Document
 
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 September 30, 2017
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 000-15867
_____________________________________ 
cdnslogoa01a01a01a01a03.jpg
CADENCE DESIGN SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
_____________________________________ 
Delaware
 
00-0000000
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
2655 Seely Avenue, Building 5, San Jose, California
 
95134
(Address of Principal Executive Offices)
 
(Zip Code)
(408) 943-1234
Registrant’s Telephone Number, including Area Code
_____________________________________ 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
 
Accelerated filer
o
 
Smaller reporting company
o
 
 
 
 
 
Non-accelerated filer
o
 
(Do not check if a smaller reporting company)
 
 
Emerging growth company
o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.               ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
On September 30, 2017, approximately 282,360,000 shares of the registrant’s common stock, $0.01 par value, were outstanding.



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











PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
 
As of
 
September 30,
2017
 
December 31,
2016
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
678,284

 
$
465,232

Short-term investments
4,135

 
3,057

Receivables, net
170,312

 
157,171

Inventories
36,000

 
39,475

Prepaid expenses and other
42,374

 
37,099

Total current assets
931,105

 
702,034

Property, plant and equipment, net of accumulated depreciation of $648,298 and $612,961, respectively
244,620

 
238,607

Goodwill
574,912

 
572,764

Acquired intangibles, net of accumulated amortization of $283,632 and $267,723, respectively
216,177

 
258,814

Long-term receivables
11,590

 
12,949

Other assets
326,823

 
311,740

Total assets
$
2,305,227

 
$
2,096,908

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

 
$
50,000

Accounts payable and accrued liabilities
199,672

 
239,496

Current portion of deferred revenue
320,462

 
296,066

Total current liabilities
520,134

 
585,562

Long-term liabilities:
 
 
 
Long-term portion of deferred revenue
57,865

 
66,769

Long-term debt
644,146

 
643,493

Other long-term liabilities
72,342

 
59,314

Total long-term liabilities
774,353

 
769,576

Commitments and contingencies (Note 11)


 


Stockholders’ equity:
 
 
 
Common stock and capital in excess of par value
1,807,839

 
1,820,081

Treasury stock, at cost
(1,142,524
)
 
(1,190,053
)
Retained earnings
355,445

 
136,902

Accumulated other comprehensive loss
(10,020
)
 
(25,160
)
Total stockholders’ equity
1,010,740

 
741,770

Total liabilities and stockholders’ equity
$
2,305,227

 
$
2,096,908



See notes to condensed consolidated financial statements.



CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
Revenue:
 
 
 
 
 
 
 
Product and maintenance
$
451,229

 
$
415,370

 
$
1,346,483

 
$
1,247,077

Services
34,169

 
30,850

 
94,827

 
100,026

Total revenue
485,398

 
446,220

 
1,441,310

 
1,347,103

Costs and expenses:
 
 
 
 
 
 
 
Cost of product and maintenance
34,825

 
38,740

 
117,371

 
125,881

Cost of services
19,657

 
17,867

 
59,735

 
54,563

Marketing and sales
104,263

 
96,793

 
311,507

 
297,103

Research and development
206,568

 
191,547

 
600,755

 
553,824

General and administrative
36,302

 
30,441

 
100,892

 
95,129

Amortization of acquired intangibles
3,453

 
3,889

 
11,145

 
14,206

Restructuring and other charges (credits)
(55
)
 
101

 
(2,772
)
 
14,613

Total costs and expenses
405,013

 
379,378

 
1,198,633

 
1,155,319

Income from operations
80,385

 
66,842

 
242,677

 
191,784

Interest expense
(6,225
)
 
(6,053
)
 
(18,952
)
 
(17,306
)
Other income, net
12,387

 
2,836

 
14,370

 
10,441

Income before provision (benefit) for income taxes
86,547

 
63,625

 
238,095

 
184,919

Provision (benefit) for income taxes
5,390

 
(1,087
)
 
19,552

 
20,310

Net income
$
81,157

 
$
64,712

 
$
218,543

 
$
164,609

Net income per share - basic
$
0.30

 
$
0.23

 
0.80

 
0.57

Net income per share - diluted
$
0.29

 
$
0.23

 
0.78

 
0.56

Weighted average common shares outstanding – basic
273,156

 
280,622

 
271,739

 
288,476

Weighted average common shares outstanding – diluted
281,400

 
287,473

 
279,554

 
295,369











See notes to condensed consolidated financial statements.



CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
Net income
$
81,157

 
$
64,712

 
$
218,543

 
$
164,609

Other comprehensive income, net of tax effects:
 
 
 
 
 
 
 
Foreign currency translation adjustments
3,549

 
951

 
13,803

 
2,858

Changes in unrealized holding gains or losses on available-for-sale securities, net of reclassification adjustment for realized gains and losses
1,000

 
122

 
1,248

 
682

Changes in defined benefit plan liabilities
19

 
(238
)
 
89

 
(265
)
Total other comprehensive income, net of tax effects
4,568

 
835

 
15,140

 
3,275

Comprehensive income
$
85,725

 
$
65,547

 
$
233,683

 
$
167,884





































See notes to condensed consolidated financial statements.



CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
Cash and cash equivalents at beginning of period
$
465,232

 
$
616,686

Cash flows from operating activities:
 
 
 
Net income
218,543

 
164,609

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
86,605

 
89,726

Amortization of debt discount and fees
920

 
792

Stock-based compensation
94,008

 
79,986

Gain on investments, net
(12,502
)
 
(4,070
)
Gain on sale of property, plant and equipment

 
(482
)
Deferred income taxes
212

 
8,657

Other non-cash items
3,763

 
1,869

Changes in operating assets and liabilities, net of effect of acquired businesses:
 
 
 
Receivables
(8,040
)
 
2,873

Inventories
2,282

 
(16,339
)
Prepaid expenses and other
(4,627
)
 
(12,135
)
Other assets
(14,469
)
 
(3,822
)
Accounts payable and accrued liabilities
(41,127
)
 
(46,585
)
Deferred revenue
14,245

 
(10,823
)
Other long-term liabilities
4,071

 
(6,239
)
Net cash provided by operating activities
343,884

 
248,017

Cash flows from investing activities:
 
 
 
Purchases of available-for-sale securities

 
(20,525
)
Proceeds from the sale of available-for-sale securities
421

 
55,418

Proceeds from the maturity of available-for-sale securities

 
52,362

Proceeds from the sale of long-term investments
9,108

 
2,913

Proceeds from the sale of property, plant and equipment

 
482

Purchases of property, plant and equipment
(39,676
)
 
(42,452
)
Cash paid in business combinations and asset acquisitions, net of cash acquired
(550
)
 
(41,627
)
Net cash provided by (used for) investing activities
(30,697
)
 
6,571

Cash flows from financing activities:
 
 
 
Proceeds from term loan

 
300,000

Proceeds from revolving credit facility
50,000

 
50,000

Payment on revolving credit facility
(100,000
)
 

Payment of debt issuance costs
(793
)
 
(622
)
Proceeds from issuance of common stock
45,419

 
50,293

Stock received for payment of employee taxes on vesting of restricted stock
(54,130
)
 
(35,532
)
Payments for repurchases of common stock
(50,013
)
 
(720,196
)
Net cash used for financing activities
(109,517
)
 
(356,057
)
Effect of exchange rate changes on cash and cash equivalents
9,382

 
9,116

Increase (decrease) in cash and cash equivalents
213,052

 
(92,353
)
Cash and cash equivalents at end of period
$
678,284

 
$
524,333

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
14,188

 
$
11,238

Cash paid for taxes, net
$
40,021

 
$
27,332






See notes to condensed consolidated financial statements.



CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared by Cadence Design Systems, Inc., or Cadence, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission, or the SEC. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP, have been condensed or omitted pursuant to such rules and regulations. However, Cadence believes that the disclosures contained in this Quarterly Report on Form 10-Q comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These condensed consolidated financial statements are meant to be, and should be, read in conjunction with the consolidated financial statements and the Notes thereto included in Cadence’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Certain prior period balances have been reclassified to conform to current period presentation.
The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q reflect all adjustments (which include only normal, recurring adjustments and those items discussed in these Notes) that are, in the opinion of management, necessary to state fairly the results of operations, cash flows and financial position for the periods and dates presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year. Management has evaluated subsequent events through the issuance date of the unaudited condensed consolidated financial statements.
Use of Estimates
Preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

NOTE 2. DEBT
Cadence’s outstanding debt as of September 30, 2017 and December 31, 2016 was as follows:
 
September 30, 2017
 
December 31, 2016
 
(In thousands)
 
Principal
 
Unamortized Discount
 
Carrying Value
 
Principal
 
Unamortized Discount
 
Carrying Value
Revolving Credit Facility
$

 
$

 
$

 
$
50,000

 
$

 
$
50,000

2019 Term Loan
300,000

 
(278
)
 
299,722

 
300,000

 
(434
)
 
299,566

2024 Notes
350,000

 
(5,576
)
 
344,424

 
350,000

 
(6,073
)
 
343,927

Total outstanding debt
$
650,000

 
$
(5,854
)
 
$
644,146

 
$
700,000

 
$
(6,507
)
 
$
693,493

Revolving Credit Facility
On January 30, 2017, Cadence entered into a five-year senior unsecured revolving credit facility with a group of lenders led by JPMorgan Chase Bank, N.A., as administrative agent, which replaced Cadence’s existing revolving credit facility. The credit facility provides for borrowings up to $350.0 million, with the right to request increased capacity up to an additional $250.0 million upon the receipt of lender commitments, for total maximum borrowings of $600.0 million. The credit facility expires on January 28, 2022 and has no subsidiary guarantors. Any outstanding loans drawn under the credit facility are due at maturity on January 28, 2022. Outstanding borrowings may be paid at any time prior to maturity.
Interest accrues on borrowings under the credit facility at either LIBOR plus a margin between 1.25% and 1.875% per annum or at the base rate plus a margin between 0.25% and 0.875% per annum. Interest is payable quarterly. A commitment fee ranging from 0.15% to 0.30% is assessed on the daily average undrawn portion of revolving commitments.

5


The credit facility contains customary negative covenants that, among other things, restrict Cadence’s ability to incur additional indebtedness, grant liens, make certain investments (including acquisitions), dispose of certain assets and make certain payments, including share repurchases and dividends. In addition, the credit facility contains financial covenants that require Cadence to maintain a funded debt to EBITDA ratio not greater than 3.00 to 1, with a step up to 3.50 to 1 for one year following an acquisition by Cadence of at least $250.0 million that results in a pro forma leverage ratio between 2.75 to 1 and 3.25 to 1. As of September 30, 2017, Cadence was in compliance with all financial covenants associated with the revolving credit facility.
2019 Term Loan
In January 2016, Cadence entered into a $300.0 million three-year senior unsecured non-amortizing term loan facility due on January 28, 2019, or the 2019 Term Loan, with a group of lenders led by JPMorgan Chase Bank, N.A., as administrative agent. On January 30, 2017, Cadence amended the agreement for its 2019 Term Loan. The amendment modified the 2019 Term Loan covenants to make them consistent with the covenants in the revolving credit facility. The other material terms of the 2019 Term Loan remain unchanged.
Amounts outstanding under the 2019 Term Loan initially accrue interest at a rate equal to LIBOR plus a margin of 1.125% per annum, which may increase to a rate equal to LIBOR plus a margin of up to 1.875% per annum, depending on Cadence’s leverage ratio. As of September 30, 2017, the interest rate on Cadence’s 2019 Term Loan was 2.57%.
The 2019 Term Loan contains customary negative covenants that, among other things, restrict Cadence’s ability to incur additional indebtedness, grant liens, make certain investments (including acquisitions), dispose of certain assets and make certain payments, including share repurchases and dividends. In addition, the term loan agreement contains certain financial covenants that require Cadence to maintain a funded debt to EBITDA ratio not greater than 3.00 to 1, with a step-up to 3.50 to 1 for one year following an acquisition by Cadence of at least $250.0 million that results in a pro forma leverage ratio between 2.75 to 1 and 3.25 to 1. As of September 30, 2017, Cadence was in compliance with all financial covenants associated with the 2019 Term Loan.
2024 Notes
In October 2014, Cadence issued $350.0 million aggregate principal amount of 4.375% Senior Notes due October 15, 2024, or the 2024 Notes. Cadence received net proceeds of $342.4 million from the issuance of the 2024 Notes, net of a discount of $1.4 million and issuance costs of $6.2 million. Both the discount and issuance costs are being amortized to interest expense over the term of the 2024 Notes using the effective interest method. Interest is payable in cash semi-annually in April and October. The 2024 Notes are unsecured and rank equal in right of payment to all of Cadence’s existing and future senior indebtedness.
Cadence may redeem the 2024 Notes, in whole or in part, at a redemption price equal to the greater of (a) 100% of the principal amount of the notes to be redeemed and (b) the sum of the present values of the remaining scheduled payments of principal and interest, plus any accrued and unpaid interest, as more particularly described in the indenture governing the 2024 Notes.
The indenture governing the 2024 Notes includes customary representations, warranties and restrictive covenants, including, but not limited to, restrictions on Cadence’s ability to grant liens on assets, enter into sale and lease-back transactions, or merge, consolidate or sell assets, and also includes customary events of default. As of September 30, 2017, Cadence was in compliance with all financial covenants associated with the 2024 Notes.

NOTE 3. CASH, CASH EQUIVALENTS AND INVESTMENTS
Cadence’s cash, cash equivalents and short-term investments at fair value as of September 30, 2017 and December 31, 2016 were as follows:
 
As of
 
September 30,
2017
 
December 31,
2016
 
(In thousands)
Cash and cash equivalents
$
678,284

 
$
465,232

Short-term investments
4,135

 
3,057

Cash, cash equivalents and short-term investments
$
682,419

 
$
468,289


6


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 September 30, 2017 and December 31, 2016:
 
As of
 
September 30,
2017
 
December 31,
2016
 
(In thousands)
Cash and interest bearing deposits
$
188,797

 
$
227,508

Money market funds
489,487

 
237,724

Total cash and cash equivalents
$
678,284

 
$
465,232

Short-Term Investments
The following tables summarize Cadence’s short-term investments as of September 30, 2017 and December 31, 2016:
 
As of September 30, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Marketable equity securities
$
1,961

 
$
2,174

 
$

 
$
4,135

 
As of December 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Marketable equity securities
$
2,131

 
$
926

 
$

 
$
3,057

Realized gains and losses from the sale of marketable equity securities are recorded in other income, net in the condensed consolidated income statements.
Non-Marketable Investments
Cadence’s non-marketable investments generally consist of voting preferred stock, convertible debt or other instruments of privately-held entities and are included in other assets on Cadence’s condensed consolidated balance sheets. Cadence’s non-marketable investments had a carrying value of $3.2 million as of September 30, 2017 and December 31, 2016.
Cadence records realized gains and losses from the sale of non-marketable investments and write-downs related to cost method investments due to other-than-temporary declines in value in the condensed consolidated income statements as other income, net. During the three months ended September 30, 2017, Cadence recognized a gain of $9.1 million from the sale of one of its non-marketable investments.


7


NOTE 4. RECEIVABLES, NET
Cadence’s current and long-term receivables balances as of September 30, 2017 and December 31, 2016 were as follows:
 
As of
 
September 30,
2017
 
December 31,
2016
 
(In thousands)
Accounts receivable
$
95,274

 
$
85,554

Unbilled accounts receivable
75,038

 
71,617

Long-term receivables
11,590

 
12,949

Total receivables
181,902

 
170,120

Less allowance for doubtful accounts

 

Total receivables, net
$
181,902

 
$
170,120

Cadence’s customers are primarily concentrated within the semiconductor and electronics systems industries. As of September 30, 2017 and December 31, 2016, no one customer accounted for 10% or more of Cadence’s total receivables.

NOTE 5. GOODWILL AND ACQUIRED INTANGIBLES
Goodwill
The changes in the carrying amount of goodwill during the nine months ended September 30, 2017 were as follows:
 
Gross Carrying
Amount
 
(In thousands)
Balance as of December 31, 2016
$
572,764

Effect of foreign currency translation
2,148

Balance as of September 30, 2017
$
574,912

Acquired Intangibles, Net
Acquired intangibles as of September 30, 2017 were as follows, excluding intangibles that were fully amortized as of December 31, 2016:
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Acquired
Intangibles, Net
 
(In thousands)
Existing technology
$
340,772

 
$
(189,572
)
 
$
151,200

Agreements and relationships
150,018

 
(87,154
)
 
62,864

Tradenames, trademarks and patents
9,019

 
(6,906
)
 
2,113

Total acquired intangibles
$
499,809

 
$
(283,632
)
 
$
216,177

Acquired intangibles as of December 31, 2016 were as follows, excluding intangibles that were fully amortized as of January 2, 2016:
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Acquired
Intangibles, Net
 
(In thousands)
Existing technology
$
342,108

 
$
(160,178
)
 
$
181,930

Agreements and relationships
174,623

 
(100,778
)
 
73,845

Tradenames, trademarks and patents
9,806

 
(6,767
)
 
3,039

Total acquired intangibles
$
526,537

 
$
(267,723
)
 
$
258,814


8


Amortization expense from existing technology and maintenance agreements is included in cost of product and maintenance. Amortization of acquired intangibles for the three and nine months ended September 30, 2017 and October 1, 2016 was as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
 
(In thousands)
Cost of product and maintenance
$
10,165

 
$
10,593

 
$
31,611

 
$
31,802

Amortization of acquired intangibles
3,453

 
3,889

 
11,145

 
14,206

Total amortization of acquired intangibles
$
13,618

 
$
14,482

 
$
42,756

 
$
46,008

Estimated amortization expense for intangible assets with definite lives for the following five fiscal years and thereafter is as follows:
 
(In thousands)
2017 – remaining period
$
13,619

2018
52,193

2019
45,183

2020
39,975

2021
35,484

Thereafter
29,723

Total estimated amortization expense
$
216,177


NOTE 6. STOCK REPURCHASE PROGRAM
In January 2017, Cadence’s Board of Directors authorized the repurchase of shares of Cadence’s common stock with a value of up to $525.0 million in the aggregate. The actual timing and amount of repurchases are subject to business and market conditions, corporate and regulatory requirements, acquisition opportunities and other factors. As of September 30, 2017, $475.0 million remained available to repurchase shares of our common stock under the current authorization.
The shares repurchased under Cadence’s repurchase authorizations and the total cost of repurchased shares, including commissions, during the three and nine months ended September 30, 2017 and October 1, 2016 were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
 
(In thousands)
Shares repurchased
1,331

 
9,596

 
1,331

 
31,177

Total cost of repurchased shares
$
50,013

 
$
240,096

 
$
50,013

 
$
720,196



9


NOTE 7. STOCK-BASED COMPENSATION
Stock-based compensation expense is reflected in Cadence’s condensed consolidated income statements for the three and nine months ended September 30, 2017 and October 1, 2016 as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
 
(In thousands)
Cost of product and maintenance
$
612

 
$
550

 
$
1,632

 
$
1,461

Cost of services
895

 
807

 
2,373

 
2,141

Marketing and sales
7,422

 
6,040

 
19,667

 
16,881

Research and development
21,792

 
18,002

 
55,288

 
46,376

General and administrative
5,369

 
4,599

 
15,048

 
13,127

Total stock-based compensation expense
$
36,090

 
$
29,998

 
$
94,008

 
$
79,986

Cadence had total unrecognized compensation expense related to stock option and restricted stock grants of $277.5 million as of September 30, 2017, which will be recognized over the remaining vesting period. The remaining weighted-average vesting period of unvested awards is 2.3 years.

NOTE 8. RESTRUCTURING AND OTHER CHARGES
Cadence has initiated various restructuring plans, most recently in fiscal 2016, in an effort to better align its resources with its business strategy. These restructuring plans have primarily been comprised of severance payments and termination benefits related to headcount reductions, estimated lease losses related to facilities vacated under the restructuring plans and charges related to assets abandoned as part of the restructuring plans. During the nine months ended September 30, 2017, Cadence revised certain estimates made in connection with its 2016 restructuring plans and recorded credits of approximately $2.8 million. As of September 30, 2017, total liabilities related to the 2016 restructuring plans were $3.6 million. Cadence expects to make cash payments for severance and related benefits for the 2016 restructuring plans through the first quarter of fiscal 2019.
The following table presents activity relating to Cadence’s restructuring plans during the nine months ended September 30, 2017:
 
Severance
and
Benefits
 
Excess
Facilities
 
Total
 
(In thousands)
Balance, December 31, 2016
$
24,402

 
$
58

 
$
24,460

Restructuring and other charges (credits):
 
 
 
 
 
2016 Restructuring Plans
(2,905
)
 
79

 
(2,826
)
Prior restructuring plans
2

 
52

 
54

Cash payments
(18,111
)
 
(162
)
 
(18,273
)
Effect of foreign currency translation
242

 
(3
)
 
239

Balance, September 30, 2017
$
3,630

 
$
24

 
$
3,654

The remaining liability for Cadence’s restructuring plans is recorded in the condensed consolidated balance sheet as follows:
 
As of
 
September 30, 2017
 
(In thousands)
Accounts payable and accrued liabilities
$
3,457

Other long-term liabilities
197

Total liabilities
$
3,654


10



NOTE 9. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income during the period by the weighted average number of shares of common stock outstanding during that period, less unvested restricted stock awards. Diluted net income per share is impacted by equity instruments considered to be potential common shares, if dilutive, computed using the treasury stock method of accounting.
The calculations for basic and diluted net income per share for the three and nine months ended September 30, 2017 and October 1, 2016 are as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
 
(In thousands, except per share amounts)
Net income
$
81,157

 
$
64,712

 
$
218,543

 
$
164,609

Weighted average common shares used to calculate basic net income per share
273,156

 
280,622

 
271,739

 
288,476

Stock-based awards
8,244

 
6,851

 
7,815

 
6,893

Weighted average common shares used to calculate diluted net income per share
281,400

 
287,473

 
279,554

 
295,369

Net income per share - basic
$
0.30

 
$
0.23

 
$
0.80

 
$
0.57

Net income per share - diluted
$
0.29

 
$
0.23

 
$
0.78

 
$
0.56

The following table presents shares of Cadence’s common stock outstanding for the three and nine months ended September 30, 2017 and October 1, 2016 that were excluded from the computation of diluted net income per share because the effect of including these shares in the computation of diluted net income per share would have been anti-dilutive:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
 
(In thousands)
Long-term performance-based stock awards
100

 
1,250

 
186

 
1,008

Options to purchase shares of common stock

 
160

 
404

 
729

Non-vested shares of restricted stock
12

 
7

 
62

 
36

Total potential common shares excluded
112

 
1,417

 
652

 
1,773


NOTE 10. 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.

11


This hierarchy requires Cadence to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. Cadence recognizes transfers between levels of the hierarchy based on the fair values of the respective financial instruments at the end of the reporting period in which the transfer occurred. There were no transfers between levels of the fair value hierarchy during the nine months ended September 30, 2017.
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 September 30, 2017 and December 31, 2016:
 
Fair Value Measurements as of September 30, 2017
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
489,487

 
$
489,487

 
$

 
$

Short-term investments:

 
 
 
 
 
 
Marketable equity securities
4,135

 
4,135

 

 

Trading securities held in Non-Qualified Deferred Compensation, or NQDC, trust
29,498

 
29,498

 

 

Total Assets
$
523,120

 
$
523,120

 
$

 
$

 
 
 
 
 
 
 
 
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Liabilities
 
Foreign currency exchange contracts
$
1,971

 
$

 
$
1,971

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements as of December 31, 2016
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets
 
Cash equivalents:


 
 
 
 
 
 
Money market funds
$
237,724

 
$
237,724

 
$

 
$

Short-term investments:
 
 
 
 
 
 
 
Marketable equity securities
3,057

 
3,057

 

 

Trading securities held in NQDC trust
26,622

 
26,622

 

 

Total Assets
$
267,403

 
$
267,403

 
$

 
$

 
 
 
 
 
 
 
 
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Liabilities
 
Foreign currency exchange contracts
$
2,653

 
$

 
$
2,653

 
$



12


NOTE 11. CONTINGENCIES
Legal Proceedings
From time to time, Cadence is involved in various disputes and litigation that arise in the ordinary course of business. These include disputes and lawsuits related to intellectual property, indemnification obligations, mergers and acquisitions, licensing, contracts, distribution arrangements and employee relations matters. At least quarterly, Cadence reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount or the range of loss can be estimated, Cadence accrues a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on Cadence’s judgments using the best information available at the time. As additional information becomes available, Cadence reassesses the potential liability related to pending claims and litigation matters and may revise estimates.
Other Contingencies
Cadence provides its customers with a warranty on sales of hardware products, generally for a 90-day period. Cadence did not incur any significant costs related to warranty obligations during the three and nine months ended September 30, 2017 and October 1, 2016.
Cadence’s product license and services agreements typically include a limited indemnification provision for claims from third parties relating to Cadence’s intellectual property. If the potential loss from any indemnification claim is considered probable and the amount or the range of loss can be estimated, Cadence accrues a liability for the estimated loss. The indemnification is generally limited to the amount paid by the customer. Cadence did not incur any significant losses from indemnification claims during the three and nine months ended September 30, 2017 and October 1, 2016.
Non-Income Based Taxes
Cadence undergoes examination from time to time by U.S. and foreign authorities for non-income based taxes, such as payroll, sales, use, value-added, net worth or franchise, property, goods and services, consumption, import, stamp and excise taxes. Cadence is under examination by tax authorities in certain jurisdictions. If the potential loss from the examinations is considered probable and the amount or the range of loss can be estimated, Cadence accrues a liability for the estimated expense. Tax examinations and the related appeals processes 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 losses related to the non-income based taxes and may revise estimates.

NOTE 12. OTHER COMPREHENSIVE LOSS
Cadence’s other comprehensive loss is comprised of foreign currency translation losses, changes in defined benefit plan liabilities, and changes in unrealized holding gains and losses on available-for-sale securities net of reclassifications for realized gains and losses, as presented in Cadence’s condensed consolidated statements of comprehensive income.
Accumulated other comprehensive loss was comprised of the following as of September 30, 2017 and December 31, 2016:
 
As of
 
September 30,
2017
 
December 31,
2016
 
(In thousands)
Foreign currency translation loss
$
(8,567
)
 
$
(22,370
)
Changes in defined benefit plan liabilities
(3,627
)
 
(3,716
)
Unrealized holding gains on available-for-sale securities
2,174

 
926

Total accumulated other comprehensive loss
$
(10,020
)
 
$
(25,160
)
For the three and nine months ended September 30, 2017 and October 1, 2016 there were no significant amounts reclassified from accumulated other comprehensive loss to net income.


13


NOTE 13. SEGMENT REPORTING
Segment reporting is based on the “management approach,” following the method that management organizes the company’s reportable segments for which separate financial information is made available to, and evaluated regularly by, the chief operating decision maker in allocating resources and in assessing performance. Cadence’s chief operating decision maker is its President and CEO, who reviews Cadence’s consolidated results as one operating segment. In making operating decisions, the CEO primarily considers consolidated financial information, accompanied by disaggregated information about revenues by geographic region.
Outside the United States, Cadence markets and supports its products and services primarily through its subsidiaries. Revenue is attributed to geography based upon the country in which the product is used or services are delivered. Long-lived assets are attributed to geography based on the country where the assets are located.
The following table presents a summary of revenue by geography for the three and nine months ended September 30, 2017 and October 1, 2016:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
 
(In thousands)
Americas:
 
 
 
 
 
 
 
United States
$
208,348

 
$
197,715

 
$
620,525

 
$
614,153

Other Americas
7,938

 
6,924

 
25,749

 
23,361

Total Americas
216,286

 
204,639

 
646,274

 
637,514

Asia
131,890

 
120,206

 
385,708

 
330,417

Europe, Middle East and Africa
94,681

 
83,124

 
284,415

 
257,308

Japan
42,541

 
38,251

 
124,913

 
121,864

Total
$
485,398

 
$
446,220

 
$
1,441,310

 
$
1,347,103

The following table presents a summary of long-lived assets by geography as of September 30, 2017 and December 31, 2016: 
 
As of
 
September 30,
2017
 
December 31,
2016
 
(In thousands)
Americas:
 
 
 
United States
$
194,245

 
$
193,750

Other Americas
641

 
757

Total Americas
194,886

 
194,507

Asia
34,925

 
30,564

Europe, Middle East and Africa
14,106

 
12,692

Japan
703

 
844

Total
$
244,620

 
$
238,607




14


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 31, 2016. This Quarterly Report contains statements that are not historical in nature, are predictive, or that depend upon or refer to future events or conditions or contain forward-looking statements. Statements including, but not limited to, statements regarding the extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of our products, statements regarding our reliance on third parties and other statements using words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “plans,” “projects,” “should,” “will” and “would,” and words of similar import and the negatives thereof, constitute forward-looking statements. These statements are predictions based upon our current expectations about future events. Actual results could vary materially as a result of certain factors, including, but not limited to, those expressed in these statements. We refer you to the “Risk Factors,” “Results of Operations,” “Quantitative and Qualitative 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 enable our customers to design electronic products. Our products and services are designed to give our customers a competitive edge in their development of electronic systems, integrated circuits, or ICs, electronic devices and increasingly sophisticated manufactured products, by optimizing performance, minimizing power consumption, shortening the time to bring their products to market and reducing their design, development and manufacturing costs. We offer software, hardware, services and reusable IC design blocks, which are commonly referred to as intellectual property, or IP.
System Design Enablement, or SDE, is our overall strategy to provide the technologies necessary for our customers to develop a complete and functional electronic product. Our SDE strategy enables us to address the growing trends of electronic systems companies developing their own ICs as part of their end product systems, as well as semiconductor companies delivering greater portions of the systems into which their IC products are integrated. Demand for our products is driven by our customers’ investment in new designs and products.
We combine our products and technologies into categories related to major design activities:
Functional Verification, including Emulation and Prototyping Hardware;
Digital IC Design and Signoff;
Custom IC Design;
System Interconnect and Analysis; and
IP.
For additional information about our products, see the discussion in Item 1, “Business,” under the heading “Products and Product Strategy,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
We have identified certain items that management uses as performance indicators to manage our business, including revenue, certain elements of operating expenses and cash flow from operations, and we describe these items further below under the headings “Results of Operations” and “Liquidity and Capital Resources.”
Critical Accounting Estimates
In preparing our condensed consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income and net income, as well as on the value of certain assets and liabilities on our condensed consolidated balance sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. At least quarterly, we evaluate our assumptions, judgments and estimates, and make changes as deemed necessary. 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 31, 2016.

15


New Accounting Standards
Revenue Recognition
In May 2014, the FASB issued Accounting Standards Update, or ASU, 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605).” Under Topic 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, Topic 606 requires enhanced disclosures, including disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued several amendments to the standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations. Topic 606 will be effective for us beginning with the first quarter of fiscal 2018.
While we continue to assess all potential impacts of Topic 606, we currently expect:
Our revenue mix will remain approximately 90% recurring, or recognizable over time, under both Topic 605 and Topic 606;
The use of the cumulative catch-up method upon adoption of Topic 606 requires us to evaluate only contracts that are effective on the adoption date as if that contract had been accounted for under Topic 606;
A small percentage of our existing backlog at the beginning of fiscal 2018 will be adjusted through retained earnings upon adoption of Topic 606 and such backlog will not be recognized as revenue in future periods under Topic 606;
Because of the transition method, revenue generated under Topic 606 will be slightly lower than Topic 605 in the year of adoption; and
In 2018, the year of adoption, we will report revenue under Topic 606 with supplemental disclosures of what revenue would have been under Topic 605.
We currently expect to continue to recognize revenue over time for our time-based software arrangements, which represents a significant percentage of our total revenue, because the multiple software licenses and related updates in our time-based arrangements constitute a single, combined performance obligation. The timing of revenue recognition for our hardware and professional services is expected to remain substantially unchanged.
We currently believe the adoption of Topic 606 will impact our accounting for multiple element arrangements, or MEAs, that combine many software-related deliverables, which may include multiple software contracts with varying terms, IP licenses, and/or service elements. Topic 605 requires vendor-specific objective evidence, or VSOE, to recognize revenue separately for the different undelivered elements. We have not established VSOE under Topic 605, thus the revenue related to these agreements is generally recognized over time beginning with the delivery of the last specified deliverable and ending on the latest end date. Topic 606 requires us to separate the different elements through the use of stand-alone selling prices, or SSPs, and to recognize the revenue allocated to the different elements as if those elements had been sold on a standalone basis, either up front or over time. We expect certain IP license agreements to be recognized up front under Topic 606, as opposed to over time under Topic 605. We also expect certain software agreements to be recognized over time under Topic 606, as opposed to up front under Topic 605. Despite these changes, we expect our revenue mix will remain consistent such that approximately 90% of our revenue is recognized over time.
More judgment and estimates will be required under Topic 606 than are required under Topic 605, including estimating the SSP for each performance obligation identified within our contracts. Due to the complexity of certain contracts, the actual revenue recognition treatment required under the new standard for these arrangements may be dependent on contract-specific terms and vary in some instances.
Topic 606 permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or modified retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). We currently anticipate adopting the standard using the cumulative catch-up transition method.
Under the cumulative catch-up transition method, we will evaluate each contract that is effective on the adoption date as if that contract had been accounted for under Topic 606 from contract inception. Some revenue related to the MEAs and IP arrangements noted above that would have been recognized in future periods under Topic 605 will be recast under Topic 606 as if the revenue had been recognized in prior periods. As this transition method requires that we not adjust historical reported revenue amounts, the revenue that would have been recognized under this method prior to the adoption date will be an adjustment to retained earnings and will not be recognized as revenue in future periods as previously planned. Because of this transition method, we expect that a small percentage of our year-end backlog will be adjusted to retained earnings upon adoption.

16


Topic 606 also requires the deferral of incremental costs of obtaining a contract with a customer. This will require that we capitalize commission costs directly related to obtaining customer contracts, and we will amortize those costs over the life of the contract. Due to the broad scope and complexity associated with Topic 606, we are currently implementing systems and processes to assist in the adoption of this new accounting standard.
Financial Instruments
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which will impact certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The updated standard becomes effective for us in the first quarter of fiscal 2018. Upon the effective date of the new standard, all equity investments in unconsolidated entities, other than those accounted for using the equity method of accounting, will generally be measured at fair value with the changes in fair value recognized through earnings. There will no longer be an available-for-sale classification for equity investments and therefore, the changes in the fair value of our marketable equity securities will no longer be reported in other comprehensive income (loss).
The updated standard also simplifies the impairment assessment of investments without readily determinable fair values by requiring a qualitative assessment of investments at each reporting period. The new guidance must be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption. We do not anticipate that the adoption of this standard will have a significant impact on our consolidated financial statements or the related disclosures based on our current holdings of equity investments.
Leases
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” requiring, among other things, the recognition of lease liabilities and corresponding right-of-use assets on the balance sheet by lessees for certain lease arrangements that are classified as operating leases under the previous standard. While we are continuing to assess the potential impacts of the standard, we anticipate that the adoption of this standard will have a material impact on our consolidated balance sheets and may require changes to our systems and processes. We currently expect the most significant impact will be the recognition of right-of-use assets and lease liabilities for operating leases.
The updated standard becomes effective for us in the first quarter of fiscal 2019 and requires the use of a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements.
Income Tax
In October 2016, the FASB issued ASU 2016-16, “Income taxes (Topic 740): Intra-entity Transfers of Assets Other Than Inventory.” The new guidance requires the recognition of the income tax consequences of an intra-entity asset transfer when the transfer occurs. For intra-entity transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The new standard becomes effective for us in the first quarter of fiscal 2018. The new guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We are currently evaluating the effects that the adoption of this guidance will have on our consolidated financial statements. We anticipate the potential for increased volatility in future effective tax rates from the adoption of this guidance.
Business Combinations
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” that revises the definition of a business as it relates to acquisitions, disposals, goodwill impairments and consolidations. The updated standard becomes effective for us in the first quarter of fiscal 2018, and early adoption is permitted. We are currently evaluating the effect of adopting the new standard.
Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” that eliminates “Step 2” from the goodwill impairment test. The new standard is effective for us in the first quarter of fiscal 2020, and early adoption is permitted. The new guidance must be applied on a prospective basis. We do not anticipate that the adoption of this standard will have a significant impact on our consolidated financial statements or the related disclosures.
Stock-based Compensation
In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,” that provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The new standard is effective for us in the first quarter of fiscal 2018. The new guidance must be applied on a prospective basis. We do not anticipate that the adoption of this standard will have a significant impact on our consolidated financial statements or the related disclosures.

17


Results of Operations
Financial results for the three and nine months ended September 30, 2017, as compared to the three and nine months ended October 1, 2016, reflect the following:
increased product and maintenance revenue resulting from overall growth in our software and IP business, particularly in Asia, partially offset by lower emulation and prototyping hardware revenue; and
continued investment in research and development activities focused on creating and enhancing our products.
Revenue
We primarily generate revenue from licensing our software and IP, selling or leasing our emulation and prototyping hardware technology, providing maintenance for our software, hardware and IP, providing engineering services and earning royalties generated from the use of our IP. The timing of our revenue is significantly affected by the mix of software, hardware and IP products generating revenue in any given period and whether the revenue is recognized over multiple periods or up front, upon completion of delivery.
Approximately 90% of our revenue is recognized over time, and the remainder of the resulting revenue is recognized up front, upon completion of delivery. Revenue recognized over time includes revenue from our time-based software arrangements, certain IP license arrangements where revenue is recognized over multiple periods, services, royalties from certain IP arrangements, maintenance on perpetual software licenses and hardware, and operating leases of hardware. Upfront revenue is primarily generated by our sales of emulation and prototyping hardware and perpetual software and certain IP licenses. Our ability to maintain this mix in any single fiscal period may be impacted primarily by delivery of hardware and IP products to our customers.
Revenue by Period
The following table shows our revenue for the three months ended September 30, 2017 and October 1, 2016 and the change in revenue between periods:
 
Three Months Ended
 
Change
 
September 30,
2017
 
October 1,
2016
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance
$
451.2

 
$
415.4

 
$
35.8

 
9
%
Services
34.2

 
30.8

 
3.4

 
11
%
Total revenue
$
485.4

 
$
446.2

 
$
39.2

 
9
%
The following table shows our revenue for the nine months ended September 30, 2017 and October 1, 2016 and the change in revenue between periods:
 
Nine Months Ended
 
Change
 
September 30,
2017
 
October 1,
2016
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance
$
1,346.5

 
$
1,247.1

 
$
99.4

 
8
 %
Services
94.8

 
100.0

 
(5.2
)
 
(5
)%
Total revenue
$
1,441.3

 
$
1,347.1

 
$
94.2

 
7
 %
Product and maintenance revenue may fluctuate from period to period and by geography based on demand for emulation hardware and IP offerings. Product and maintenance revenue increased during the three and nine months ended September 30, 2017, as compared to the three and nine months ended October 1, 2016, primarily because of growth in our software and IP business, partially offset by lower emulation and prototyping hardware revenue.
Services revenue may fluctuate from period to period based on demand for, and our available resources to fulfill, our services and IP offerings.
No one customer accounted for 10% or more of total revenue during the three and nine months ended September 30, 2017 or October 1, 2016.

18


Revenue by Product Group
The following table shows the percentage of revenue contributed by each of our five product categories and services for the past five consecutive quarters:
 
Three Months Ended
 
October 1,
2016
 
December 31,
2016
 
April 1,
2017
 
July 1,
2017
 
September 30,
2017
Functional Verification, including Emulation and Prototyping Hardware
24
%
 
25
%
 
23
%
 
23
%
 
21
%
Digital IC Design and Signoff
28
%
 
30
%
 
29
%
 
30
%
 
30
%
Custom IC Design
27
%
 
25
%
 
26
%
 
26
%
 
28
%
System Interconnect and Analysis
10
%
 
9
%
 
10
%
 
10
%
 
10
%
IP
11
%
 
11
%
 
12
%
 
11
%
 
11
%
Total
100
%
 
100
%
 
100
%
 
100
%
 
100
%
Revenue by product group fluctuates from period to period based on demand for, and our resources to fulfill, our services, emulation hardware and IP offerings. 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 31, 2016, certain of our licensing arrangements allow customers the ability to remix among software products. Additionally, we have arrangements with customers that include a combination of our products, with the actual product selection and number of licensed users to be determined at a later date. For these arrangements, we estimate the allocation of the revenue to product groups based upon the expected usage of our products. The actual usage of our products by these customers may differ and, if that proves to be the case, the revenue allocation in the table above would differ.
Revenue by Geography
 
Three Months Ended
 
Change
 
September 30,
2017
 
October 1,
2016
 
Amount
 
Percentage
 
(In millions, except percentages)
United States
$
208.4

 
$
197.7

 
$
10.7

 
5
%
Other Americas
7.9

 
6.9

 
1.0

 
14
%
Asia
131.9

 
120.2

 
11.7

 
10
%
Europe, Middle East and Africa
94.7

 
83.1

 
11.6

 
14
%
Japan
42.5

 
38.3

 
4.2

 
11
%
Total revenue
$
485.4

 
$
446.2

 
$
39.2

 
9
%
 
Nine Months Ended
 
Change
 
September 30,
2017
 
October 1,
2016
 
Amount
 
Percentage
 
(In millions, except percentages)
United States
$
620.5

 
$
614.1

 
$
6.4

 
1
%
Other Americas
25.8

 
23.4

 
2.4

 
10
%
Asia
385.7

 
330.4

 
55.3

 
17
%
Europe, Middle East and Africa
284.4

 
257.3

 
27.1

 
11
%
Japan
124.9

 
121.9

 
3.0

 
2
%
Total revenue
$
1,441.3

 
$
1,347.1

 
$
94.2

 
7
%
Revenue by geography fluctuates from period to period based on demand for, and our resources to fulfill, our services, emulation hardware and IP offerings.
Most of our revenue is transacted in the United States dollar. However, certain revenue transactions are denominated in foreign currencies. For an additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see the discussion under Item 3, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”

19


Revenue by Geography as a Percent of Total Revenue
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
United States
43
%
 
44
%
 
43
%
 
46
%
Other Americas
2
%
 
2
%
 
2
%
 
2
%
Asia
27
%
 
27
%
 
26
%
 
25
%
Europe, Middle East and Africa
19
%
 
19
%
 
20
%
 
19
%
Japan
9
%
 
8
%
 
9
%
 
8
%
Total
100
%
 
100
%
 
100
%
 
100
%
Cost of Revenue
 
Three Months Ended
 
Change
 
September 30,
2017
 
October 1,
2016
 
Amount
 
Percentage
 
(In millions, except percentages)
Cost of product and maintenance
$
34.8

 
$
38.7

 
$
(3.9
)
 
(10
)%
Cost of services
19.7

 
17.9

 
1.8

 
10
 %
 
Nine Months Ended
 
Change
 
September 30,
2017
 
October 1,
2016
 
Amount
 
Percentage
 
(In millions, except percentages)
Cost of product and maintenance
$
117.4

 
$
125.9

 
$
(8.5
)
 
(7
)%
Cost of services
59.7

 
54.6

 
5.1

 
9
 %
Cost of Product and Maintenance
Cost of product and maintenance includes costs associated with the sale and lease of our emulation and prototyping hardware and licensing of our software and IP products, certain employee salary and benefits and other employee-related costs, cost of our customer support services, amortization of technology-related and maintenance-related acquired intangibles, costs of technical documentation and royalties payable to third-party vendors. Costs associated with our emulation and prototyping hardware products include materials, assembly, testing, applicable reserves and overhead. These hardware manufacturing costs make our cost of emulation and prototyping hardware 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
 
September 30,
2017
 
October 1,
2016
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance-related costs
$
24.6

 
$
28.1

 
$
(3.5
)
 
(12
)%
Amortization of acquired intangibles
10.2

 
10.6

 
(0.4
)
 
(4
)%
Total cost of product and maintenance
$
34.8

 
$
38.7

 
$
(3.9
)
 
(10
)%
 
Nine Months Ended
 
Change
 
September 30,
2017
 
October 1,
2016
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance-related costs
$
85.8

 
$
94.1

 
$
(8.3
)
 
(9
)%
Amortization of acquired intangibles
31.6

 
31.8

 
(0.2
)
 
(1
)%
Total cost of product and maintenance
$
117.4

 
$
125.9

 
$
(8.5
)
 
(7
)%

20


Cost of product and maintenance depends primarily on our hardware product sales in any given period. Cost of product and maintenance is also affected by employee salary and benefits and other employee-related costs, as well as the timing and extent to which we acquire intangible assets, acquire or license third-parties’ intellectual property or technology and sell our products that include such acquired or licensed intellectual property or technology.
The changes in product and maintenance-related costs for the three and nine months ended September 30, 2017, as compared to the three and nine months ended October 1, 2016, were due to the following:
 
Change
 
Three Months Ended
 
Nine Months Ended
 
(In millions)
Emulation and prototyping hardware costs
$
(3.5
)
 
$
(5.3
)
Salary, benefits and other employee-related costs
(0.4
)
 
(3.3
)
Other items
0.4

 
0.3

Total change in product and maintenance-related costs
$
(3.5
)
 
$
(8.3
)
Emulation and prototyping hardware costs decreased during the three and nine months ended September 30, 2017, as compared to the three and nine months ended October 1, 2016, primarily due to lower emulation and prototyping hardware revenue. Gross margins on our hardware products will fluctuate based on product life cycle, product competition, product mix and pricing strategies.
Salary, benefits and other employee-related costs decreased during the three and nine months ended September 30, 2017, as compared to the three and nine months ended October 1, 2016, primarily due to a reduction in headcount.
Cost of Services
Cost of services primarily includes employee salary, benefits and other employee-related costs to perform work on revenue-generating projects, costs to maintain the infrastructure necessary to manage a services organization, and provisions for contract losses, if any. Cost of services will fluctuate from period to period based on our utilization of design services engineers on revenue-generating projects or on internal development projects.
Operating Expenses
Our operating expenses include marketing and sales, research and development and general and administrative expenses. Factors that cause our operating expenses to fluctuate include changes in the number of employees due to hiring and acquisitions, restructuring activities, foreign exchange rates, stock-based compensation and the impact of our variable compensation programs that are driven by overall operating results.
Salary, benefits and other employee-related costs and facilities and other infrastructure costs included in operating expenses increased during the three and nine months ended September 30, 2017, as compared to the three and nine months ended October 1, 2016, primarily due to an increase in headcount resulting from additional hiring and our 2016 acquisitions.
Stock-based compensation included in our operating expenses increased during the three and nine months ended September 30, 2017, as compared to the three and nine months ended October 1, 2016, primarily because successive increases in the price of our common stock have resulted in higher grant-date fair values for the mix of stock awards expensed in each period. We expect stock-based compensation included in operating expenses to increase during the remainder of fiscal 2017, as compared to fiscal 2016, due to higher grant-date fair values of stock awards vesting during fiscal 2017.
Many of our operating expenses are transacted in various foreign currencies. We recognize lower expenses in periods when the United States dollar strengthens in value against other currencies and we recognize higher expenses when the United States dollar weakens against other currencies. For an additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see the discussion in Item 3, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”

21


Our operating expenses for the three and nine months ended September 30, 2017 and October 1, 2016 were as follows:
 
Three Months Ended
 
Change
 
September 30,
2017
 
October 1,
2016
 
Amount
 
Percentage
 
(In millions, except percentages)
Marketing and sales
$
104.3

 
$
96.8

 
$
7.5

 
8
%
Research and development
206.6

 
191.5

 
15.1

 
8
%
General and administrative
36.3

 
30.4

 
5.9

 
19
%
Total operating expenses
$
347.2

 
$
318.7

 
$
28.5

 
9
%
 
Nine Months Ended
 
Change
 
September 30,
2017
 
October 1,
2016
 
Amount
 
Percentage
 
(In millions, except percentages)
Marketing and sales
$
311.5

 
$
297.1

 
$
14.4

 
5
%
Research and development
600.8

 
553.8

 
47.0

 
8
%
General and administrative
100.9

 
95.1

 
5.8

 
6
%
Total operating expenses
$
1,013.2

 
$
946.0

 
$
67.2

 
7
%
Our operating expenses, as a percentage of total revenue, for the three and nine months ended September 30, 2017 and October 1, 2016 were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
Marketing and sales
21
%
 
22
%
 
22
%
 
22
%
Research and development
43
%
 
43
%
 
42
%
 
41
%
General and administrative
7
%
 
7
%
 
7
%
 
7
%
Total operating expenses
71
%
 
72
%
 
71
%
 
70
%
Marketing and Sales
The changes in marketing and sales expense for the three and nine months ended September 30, 2017, as compared to the three and nine months ended October 1, 2016, were due to the following:
 
Change
 
Three Months Ended
 
Nine Months Ended
 
(In millions)
Salary, benefits and other employee-related costs
$
6.4

 
$
11.2

Facilities and other infrastructure costs
2.0

 
3.5

Stock-based compensation
1.4

 
2.8

Professional services
(1.4
)
 
(1.8
)
Other items
(0.9
)
 
(1.3
)
Total change in marketing and sales expense
$
7.5

 
$
14.4



22


Research and Development
The changes in research and development expense for the three and nine months ended September 30, 2017, as compared to the three and nine months ended October 1, 2016, were due to the following:
 
Change
 
Three Months Ended
 
Nine Months Ended
 
(In millions)
Salary, benefits and other employee-related costs
$
6.7

 
$
31.9

Stock-based compensation
3.8

 
8.9

Facilities and other infrastructure costs
3.2

 
7.4

Materials and other pre-production costs
1.1

 
(0.7
)
Other items
0.3

 
(0.5
)
Total change in research and development expense
$
15.1

 
$
47.0

We must invest significantly in product research and development to keep pace with the latest manufacturing technology. The demand for new IC manufacturing technology directly impacts the demand for our newest products and we must keep pace with our customers’ technical developments, satisfy industry standards and meet our customers’ increasingly demanding performance, productivity, quality and predictability requirements. Therefore, we expect research and development expense to increase during the remainder of fiscal 2017, as compared to fiscal 2016.
General and Administrative
The changes in general and administrative expense for the three and nine months ended September 30, 2017, as compared to the three and nine months ended October 1, 2016, were due to the following:
 
Change
 
Three Months Ended
 
Nine Months Ended
 
(In millions)
Professional services
$
2.2

 
$
3.7

Bad debt
1.1

 
1.5

Salary, benefits and other employee-related costs
1.0

 
2.4

Stock-based compensation
0.8

 
1.9

Acquisition-related costs

 
(4.9
)
Other items
0.8

 
1.2

Total change in general and administrative expense
$
5.9

 
$
5.8

Restructuring and Other Charges
We have initiated various restructuring plans in recent years to better align our resources with our business strategy. Because the restructuring charges and related benefits are derived from management’s estimates made during the formulation of the restructuring plans, based on then-currently available information, our restructuring plans may not achieve the benefits anticipated on the timetable or at the level contemplated. Demand for our products and services and, ultimately, our future financial performance, is difficult to predict with any degree of certainty. Accordingly, additional actions, including further restructuring of our operations, may be required in the future.
During the nine months ended September 30, 2017, we revised certain estimates made in connection with the 2016 Restructuring Plans and recorded credits of approximately $2.8 million. For additional information about our restructuring plans, see Note 8 in the notes to condensed consolidated financial statements.

23


Interest Expense
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
 
(In millions)
Contractual interest expense:
 
 
 
 
 
 
 
2019 Term Loan
$
1.9

 
$
1.6

 
$
5.7

 
$
3.9

2024 Notes
3.8

 
3.8

 
11.4

 
11.4

Revolving credit facility
0.1

 
0.4

 
0.8

 
1.0

Amortization of debt discount:
 
 
 
 
 
 
 
2019 Term Loan
0.1

 
0.1

 
0.2

 
0.1

2024 Notes
0.2

 
0.2

 
0.5

 
0.5

Other
0.1

 

 
0.4

 
0.4

Total interest expense
$
6.2

 
$
6.1

 
$
19.0

 
$
17.3

For an additional description of our debt arrangements, see Note 2 in the notes to condensed consolidated financial statements.
Income Taxes
The following table presents the provision (benefit) for income taxes and the effective tax rate for the three and nine months ended September 30, 2017 and October 1, 2016:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
 
(In millions, except percentages)
Provision (benefit) for income taxes
$
5.4

 
$
(1.1
)
 
$
19.6

 
$
20.3

Effective tax rate
6.2
%
 
(1.7
)%
 
8.2
%
 
11.0
%
Our provision for income taxes for the three and nine months ended September 30, 2017 is primarily attributable to federal, state and foreign income taxes on our anticipated fiscal 2017 income, partially offset by tax benefits related to stock-based compensation. Our provision for income taxes for the three and nine months ended September 30, 2017 includes $14.7 million and $28.0 million of tax benefit, respectively, related to stock-based compensation that vested or was exercised during the period.
Our foreign earnings are generally subject to lower statutory tax rates than our United States earnings. We estimate our annual effective tax rate for fiscal 2017 to be approximately 11.0%. Our estimate excludes tax effects of certain stock-based compensation, potential acquisitions, and other items that we cannot reliably anticipate.
Our provision (benefit) for income taxes for the three and nine months ended October 1, 2016 is primarily attributable to federal, state and foreign income taxes on our then-anticipated fiscal 2016 income. Our provision (benefit) for income taxes for the three and nine months ended October 1, 2016 includes $6.7 million and $14.5 million of tax benefit, respectively, related to stock-based compensation that vested or was exercised during the period.
Our future effective tax rates may be materially impacted by tax amounts associated with our foreign earnings at rates different from the United States federal statutory rate, the tax impact of stock-based compensation, accounting for uncertain tax positions, business combinations, closure of statute of limitations or settlement of tax audits, changes in valuation allowance and changes in tax law. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and Hungary. Our future effective tax rates may be adversely affected if our earnings were to be lower in countries where we have lower statutory tax rates or if we were to repatriate certain foreign earnings on which United States taxes have not been previously accrued.
For further discussion regarding our income taxes, see Note 10 in the notes to consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.


24


Liquidity and Capital Resources
 
As of
 
 
 
September 30,
2017
 
December 31,
2016
 
Change
 
(In millions)
Cash, cash equivalents and short-term investments
$
682.4

 
$
468.3

 
$
214.1

Net working capital
$
411.0

 
$
116.5

 
$
294.5

Cash, Cash Equivalents and Short-term Investments
As of September 30, 2017, our principal sources of liquidity consisted of $682.4 million of cash, cash equivalents and short-term investments, as compared to $468.3 million as of December 31, 2016.
Our primary sources of cash, cash equivalents and short-term investments during the nine months ended September 30, 2017 were cash generated from operations, proceeds from the exercise of stock options and proceeds from stock purchases under our employee stock purchase plan.
Our primary uses of cash, cash equivalents and short-term investments during the nine months ended September 30, 2017 were payments related to salaries and benefits, other employee-related costs and operating expenses, payment on our revolving credit facility, repurchases of our common stock, tax payments and purchases of property, plant and equipment.
Approximately 73% of our cash, cash equivalents and short-term investments were held by our foreign subsidiaries as of September 30, 2017. Our intent is to indefinitely reinvest our earnings from certain foreign operations. We do not anticipate we will need to repatriate dividends from foreign operations that are indefinitely reinvested in order to fund our domestic operations. In the event that dividends from foreign operations that are currently indefinitely reinvested are needed to fund United States liquidity, we could be required to accrue and pay additional taxes in order to repatriate these funds. For further discussion regarding our income taxes see Note 10 in the notes to consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
We expect that current cash, cash equivalents and short-term investment balances, cash flows that are generated from operations and cash borrowings available under our revolving credit facility will be sufficient to meet our domestic and international working capital needs, and other capital and liquidity requirements, including acquisitions and share repurchases for at least the next 12 months.
Net Working Capital
Net working capital is comprised of current assets less current liabilities, as shown on our condensed consolidated balance sheets. The increase in our net working capital as of September 30, 2017, as compared to December 31, 2016, is primarily due to a net increase in cash and cash equivalents generated from operations.
Cash Flows from Operating Activities
 
Nine Months Ended
 
 
 
September 30,
2017
 
October 1,
2016
 
Change
 
(In millions)
Cash provided by operating activities
$
343.9

 
$
248.0

 
$
95.9

Cash flows from operating activities include net income, adjusted for certain non-cash items, as well as changes in the balances of certain assets and liabilities. Our cash flows from operating activities are significantly influenced by business levels and the payment terms set forth in our customer agreements. The increase in cash flows from operating activities for the nine months ended September 30, 2017, as compared to the nine months ended October 1, 2016, was primarily due to the timing of cash receipts from customers and disbursements made to vendors and improved profitability.
We expect that cash flows from operating activities will fluctuate in future periods due to a number of factors, including our operating results, the timing of our billings, collections and disbursements and tax payments.

25


Cash Flows from Investing Activities
 
Nine Months Ended
 
 
 
September 30,
2017
 
October 1,
2016
 
Change
 
(In millions)
Cash provided by (used for) investing activities
$
(30.7
)
 
$
6.6

 
$
(37.3
)
Cash used for investing activities increased during the nine months ended September 30, 2017, as compared to the nine months ended October 1, 2016, due to a decrease in net proceeds from our investment portfolio, partially offset by a decrease in cash used for business combinations and asset acquisitions because we did not complete any acquisitions during the nine months ended September 30, 2017. We expect to continue our investing activities, including purchasing property, plant and equipment, purchasing intangible assets, business combinations, purchasing software licenses, and making long-term equity investments.
Cash Flows from Financing Activities
 
Nine Months Ended
 
 
 
September 30,
2017
 
October 1,
2016
 
Change
 
(In millions)
Cash used for financing activities
$
(109.5
)
 
$
(356.1
)
 
$
246.6

Cash used for financing activities decreased during the nine months ended September 30, 2017, as compared to the nine months ended October 1, 2016, primarily due to a decrease in payments