,940

2023 Notes
11

 
11

2015 Warrants
10,668

 
2,523

Share-based awards
6,536

 
7,259

Weighted average common shares used to calculate diluted net income per share
292,151

 
277,733

Net income per share - basic
$
0.29

 
$
0.12

Net income per share - diluted
$
0.27

 
$
0.11

The following table presents shares of Cadence’s common stock outstanding for the three months ended March 30, 2013, and March 31, 2012, 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
 
March 30,
2013
 
March 31,
2012
 
(In thousands)
2011 Warrants and 2013 Warrants
6,830

 
7,815

Options to purchase shares of common stock
6,754

 
14,070

Non-vested shares of restricted stock

 
33

Total potential common shares excluded
13,584

 
21,918


NOTE 9. 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.

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Table of Contents

Accumulated other comprehensive income was comprised of the following as of March 30, 2013, and December 29, 2012:
 
 
As of
 
March 30,
2013
 
December 29,
2012
 
(In thousands)
Foreign currency translation gain
$
42,491

 
$
48,653

Changes in defined benefit plan liabilities
(4,911
)
 
(5,229
)
Unrealized holding gains on available-for-sale securities
242

 
526

Total accumulated other comprehensive income
$
37,822

 
$
43,950

For the three months ended March 30, 2013 and March 31, 2012 there were no significant amounts reclassified from accumulated other comprehensive income to net income.

NOTE 10. CONTINGENCIES
Legal Proceedings
From time to time, Cadence is involved in various disputes and litigation that arise in the ordinary course of business. These include disputes and lawsuits related to intellectual property, indemnification obligations, mergers and acquisitions, licensing, contracts, distribution arrangements and employee relations matters. At least quarterly, Cadence reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount or the range of loss can be estimated, Cadence accrues a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on Cadence’s judgments using the best information available at the time. As additional information becomes available, Cadence reassesses the potential liability related to pending claims and litigation matters and may revise estimates.
Other Contingencies
Cadence provides its customers with a warranty on sales of hardware products, generally for a 90-day period. Cadence did not incur any significant costs related to warranty obligations during the three months ended March 30, 2013 or March 31, 2012.
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 March 30, 2013 or March 31, 2012.

NOTE 11. OTHER INCOME, NET
Cadence’s other income, net for the three months ended March 30, 2013 and March 31, 2012 was as follows:
 
 
Three Months Ended
 
March 30,
2013
 
March 31,
2012
 
(In thousands)
Interest income
$
425

 
$
337

Gains (losses) on sale of marketable debt and equity securities, net
(25
)
 
117

Gains on sale of non-marketable equity investments
1,190

 

Gains on securities in Cadence’s NQDC
152

 
1,798

Gains on foreign exchange
764

 
100

Other income (expense), net
(331
)
 
82

Total other income, net
$
2,175

 
$
2,434



19

Table of Contents

NOTE 12. SEGMENT REPORTING
Segment reporting is based on the “management approach,” following the method that management organizes the company’s reportable segments for which separate financial information is made available to, and evaluated regularly by, the chief operating decision maker in allocating resources and in assessing performance. Cadence’s chief operating decision maker is its President and Chief Executive Officer, or CEO, who reviews Cadence’s consolidated results as one reportable segment. In making operating decisions, the CEO primarily considers consolidated financial information, accompanied by disaggregated information about revenues by geographic region.
Outside the United States, Cadence markets and supports its products and services primarily through its subsidiaries. Revenue is attributed to geography based upon the country in which the product is used or services are delivered. Long-lived assets are attributed to geography based on the country where the assets are located.

The following table presents a summary of revenue by geography for the three months ended March 30, 2013 and March 31, 2012:
 
 
Three Months Ended
 
March 30,
2013
 
March 31,
2012
 
(In thousands)
Americas:
 
 
 
United States
$
149,171

 
$
130,455

Other Americas
4,615

 
8,124

Total Americas
153,786

 
138,579

Europe, Middle East and Africa
78,920

 
59,709

Japan
53,474

 
56,219

Asia
68,086

 
61,323

Total
$
354,266

 
$
315,830

The following table presents a summary of long-lived assets by geography as of March 30, 2013 and December 29, 2012: 
 
As of
 
March 30,
2013
 
December 29,
2012
 
(In thousands)
Americas:
 
 
 
United States
$
209,006

 
$
214,711

Other Americas
216

 
185

Total Americas
209,222

 
214,896

Europe, Middle East and Africa
4,994

 
5,410

Japan
979

 
1,649

Asia
22,260

 
22,484

Total
$
237,455

 
$
244,439




20

Table of Contents


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q, or this Quarterly Report, and in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 29, 2012. Certain of these statements, including, but not limited to, statements regarding the extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of our products, statements regarding our reliance on third parties and other statements using words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “plans,” “projects,” “should,” “will” and “would,” and words of similar import and the negatives thereof, constitute forward-looking statements. These statements are predictions based upon our current expectations about future events. Actual results could vary materially as a result of certain factors, including, but not limited to, those expressed in these statements. We refer you to the “Risk Factors,” “Results of Operations,” “Disclosures About Market Risk,” and “Liquidity and Capital Resources” sections contained in this Quarterly Report, and the risks discussed in our other Securities Exchange Commission, or SEC, filings, which identify important risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements.
We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. We do not intend, and undertake no obligation, to update these forward-looking statements.
Overview

We develop solutions that our customers use to design increasingly complex integrated circuits, or ICs, and electronic devices. Our solutions are designed to help our customers reduce the time to bring an IC or electronic device to market and to reduce their design and development costs. Our offerings include software, two categories of intellectual property, or IP (commonly referred to as verification IP, or VIP, and Design IP), and hardware technology. We provide maintenance for our product offerings and provide engineering services related to methodology, education and hosted design solutions, which help our customers manage and accelerate their electronics product development processes.
Substantially all of our business is generated from semiconductor and electronics systems manufacturers and designers and the renewal of many of our customer contracts is dependent upon their commencement of new design projects. As a result, our business is significantly influenced by our customers’ business outlook and investment in the introduction of new products and the improvement of existing products.
The markets our customers serve are sensitive to product price and the time it takes to bring the products to market. In order to be competitive and profitable in these markets, our customers demand high levels of productivity from their design teams, better predictability in shorter development schedules, high quality products and lower development costs. Semiconductor and electronics systems companies are responding to these challenges and users’ demand for increased functionality and smaller devices by combining subsystems - such as radio frequency, or RF, wireless communication, signal processing, microprocessors and memory controllers - onto a single silicon chip, creating a system-on-chip, or SoC, or combining multiple chips into a single chip package in a format referred to as system-in-package, or SiP. The trend toward subsystem integration has required these chip makers to find solutions to challenges previously addressed by system companies, such as verifying system-level functionality and hardware-software interoperability.
Our offerings address many of the challenges associated with developing unique silicon circuitry, integrating that circuitry with design IP developed by us or third parties to create SoCs, and combining ICs and SoCs with software to create electronic systems. Our strategy is to provide our customers with the ability to address the broad range of issues that arise at the silicon, SoC, and system levels.
Significant issues that our customers face in creating their products include optimizing energy consumption, manufacturing microscopic circuitry, verifying device functionality, and achieving technical performance targets, all while meeting aggressive time-to-market and cost requirements. Providers of electronic design automation, or EDA, solutions must deliver products that address these technical challenges while improving the productivity, predictability, reliability and profitability of the design processes and products of their customers.
Our products are engineered to improve our customers’ design productivity and design quality by providing a comprehensive set of EDA solutions and a differentiated portfolio of Design IP and VIP. Product revenue includes fees from licenses to use our software and IP, and from sales and leases of our hardware products. See "Product Arrangements" below for a discussion of our license types.

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We combine our products and technologies into categories related to major design activities:

Functional Verification, Hardware and IP;
Custom IC Design;
Digital IC Design;
System Interconnect Design; and
Design for Manufacturing, or DFM.
The major Cadence® design platforms are branded as Incisive® functional verification, Virtuoso® custom IC design, Encounter® digital IC design and Allegro® system interconnect design. Our functional verification offerings include VIP products and are supplemented by our Design IP offerings and our hardware offerings. In addition, we augment these platform product offerings with a set of DFM products that service both the digital and custom IC design flows.
The products and technologies included in these categories are combined with ready-to-use packages of technologies assembled from our broad portfolio of IP and other associated components that provide comprehensive solutions for low power, mixed signal and designs at smaller geometries referred to as advanced process nodes, as well as popular designs based on design IP owned and licensed by other companies such as ARM Holdings plc. These solutions are marketed to users who specialize in areas such as system design and verification, functional verification, logic design, digital implementation, custom IC design and printed circuit board, or PCB, and IC package and SiP design. During the first quarter of fiscal 2013, we announced that we had signed definitive agreements to purchase Tensilica and Cosmic to add to our IP offerings. The addition of these technologies will enable us to offer broader IP solutions to customers.
We have identified certain items that management uses as performance indicators to manage our business, including revenue, certain elements of operating expenses and cash flow from operations, and we describe these items further below under the heading "Results of Operations" and "Liquidity and Capital Resources."
Critical Accounting Estimates
In preparing our condensed consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income and net income, as well as on the value of certain assets and liabilities on our condensed consolidated balance sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. At least quarterly, we evaluate our assumptions, judgments and estimates, and make changes as deemed necessary. Historically, our assumptions, judgments and estimates relative to our critical accounting estimates have not differed materially from actual results. For further information about our critical accounting estimates, see the discussion in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the heading “Critical Accounting Estimates” in our Annual Report on Form 10-K for the fiscal year ended December 29, 2012.

Results of Operations
Financial results for the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, reflect the following:
An increase in our product and maintenance revenue, primarily because of increased business levels and increased revenue recognized from bookings in prior periods;
An increase in employee-related costs, primarily consisting of costs related to hiring additional employees subsequent to March 31, 2012 and incremental costs related to employees added from our acquisition of Sigrity, Inc., or Sigrity, during fiscal 2012;
An increase in variable compensation due to increased revenue, bookings and operating performance; and
An income tax benefit in the three months ended March 30, 2013, primarily resulting from the release of uncertain tax benefits recorded in a past business combination.
Revenue
We primarily generate revenue from licensing our EDA software and IP, selling or leasing our hardware technology, providing maintenance for our software, IP and hardware and providing engineering services.
The timing of our product revenue is significantly affected by the mix of hardware and software products in the bookings executed in any given period and whether the revenue for such bookings is recognized over multiple periods or up-front, upon completion of delivery.

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We seek to achieve a consistent mix of bookings with approximately 90% of the aggregate value of our bookings of a type for which the revenue is recurring, or ratable, in nature, and the remainder of the resulting revenue recognized up-front, upon completion of delivery. Our ability to achieve this bookings mix in any single fiscal quarter may be impacted by hardware sales, because product revenue for hardware sales is generally recognized up-front in the quarter in which delivery is completed.
Greater than 90% of the aggregate value of our bookings during the three months ended March 30, 2013 and March 31, 2012 was of a type for which the revenue is recurring, or ratable, in nature.
For an additional description of the impact of hardware sales on the anticipated mix of bookings, our other license types and the timing of revenue recognition for license transactions, see the discussion under the heading “Critical Accounting Estimates – Revenue Recognition” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K for the fiscal year ended December 29, 2012.
Revenue by Period
In the condensed consolidated income statements for the three months ended March 30, 2013, we combined product and maintenance revenue because product and maintenance revenue is generally recognized from agreements that require customers to purchase both the product and associated maintenance in a bundled offering. We reclassified prior period product and maintenance revenue balances to conform to the current year presentation.
The following table shows our revenue for the three months ended March 30, 2013 and March 31, 2012 and the change in revenue between periods:
 
 
Three Months Ended
 
Change
 
March 30,
2013
 
March 31,
2012
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance
$
328.3

 
$
286.3

 
$
42.0

 
15
 %
Services
26.0

 
29.5

 
(3.5
)
 
(12
)%
Total revenue
$
354.3

 
$
315.8

 
$
38.5

 
12
 %

Product and maintenance revenue increased during the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, primarily because of increased business levels and increased revenue recognized from bookings in prior periods. Services revenue decreased during the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, because of the redeployment of certain of our design services engineers to internal research and development projects. We expect services revenue to decrease during the remainder of fiscal 2013, as compared to the same periods in fiscal 2012, as we expect these design services engineers to continue to work on internal research and development projects, primarily related to our Design IP activities.
No one customer accounted for 10% or more of total revenue during the three months ended March 30, 2013 or March 31, 2012.


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Revenue by Product Group
The following table shows the percentage of product and related maintenance revenue contributed by each of our five product groups, and services and other for the past five consecutive quarters:
 
 
Three Months Ended
 
March 30,
2013
 
December 29,
2012
 
September 29,
2012

 
June 30,
2012

 
March 31,
2012
Functional Verification, Hardware and IP
26
%
 
30
%
 
30
%
 
33
%
 
30
%
Digital IC Design
25
%
 
23
%
 
23
%
 
22
%
 
23
%
Custom IC Design
25
%
 
24
%
 
24
%
 
22
%
 
23
%
System Interconnect Design
10
%
 
9
%
 
9
%
 
8
%
 
8
%
Design for Manufacturing
7
%
 
6
%
 
6
%
 
6
%
 
7
%
Services and other
7
%
 
8
%
 
8
%
 
9
%
 
9
%
Total
100
%
 
100
%
 
100
%
 
100
%
 
100
%

As described in Note 2 in the notes to consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 29, 2012, 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.
The changes in the percentage of revenue contributed by the Functional Verification, Hardware and IP product group for the quarters presented are primarily related to changes in revenue related to our hardware products.
Revenue by Geography
 
 
Three Months Ended
 
Change
 
March 30,
2013
 
March 31,
2012
 
Amount
 
Percentage
 
(In millions, except percentages)
United States
$
149.2

 
$
130.5

 
$
18.7

 
14
 %
Other Americas
4.6

 
8.1

 
(3.5
)
 
(43
)%
Europe, Middle East and Africa
78.9

 
59.7

 
19.2

 
32
 %
Japan
53.5

 
56.2

 
(2.7
)
 
(5
)%
Asia
68.1

 
61.3

 
6.8

 
11
 %
Total revenue
$
354.3

 
$
315.8

 
$
38.5

 
12
 %

Most of our revenue is transacted in the United States dollar. However, certain revenue transactions are denominated in foreign currencies, primarily the Japanese yen, and we recognize reduced revenue from those contracts in periods when the Japanese yen weakens in value against the United States dollar and additional revenue from those contracts in periods when the Japanese yen strengthens against the United States dollar. For an additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see the discussion under the heading “Item 3. Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”
Revenue for Japan decreased during the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, due to the devaluation of the Japanese yen and the economic climate facing our customers in Japan. We expect revenue for Japan to continue to decrease during the remainder of fiscal 2013, as compared to the same period in 2012, because of expected further devaluation of the Japanese yen.
For the primary factors contributing to our increase in revenue in other geographies, see the general description under “Revenue by Period,” above.

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Table of Contents

Revenue by Geography as a Percent of Total Revenue
 
 
Three Months Ended
 
March 30,
2013
 
March 31,
2012
United States
42
%
 
41
%
Other Americas
2
%
 
3
%
Europe, Middle East and Africa
22
%
 
19
%
Japan
15
%
 
18
%
Asia
19
%
 
19
%
Total
100
%
 
100
%
Cost of Revenue
 
Three Months Ended
 
Change
 
March 30,
2013
 
March 31,
2012
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance
$
29.8

 
$
27.2

 
$
2.6

 
10
 %
Services
18.3

 
19.4

 
(1.1
)
 
(6
)%
 
The following table shows cost of revenue as a percentage of related revenue for the three months ended March 30, 2013 and March 31, 2012:
 
 
Three Months Ended
 
March 30,
2013
 
March 31,
2012
Product and maintenance
9
%
 
10
%
Services
71
%
 
66
%
Cost of Product and Maintenance
Cost of product and maintenance includes costs associated with the sale and lease of our hardware and licensing of our software and IP products, employee salary, benefits and other employee-related costs, cost of our customer support services, amortization of acquired intangibles, as well as the costs of technical documentation and royalties payable to third-party vendors. Costs associated with our hardware products include materials, assembly and overhead. These additional hardware manufacturing costs make our cost of 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
 
March 30,
2013
 
March 31,
2012
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance-related costs
$
26.0

 
24.3

 
$
1.7

 
7
%
Amortization of acquired intangibles
3.8

 
2.9

 
0.9

 
31
%
Total cost of product and maintenance
$
29.8

 
$
27.2

 
$
2.6

 
10
%
 Cost of product and maintenance depends primarily upon the mix of hardware and software product sales in any given period, employee salary, benefits and other employee-related costs, and also depend upon 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.


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Table of Contents

Cost of Services
Cost of services primarily includes employee salary, benefits and other employee-related costs, costs to maintain the infrastructure necessary to manage a services organization, and provisions for contract losses, if any. Certain of our design services engineers have been redeployed to internal research and development projects or to assist with pre-sales activities, resulting in lower cost of services expense. We expect to continue to utilize certain design services engineers on internal projects and pre-sales activities.
Operating Expenses
Our operating expenses include marketing and sales, research and development and general and administrative expenses. Factors that may cause our operating expenses to fluctuate include changes in the number of employees due to hiring, acquisitions, foreign exchange rates and the impact of our variable compensation programs, which are driven by overall operating results.
Our employee salary and other compensation-related costs increased during the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, primarily due to hiring additional employees for our research and development activities, the addition of employees through our fiscal 2012 acquisition of Sigrity, and higher variable compensation as a result of improved business performance.
Many of our operating expenses are denominated in various foreign currencies. We recognize lower expenses in periods when the United States dollar strengthens in value against other currencies and we recognize higher expenses when the United States dollar weakens against other currencies. For an additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see the discussion under the heading “Item 3. Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”
We expect our operating expenses to increase during the remainder of fiscal 2013, as compared to the same period in fiscal 2012, due to the addition of employees through the acquisitions of Tensilica and Cosmic and expected hiring of research and development personnel.
Our operating expenses for the three months ended March 30, 2013 and March 31, 2012 were as follows:
 
 
Three Months Ended
 
Change
 
March 30,
2013
 
March 31,
2012
 
Amount
 
Percentage
 
(In millions, except percentages)
Marketing and sales
$
90.4

 
$
83.8

 
$
6.6

 
8
%
Research and development
124.1

 
108.6

 
15.5

 
14
%
General and administrative
29.8

 
27.8

 
2.0

 
7
%
Operating expenses
$
244.3

 
$
220.2

 
$
24.1

 
11
%
 
Our operating expenses, as a percentage of total revenue, for the three months ended March 30, 2013 and March 31, 2012 were as follows:
 
 
Three Months Ended
 
March 30,
2013
 
March 31,
2012
Marketing and sales
26
%
 
27
%
Research and development
35
%
 
34
%
General and administrative
8
%
 
9
%
Operating expenses
69
%
 
70
%
 

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Table of Contents

Marketing and Sales
The changes in marketing and sales expense for the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, were due to the following:
 
 
Change
 
(In millions)
Salary, benefits and other employee-related costs
$
6.2

Other individually insignificant items
0.4

 
$
6.6

Research and Development
 
The changes in research and development expense for the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, were due to the following:
 
Change
 
(In millions)
Salary, benefits and other employee-related costs
$
10.8

Professional engineering services
2.0

Stock-based compensation
1.5

Other individually insignificant items
1.2

 
$
15.5


The increase in salary, benefits and other employee-related costs during the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, is primarily due to hiring additional employees for our research and development activities, the addition of employees through our fiscal 2012 acquisition of Sigrity and increased costs associated with design services engineers utilized for internal research and development projects.
We expect research and development expense to increase for the remainder of fiscal 2013, as compared to the same period in fiscal 2012, due to the acquisitions of Tensilica and Cosmic and higher salary, benefits and other employee-related costs from an expected increase in hiring.

General and Administrative

The changes in general and administrative expense for the three months ended March 30, 2013, as compared to the three months ended March 31, 2012 were due to the following:
 
 
Change
 
(In millions)
Professional services
2.1

Other individually insignificant items
(0.1
)
 
$
2.0


The increase in professional services costs during the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, is primarily due to services rendered in connection with the acquisitions of Tensilica and Cosmic.

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Amortization of Acquired Intangibles
 
 
Three Months Ended
 
Change
 
March 30,
2013
 
March 31,
2012
 
Amount
 
Percentage
 
(In millions, except percentages)
Amortization of acquired intangibles
$
3.8

 
$
3.8

 
$

 
%
 
We expect amortization of acquired intangibles to increase during the remainder of fiscal 2013, as compared to the same period in fiscal 2012, due to the amortization of intangible assets that we expect to be recorded in connection with the acquisitions of Tensilica and Cosmic.
Interest Expense
 
 
Three Months Ended
 
March 30,
2013
 
March 31,
2012
 
(In millions)
Contractual interest expense:
 
 
 
2013 Notes
0.5

 
0.5

2015 Notes
2.3

 
2.3

Amortization of debt discount:
 
 
 
2013 Notes
1.7

 
1.5

2015 Notes
3.9

 
3.6

Amortization of deferred financing costs:
 
 
 
2013 Notes
0.1

 
0.1

2015 Notes
0.5

 
0.5

Other
0.3

 

Total interest expense
$
9.3

 
$
8.5


Income Taxes
During the three months ended March 30, 2013, uncertain tax benefits recorded in a previous business combination were released, resulting in a reduction of uncertain tax benefits of $12.0 million, interest (net of tax benefit) of $13.4 million and penalties of $8.3 million for a total tax benefit of $33.7 million. In addition, the American Tax Relief Act of 2012, enacted in January 2013, retroactively extended the United States federal research tax credit from January 1, 2012 through December 31, 2013.
The following table presents the provision for income taxes and the effective tax rate for the three months ended March 30, 2013 and March 31, 2012:
 
 
Three Months Ended
 
March 30,
2013
 
March 31,
2012
 
(In millions, except percentages)
Provision (benefit) for income taxes
$
(27.6
)
 
$
8.1

Effective tax rate
(54.0
)%
 
20.8
%

Our benefit for income taxes for the three months ended March 30, 2013 primarily consisted of the following:
Tax benefit of $33.7 million related to the release of the uncertain tax position described above; and

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Table of Contents

A period-specific tax benefit for the retroactively extended fiscal 2012 federal research tax credit in the amount of $5.9 million, offset by:
Federal, state and foreign tax expense on anticipated fiscal 2013 income.
Our tax expense for the three months ended March 31, 2012 primarily consisted of the following:
Tax expense related to certain of our foreign subsidiaries;
Interest expense on unrecognized tax positions; and
Excess tax benefits from stock-based compensation that were allocated to equity.
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 December 29, 2012.


Liquidity and Capital Resources
 
 
As of
 
 
 
March 30,
2013
 
December 29,
2012
 
Change
 
(In millions)
Cash, cash equivalents and short-term investments
$
911.2

 
$
827.1

 
$
84.1

Net working capital
$
251.3

 
$
174.0

 
$
77.3

Cash, Cash Equivalents and Short-term Investments
As of March 30, 2013, our principal sources of liquidity consisted of $911.2 million of cash, cash equivalents and short-term investments, as compared to $827.1 million as of December 29, 2012.
During the second quarter of fiscal 2012, we began to 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 March 30, 2013. 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.”
Our primary source of cash, cash equivalents and short-term investments during the three months ended March 30, 2013 was customer payments for products, maintenance and services. We also received cash from stock purchases under our ESPP and from the exercise of stock options.
Our primary use of cash, cash equivalents and short-term investments during the three months ended March 30, 2013 was payments relating to salaries, benefits, other employee-related costs and other operating expenses.
Approximately 55% of our cash, cash equivalents and short-term investments were held by our foreign subsidiaries as of March 30, 2013. Our intent is to permanently reinvest our earnings from certain foreign operations. We do not anticipate we will need to repatriate dividends from foreign operations that are permanently reinvested in order to fund our domestic operations. In the event that dividends from foreign operations that are currently permanently reinvested are needed to fund United States liquidity, we could be required to accrue and pay additional taxes in order to repatriate these funds.
During fiscal 2012, we entered into a $250 million five-year senior secured revolving credit facility. Borrowings under the credit facility may be used to finance working capital, capital expenditures, acquisitions and other business purposes. Any outstanding loans drawn under the credit facility are payable on or before December 12, 2017. The credit facility contains customary negative covenants that, among other things, restrict our ability to incur additional indebtedness, grant liens, make certain investments, dispose of certain assets and make certain payments. In addition, the credit facility contains certain financial covenants that require us to maintain a leverage ratio of not greater than 3 to 1, subject to certain exceptions, and requires that we maintain an interest coverage ratio of at least 3 to 1. As of March 30, 2013, we were in compliance with the financial covenants. For an additional description of this revolving credit facility, see Note 2 in the notes to condensed consolidated financial statements. After quarter-end on April 23, 2013, we borrowed $100 million on our line of credit for general working capital purposes.

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Table of Contents

On April 22, 2013, after quarter-end, we completed our acquisition of Tensilica. In connection with our acquisition of Tensilica, we utilized our United States cash for cash consideration paid at closing. Additionally, we have signed a definitive agreement to purchase Cosmic. We expect that the majority of the purchase price of Cosmic will be paid using cash held in our foreign subsidiaries. We expect that current cash, cash equivalents and short-term investment balances, cash flows that are generated from operations and additional cash available under our revolving credit facility will be sufficient to meet our domestic and international working capital needs, and other capital and liquidity requirements, including acquisitions, for at least the next 12 months.

Net Working Capital
Net working capital increased by $77.3 million as of March 30, 2013, as compared to December 29, 2012, due to the following:
 
 
Change
 
(In millions)
Increase in cash and cash equivalents
$
83.8

Decrease in accounts payable and accrued liabilities
14.7

Decrease in current portion of deferred revenue
10.2

Decrease in prepaid expenses and other
(4.4
)
Increase in convertible notes
(5.6
)
Decrease in receivables, net
(22.6
)
Other individually insignificant items
1.2

 
$
77.3

Cash Flows from Operating Activities
 
Three Months Ended
 
Change
 
March 30,
2013
 
March 31,
2012
 
(In millions)
Cash provided by operating activities
$
75.3

 
$
60.7

 
$
14.6


Cash flows from operating activities increased $14.6 million during the three months ended March 30, 2013, as compared to March 31, 2012, due to the following:
 
 
Change
 
(In millions)
Net income, net of non-cash related gains and losses
$
57.7

Changes in operating assets and liabilities, net of effect of acquired businesses
(43.1
)
 
$
14.6

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.
We expect that cash flows from operating activities will fluctuate in future periods due to a number of factors, including our operating results and the timing of our billings, collections and tax payments.

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Table of Contents

Cash Flows from Investing Activities
 
Three Months Ended
 
Change
 
March 30, 2013
 
March 31, 2012
 
(In millions)
Cash used for investing activities
(1.8
)
 
(9.4
)
 
7.6

The changes in net cash used for investing activities for the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, were due to the following:
 
 
Change
 
(In millions)
Proceeds from the sale of available-for-sale securities
$
15.0

Purchases of available-for-sale securities
(24.3
)
Proceeds from the maturity of available-for-sale securities
8.7

Proceeds from the sale of long-term investments
6.1

Purchases of property, plant and equipment
1.6

Other individually insignificant items
0.5

 
$
7.6

The proceeds from, and purchases of, available-for-sale securities is primarily related to normal purchases, sales and maturities of the debt securities included in our $100 million investment portfolio.
In connection with our business combinations and asset acquisitions completed before March 30, 2013, we may be obligated to make payments based on, or subject to the satisfaction of, certain performance metrics. If performance is such that these payments are fully achieved, we would be obligated to pay up to an aggregate of $14.4 million in cash during the next 37 months.
During fiscal 2013, we expect to use cash for our acquisitions of Tensilica and Cosmic. We also expect to continue our investing activities, including purchasing property, plant and equipment, purchasing intangible assets, purchasing software licenses, business combinations, and making long-term equity investments.
Cash Flows from Financing Activities
 
Three Months Ended
 
Change
 
March 30, 2013
 
March 31, 2012
 
(In millions)
Cash provided by financing activities
15.2

 
9.4

 
5.8

The changes in net cash provided by financing activities for the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, were due to the following:
 
 
Change
 
(In millions)
Proceeds from the issuance of common stock
$
9.0

Tax effect related to employee stock transactions allocated to equity
2.4

Principal payments on receivable financing
(2.5
)
Stock received for payment of employee taxes on vesting of restricted stock
(2.6
)
Other individually insignificant items
(0.5
)
 
$
5.8


The increase in proceeds from the issuance of common stock during the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, resulted from an increase in the exercise of stock options.

31

Table of Contents

Other Factors Affecting Liquidity and Capital Resources
As of March 30, 2013, we had convertible notes outstanding with a net liability value of $452.4 million and that mature between December 15, 2013, and June 1, 2015. The principal maturity value of these convertible notes is $494.5 million. The total cash or stock 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.
In the case of our 2015 Notes, 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 warrants, or 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 hedges to the $350.0 million outstanding principal value of the 2015 Notes, we will experience dilution to our stock 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 Notes are converted and the 2015 Warrants are settled.
Additionally, holders may convert their 2015 Notes into cash during any quarter following a quarter in which our stock price closes above $9.81 for at least 20 of the last 30 trading days. The 2015 Notes are convertible into cash from March 31, 2013 through June 29, 2013 because our closing stock price exceeded $9.81 for at least 20 of the last 30 trading days prior to March 30, 2013. Accordingly, the net balance of the 2015 Notes of $312.7 million is classified as a current liability on our condensed consolidated balance sheet as of March 30, 2013. While holders of the 2015 Notes would have the right to convert their notes if early conversion conditions are met, we do not expect holders of the 2015 Notes to convert their notes under such circumstances because the economic value to the holders of the notes has exceeded and likely will continue to exceed the cash received upon conversion. If the holders of our 2015 Notes elect to convert their notes into cash, we would be required to make cash payments of up to $350 million prior to the maturity of the 2015 Notes. In connection with the 2015 Notes, we entered into the 2015 Notes Hedges and sold warrants to limit our exposure to the additional cash payments above the $350 million principal balance in the event of a cash conversion of the 2015 Notes. The 2015 Notes currently trade at a premium to their if-converted value, and we do not anticipate a conversion of the 2015 Notes by the note holders between March 31, 2013 and June 29, 2013. However, if the holders of the 2015 Notes elect to convert their notes between March 31, 2013 and June 29, 2013, we expect to have sufficient cash, cash equivalents, short-term investments and access to our revolving credit facility to fund any payment resulting from a conversion.
In the case of our 2013 Notes, we may owe shares of our common stock to the note holders upon conversion if our stock price exceeds $21.15 per share. We entered into hedges with counterparties to limit our exposure to the dilution that may result from the issuance of shares upon conversion of the 2013 Notes. In separate transactions, we sold warrants with a strike price of $31.50 per share. We will experience dilution to our stock and to diluted earnings per share from the outstanding warrants to the extent our stock price exceeds $31.50.
We expect to have sufficient cash, cash equivalents, short-term investments and access to our credit facility to fund the maturity of the 2013 Notes in December 2013. The 2013 Notes could become convertible prior to their maturity if certain conversion conditions are met. However, we do not currently expect that any of the conversion conditions will be met prior to the maturity of the 2013 Notes. We also believe that we will have sufficient cash in future periods as well as access to our revolving credit facility to service the maturities of our 2015 Notes, but future changes in our cash position, cash flows from operating activities, cash flows from investing activities, cash flows from financing activities, as well as general business levels and changes in our access to financing may impact our ability to settle the principal amount payable to the holders of the 2013 Notes and 2015 Notes when they mature or convert.
For an additional description of the 2015 Notes and 2013 Notes, the conversion terms thereof and the hedge and warrants transactions, see Note 2 in the notes to condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
A material portion of our revenue, expenses and business activity are transacted in the United States dollar. However, certain of our operations include transactions in foreign currencies that can affect our results of operations. 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 operating 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 the United States dollar against certain foreign currencies are not generally moderated by corresponding fluctuations in our revenues, except for our operations in Japan because we receive some