Item 1. Financial Statements

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

			As of
			October 2, 2021						January 2, 2021
ASSETS
Current assets:
Cash and cash equivalents			$	1,013,819					$	928,432
Receivables, net			327,191						338,487
Inventories			101,575						75,956
Prepaid expenses and other			100,428						135,712
Total current assets			1,543,013						1,478,587
Property, plant and equipment, net			303,313						311,125
Goodwill			925,949						782,087
Acquired intangibles, net			247,628						210,590
Deferred taxes			766,036						732,290
Other assets			427,936						436,106
Total assets			$	4,213,875					$	3,950,785
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities			$	363,835					$	349,951
Current portion of deferred revenue			543,361						446,857
Total current liabilities			907,196						796,808
Long-term liabilities:
Long-term portion of deferred revenue			95,991						107,064
Long-term debt			347,385						346,793
Other long-term liabilities			232,041						207,102
Total long-term liabilities			675,417						660,959
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock and capital in excess of par value			2,411,791						2,217,939
Treasury stock, at cost			(2,622,675)						(2,057,829)
Retained earnings			2,869,709						2,350,333
Accumulated other comprehensive loss			(27,563)						(17,425)
Total stockholders’ equity			2,631,262						2,493,018
Total liabilities and stockholders’ equity			$	4,213,875					$	3,950,785

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

			Three Months Ended												Nine Months Ended
			October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
Revenue:
Product and maintenance			$	706,160					$	630,329					$	2,093,098					$	1,813,384
Services			44,735						36,278						122,110						109,598
Total revenue			750,895						666,607						2,215,208						1,922,982
Costs and expenses:
Cost of product and maintenance			54,185						64,800						174,933						175,915
Cost of services			22,402						17,484						62,380						56,047
Marketing and sales			143,401						123,738						412,194						369,958
Research and development			289,105						250,934						845,324						743,423
General and administrative			42,990						35,928						123,275						105,161
Amortization of acquired intangibles			5,000						4,438						14,661						13,234
Restructuring and other charges (credits)			(222)						13						(968)						(1,329)
Total costs and expenses			556,861						497,335						1,631,799						1,462,409
Income from operations			194,034						169,272						583,409						460,573
Interest expense			(4,196)						(5,325)						(12,729)						(15,876)
Other income (expenses), net			(1,143)						1,766						3,701						1,862
Income before provision for income taxes			188,695						165,713						574,381						446,559
Provision for income taxes			12,388						4,083						55,005						29,653
Net income			$	176,307					$	161,630					$	519,376					$	416,906
Net income per share – basic			$	0.65					$	0.59					$	1.90					$	1.52
Net income per share – diluted			$	0.63					$	0.58					$	1.86					$	1.49
Weighted average common shares outstanding – basic			273,194						273,996						273,636						273,633
Weighted average common shares outstanding – diluted			278,311						280,024						279,046						279,455

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

			Three Months Ended												Nine Months Ended
			October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
Net income			$	176,307					$	161,630					$	519,376					$	416,906
Other comprehensive income (loss), net of tax effects:
Foreign currency translation adjustments			(5,483)						11,539						(9,618)						3,029
Changes in defined benefit plan liabilities			(288)						(142)						(520)						277
Total other comprehensive income (loss), net of tax effects			(5,771)						11,397						(10,138)						3,306
Comprehensive income			$	170,536					$	173,027					$	509,238					$	420,212

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

			Three Months Ended October 2, 2021
			Common Stock
									Par Value																		Accumulated
									and Capital																		Other
									in Excess						Treasury						Retained						Comprehensive
			Shares						of Par						Stock						Earnings						Loss						Total
Balance, July 3, 2021			276,780						$	2,354,801					$	(2,509,668)					$	2,693,402					$	(21,792)					$	2,516,743
Net income			—						—						—						176,307						—						$	176,307
Other comprehensive loss, net of taxes			—						—						—						—						(5,771)						$	(5,771)
Purchase of treasury stock			(723)						—						(110,011)						—						—						$	(110,011)
Issuance of common stock and reissuance of treasury stock under equity incentive plans, net of forfeitures			1,249						9,319						22,061						—						—						$	31,380
Stock received for payment of employee taxes on vesting of restricted stock			(165)						(5,075)						(25,057)						—						—						$	(30,132)
Stock-based compensation expense			—						52,746						—						—						—						$	52,746
Balance, October 2, 2021			277,141						$	2,411,791					$	(2,622,675)					$	2,869,709					$	(27,563)					$	2,631,262
			Three Months Ended September 26, 2020
			Common Stock
									Par Value																		Accumulated
									and Capital																		Other
									in Excess						Treasury						Retained						Comprehensive
			Shares						of Par						Stock						Earnings						Loss						Total
Balance, June 27, 2020			278,794						$	2,143,016					$	(1,856,333)					$	2,014,965					$	(45,017)					$	2,256,631
Net income			—						—						—						161,630						—						$	161,630
Other comprehensive income, net of taxes			—						—						—						—						11,397						$	11,397
Purchase of treasury stock			(717)						—						(75,011)						—						—						$	(75,011)
Issuance of common stock and reissuance of treasury stock under equity incentive plans, net of forfeitures			1,093						4,328						23,267						—						—						$	27,595
Stock received for payment of employee taxes on vesting of restricted stock			(239)						(5,828)						(26,030)						—						—						$	(31,858)
Stock-based compensation expense			—						45,334						—						—						—						$	45,334
Balance, September 26, 2020			278,931						$	2,186,850					$	(1,934,107)					$	2,176,595					$	(33,620)					$	2,395,718

			Nine Months Ended October 2, 2021
			Common Stock
									Par Value																		Accumulated
									and Capital																		Other
									in Excess						Treasury						Retained						Comprehensive
			Shares						of Par						Stock						Earnings						Loss						Total
Balance, January 2, 2021			278,941						$	2,217,939					$	(2,057,829)					$	2,350,333					$	(17,425)					$	2,493,018
Net income			—						—						—						519,376						—						$	519,376
Other comprehensive loss, net of taxes			—						—						—						—						(10,138)						$	(10,138)
Purchase of treasury stock			(3,766)						—						(502,301)						—						—						$	(502,301)
Issuance of common stock and reissuance of treasury stock under equity incentive plans, net of forfeitures			2,640						52,236						31,396						—						—						$	83,632
Stock received for payment of employee taxes on vesting of restricted stock			(674)						(14,244)						(93,941)						—						—						$	(108,185)
Stock-based compensation expense			—						155,860						—						—						—						$	155,860
Balance, October 2, 2021			277,141						$	2,411,791					$	(2,622,675)					$	2,869,709					$	(27,563)					$	2,631,262
			Nine Months Ended September 26, 2020
			Common Stock
									Par Value																		Accumulated
									and Capital																		Other
									in Excess						Treasury						Retained						Comprehensive
			Shares						of Par						Stock						Earnings						Loss						Total
Balance, December 28, 2019			279,855						$	2,046,237					$	(1,668,105)					$	1,761,688					$	(36,926)					$	2,102,894
Cumulative effect adjustment			—						—						—						(1,999)						—						$	(1,999)
Net income			—						—						—						416,906						—						$	416,906
Other comprehensive income, net of taxes			—						—						—						—						3,306						$	3,306
Purchase of treasury stock			(3,124)						—						(250,047)						—						—						$	(250,047)
Issuance of common stock and reissuance of treasury stock under equity incentive plans, net of forfeitures			3,049						15,086						56,364						—						—						$	71,450
Stock received for payment of employee taxes on vesting of restricted stock			(849)						(13,196)						(72,319)						—						—						$	(85,515)
Stock-based compensation expense			—						138,723						—						—						—						$	138,723
Balance, September 26, 2020			278,931						$	2,186,850					$	(1,934,107)					$	2,176,595					$	(33,620)					$	2,395,718

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

			Nine Months Ended
			October 2, 2021						September 26, 2020
Cash and cash equivalents at beginning of period			$	928,432					$	705,210
Cash flows from operating activities:
Net income			519,376						416,906
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			106,962						107,019
Amortization of debt discount and fees			952						770
Stock-based compensation			155,860						138,723
(Gain) loss on investments, net			(330)						5,118
Deferred income taxes			(34,566)						(18,966)
Provisions for losses on receivables			234						1,087
ROU asset amortization and change in operating lease liabilities			(2,917)						2,064
Other non-cash items			146						410
Changes in operating assets and liabilities, net of effect of acquired businesses:
Receivables			15,132						9,945
Inventories			(25,608)						6,376
Prepaid expenses and other			36,632						22,769
Other assets			8,127						(21,287)
Accounts payable and accrued liabilities			10,501						(30,455)
Deferred revenue			84,183						124,491
Other long-term liabilities			10,417						4,430
Net cash provided by operating activities			885,101						769,400
Cash flows from investing activities:
Proceeds from the sale of non-marketable investments			128						—
Purchases of property, plant and equipment			(49,977)						(63,745)
Cash paid in business combinations, net of cash acquired			(220,026)						(197,562)
Net cash used for investing activities			(269,875)						(261,307)
Cash flows from financing activities:
Proceeds from revolving credit facility			—						350,000
Payment of debt issuance costs			(1,285)						—
Proceeds from issuance of common stock			83,632						71,451
Stock received for payment of employee taxes on vesting of restricted stock			(108,185)						(85,515)
Payments for repurchases of common stock			(502,301)						(250,047)
Net cash provided by (used for) financing activities			(528,139)						85,889
Effect of exchange rate changes on cash and cash equivalents			(1,700)						7,372
Increase in cash and cash equivalents			85,387						601,354
Cash and cash equivalents at end of period			$	1,013,819					$	1,306,564
Supplemental cash flow information:
Cash paid for interest			$	8,117					$	10,982
Cash paid for taxes, net			47,687						44,679

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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. (“Cadence”) without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with United States generally accepted accounting principles (“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, (the “Exchange Act”) for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These condensed consolidated financial statements are meant to be, and should be, read in conjunction with the consolidated financial statements and the Notes thereto included in Cadence’s Annual Report on Form 10-K for the fiscal year ended January 2, 2021.

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. Certain prior period balances have been reclassified to conform to the current period presentation. 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.

Due to the ongoing COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. Cadence is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of October 25, 2021, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

Recently Adopted Accounting Standards

Accounting for Income Taxes

In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update 2019-12, “Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes, eliminates certain exceptions within Accounting Standards Codification 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. Cadence adopted the standard on January 3, 2021, the first day of fiscal 2021. The adoption of this standard did not impact Cadence’s condensed consolidated financial statements for the period ended October 2, 2021.

NOTE 2. DEBT

Cadence’s outstanding debt as of October 2, 2021 and January 2, 2021 was as follows:

			October 2, 2021																		January 2, 2021
			(In thousands)
			Principal						Unamortized Discount						Carrying Value						Principal						Unamortized Discount						Carrying Value
Revolving Credit Facility			$	—					$	—					$	—					$	—					$	—					$	—
2024 Notes			350,000						(2,615)						347,385						350,000						(3,207)						346,793
Total outstanding debt			$	350,000					$	(2,615)					$	347,385					$	350,000					$	(3,207)					$	346,793

Revolving Credit Facility

In June 2021, Cadence terminated its existing revolving credit facility, dated January 30, 2017, and entered into a five-year senior unsecured revolving credit facility with a group of lenders led by Bank of America, N.A., as administrative agent (the “2021 Credit Facility”). The 2021 Credit Facility provides for borrowings up to $700.0 million, with the right to request increased capacity up to an additional $350.0 million upon the receipt of lender commitments, for total maximum borrowings of $1.05 billion. The 2021 Credit Facility expires on June 30, 2026. Any outstanding loans drawn under such credit facility are due at maturity on June 30, 2026, subject to an option to extend the maturity date. Outstanding borrowings may be repaid at any time prior to maturity. Debt issuance costs of $1.3 million were recorded to other assets in Cadence’s condensed consolidated balance sheet at the inception of the agreement and are being amortized to interest expense over the term of the 2021 Credit Facility.

Interest accrues on borrowings under the 2021 Credit Facility at a rate equal to, at Cadence’s option, either (1) LIBOR plus a margin between 0.750% and 1.250% per annum, determined by reference to the credit rating of Cadence’s unsecured debt, or (2) the base rate plus a margin between 0.000% and 0.250% per annum, determined by reference to the credit rating of Cadence’s unsecured debt. Interest is payable quarterly. A commitment fee ranging from 0.070% to 0.175% is assessed on the daily average undrawn portion of revolving commitments. The 2021 Credit Facility also includes provisions addressing the potential transition from LIBOR to a new replacement benchmark.

The 2021 Credit Facility contains customary negative covenants that, among other things, restrict Cadence’s ability to incur additional indebtedness and grant liens. In addition, the 2021 Credit Facility contains financial covenants that require Cadence to maintain a funded debt to EBITDA ratio not greater than 3.25 to 1, with a step up to 3.75 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 3.00 to 1 and 3.50 to 1. As of October 2, 2021, Cadence was in compliance with all financial covenants associated with the 2021 Credit Facility.

2024 Notes

In October 2014, Cadence issued $350.0 million aggregate principal amount of 4.375% Senior Notes due October 15, 2024 (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. The fair value of the 2024 Notes was approximately $382.7 million as of October 2, 2021.

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.

NOTE 3. RECEIVABLES, NET

Cadence’s current and long-term receivables balances as of October 2, 2021 and January 2, 2021 were as follows:

			As of
			October 2, 2021						January 2, 2021
			(In thousands)
Accounts receivable			$	184,298					$	196,990
Unbilled accounts receivable			146,550						144,364
Long-term receivables			3,832						3,655
Total receivables			334,680						345,009
Less allowance for doubtful accounts			(3,657)						(2,867)
Total receivables, net			$	331,023					$	342,142

Cadence’s customers are primarily concentrated within the semiconductor and electronics systems industries. As of October 2, 2021, one customer accounted for 13% of Cadence’s total receivables. As of January 2, 2021, no customer accounted for 10% or more of Cadence’s total receivables.

NOTE 4. REVENUE

Cadence groups its products into five categories related to major design activities. The following table shows the percentage of product and related maintenance revenue contributed by each of Cadence’s five product categories and services for the three and nine months ended October 2, 2021 and September 26, 2020:

			Three Months Ended												Nine Months Ended
			October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
Custom Integrated Circuit (“IC”) Design and Simulation			23		%				24		%				23		%				25		%
Digital IC Design and Signoff			29		%				27		%				28		%				28		%
Functional Verification, including Emulation and Prototyping Hardware*			23		%				23		%				25		%				23		%
Intellectual Property (“IP”)			14		%				15		%				13		%				14		%
System Design and Analysis			11		%				11		%				11		%				10		%
Total			100		%				100		%				100		%				100		%

_____________

• Includes immaterial amount of revenue accounted for under leasing arrangements.

Cadence generates revenue from contracts with customers and applies judgment in identifying and evaluating any terms and conditions in contracts which may impact revenue recognition. Certain of Cadence’s licensing arrangements allow customers the ability to remix among software products. Cadence also has arrangements with customers that include a combination of products, with the actual product selection and number of licensed users to be determined at a later date. For these arrangements, Cadence estimates the allocation of the revenue to product categories based upon the expected usage of products. Revenue by product category fluctuates from period to period based on demand for products and services, and Cadence’s available resources to deliver them.

Significant Judgments

Cadence’s contracts with customers often include promises to transfer to a customer multiple software and/or IP licenses and services, including professional services, technical support services, and rights to unspecified updates. Determining whether licenses and services are distinct performance obligations that should be accounted for separately, or not distinct and thus accounted for together, requires significant judgment. In some arrangements, such as most of Cadence’s IP license arrangements, Cadence has concluded that the licenses and associated services are distinct from each other. In others, like Cadence’s time-based software arrangements, the licenses and certain services are not distinct from each other. Cadence’s time-based software arrangements include multiple software licenses and updates to the licensed software products, as well as technical support, and Cadence has concluded that these promised goods and services are a single, combined performance obligation.

The accounting for contracts with multiple performance obligations requires the contract’s transaction price to be allocated to each distinct performance obligation based on relative standalone selling price (“SSP”). Judgment is required to determine the SSP for each distinct performance obligation because Cadence rarely licenses or sells products on a standalone basis. In instances where the SSP is not directly observable because Cadence does not sell the license, product or service separately, Cadence determines the SSP using information that maximizes the use of observable inputs and may include market conditions. Cadence typically has more than one SSP for individual performance obligations due to the stratification of those items by classes of customers and circumstances. In these instances, Cadence may use information such as the size of the customer and geographic region of the customer in determining the SSP.

Revenue is recognized over time for Cadence’s combined performance obligations that include software licenses, updates, technical support and maintenance that are separate performance obligations with the same term. For Cadence’s professional services, revenue is recognized over time, generally using costs incurred or hours expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. For Cadence’s other performance obligations recognized over time, revenue is generally recognized using a time-based measure of progress reflecting generally consistent efforts to satisfy those performance obligations throughout the arrangement term.

If a group of agreements are so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be one arrangement for revenue recognition purposes. Cadence exercises significant judgment to evaluate the relevant facts and circumstances in determining whether the separate agreements should be accounted for separately or as, in substance, a single arrangement. Cadence’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.

Cadence is required to estimate the total consideration expected to be received from contracts with customers. In limited circumstances, the consideration expected to be received is variable based on the specific terms of the contract or based on Cadence’s expectations of the term of the contract. Generally, Cadence has not experienced significant returns or refunds to customers. These estimates require significant judgment and the change in these estimates could have an effect on its results of operations during the periods involved.

Contract Balances

The timing of revenue recognition may differ from the timing of invoicing to customers, and these timing differences result in receivables, contract assets, or contract liabilities (deferred revenue) on Cadence’s condensed consolidated balance sheets. For certain software, hardware and IP agreements with payment plans, Cadence records an unbilled receivable related to revenue recognized upon transfer of control because it has an unconditional right to invoice and receive payment in the future related to those transferred products or services. Cadence records a contract asset when revenue is recognized prior to invoicing and Cadence does not have the unconditional right to invoice or retains performance risk with respect to that performance obligation. Cadence records deferred revenue when revenue is recognized subsequent to invoicing. For Cadence’s time-based software agreements, customers are generally invoiced in equal, quarterly amounts, although some customers prefer to be invoiced in single or annual amounts.

The contract assets indicated below are included in prepaid expenses and other in the condensed consolidated balance sheet and primarily relate to Cadence’s rights to consideration for work completed but not billed as of the balance sheet date on services and customized IP contracts. The contract assets are transferred to receivables when the rights become unconditional, usually upon completion of a milestone.

Cadence’s contract balances as of October 2, 2021 and January 2, 2021 were as follows:

			As of
			October 2, 2021						January 2, 2021
			(In thousands)
Contract assets			$	7,834					$	9,709
Deferred revenue			639,352						553,921

Cadence recognized revenue of $59.8 million and $389.8 million during the three and nine months ended October 2, 2021, and $50.5 million and $292.1 million during the three and nine months ended September 26, 2020, respectively, that was included in the deferred revenue balance at the beginning of each fiscal year. All other activity in deferred revenue is due to the timing of invoices in relation to the timing of revenue as described above.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, Cadence has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing Cadence’s products and services, and not to facilitate financing arrangements.

Some customers enter into a non-cancellable IP Access Agreement (“IPAA”) whereby the customer commits to a fixed dollar amount over a specified period of time that can be used to purchase from a list of IP products or services. These arrangements do not meet the definition of a revenue contract until the customer executes a separate selection form to identify the products and services that they are purchasing. Each separate selection form under the IPAA is treated as an individual contract and accounted for based on the respective performance obligations.

Remaining Performance Obligations

Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Cadence has elected to exclude the potential future royalty receipts from the remaining performance obligations. Contracted but unsatisfied performance obligations were approximately $3.7 billion as of October 2, 2021, which included $89.1 million of non-cancellable IPAA commitments from customers where actual product selection and quantities of specific products or services are to be determined by customers at a later date. As of October 2, 2021, Cadence expected to recognize approximately 55% of the contracted but unsatisfied performance obligations, excluding non-cancellable IPAA commitments, as revenue over the next 12 months and the remainder thereafter.

Cadence recognized revenue of $13.3 million and $35.0 million during the three and nine months ended October 2, 2021, and $18.1 million and $38.9 million during the three and nine months ended September 26, 2020, respectively, from performance obligations satisfied in previous periods. These amounts represent royalties earned during the period and exclude contracts with nonrefundable prepaid royalties. Nonrefundable prepaid royalties are recognized upon delivery of the IP because Cadence’s right to the consideration is not contingent upon customers’ future shipments.

NOTE 5. ACQUISITIONS

On February 23, 2021, Cadence acquired all of the outstanding equity of Belgium-based Numerical Mechanics Applications International SA (“NUMECA”). The addition of NUMECA’s technologies and talent supports Cadence’s Intelligent System Design™ strategy, servicing the computational fluid dynamics (“CFD”) market segment as part of System Design and Analysis. The aggregate cash consideration for Cadence’s acquisition of NUMECA, net of cash acquired of $9.6 million, was $188.6 million. Cadence expects to recognize expense for consideration paid to certain former NUMECA shareholders that is subject to service and other conditions, through the first quarter of fiscal 2023.

The total purchase consideration was allocated to the assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition dates as follows:

			Acquisition Date Fair Value
			(In thousands)
Current assets			$	16,423
Goodwill			132,693
Acquired intangibles			72,200
Other long-term assets			6,928
Total assets acquired			228,244
Current liabilities			9,951
Long-term liabilities			20,091
Total liabilities assumed			30,042
Total purchase consideration			$	198,202

During the three months ended October 2, 2021, Cadence finalized certain estimates impacting total purchase consideration for NUMECA and recorded the resulting measurement period adjustment which decreased goodwill by $0.6 million. Cadence will continue to evaluate certain estimates and assumptions related to tax liabilities assumed from NUMECA during the remainder of the measurement period (up to one year from the acquisition date). The recorded goodwill is attributed to intangible assets that do not qualify for separate recognition, including the acquired assembled workforce and expected synergies from combining operations of NUMECA with Cadence. Cadence expects all of the goodwill related to the acquisition of NUMECA to be deductible for tax purposes.

On April 14, 2021, Cadence acquired all of the outstanding equity of Pointwise, Inc. (“Pointwise”), a leader in mesh generation for CFD for cash consideration of approximately $31.4 million, net of cash acquired. The addition of Pointwise’s technologies and experienced team supports Cadence’s Intelligent System Design™ strategy and further broadens its System Design and Analysis portfolio, complementing its acquisition of NUMECA. The total purchase consideration was allocated to the assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition dates. Cadence recorded $16.7 million of definite-lived intangible assets and $16.7 million of goodwill with its acquisition of Pointwise. All of the goodwill related to Cadence’s acquisition of Pointwise will be deductible for tax purposes.

Definite-lived intangible assets acquired with Cadence’s fiscal 2021 acquisitions were as follows:

			Acquisition Date Fair Value						Weighted Average Amortization Period
			(In thousands)						(in years)
Existing technology			$	55,400					14.2 years
Agreements and relationships			28,900						13.7 years
Tradenames, trademarks and patents			4,600						14.3 years
Total acquired intangibles with definite lives			$	88,900					14.1 years

Cadence has not presented pro forma financial information for its fiscal 2021 acquisitions because the results of operations for the acquired businesses are not material to Cadence’s condensed consolidated financial statements. During the three and nine months ended October 2, 2021, and the three and nine months ended September 26, 2020, transaction costs associated with acquisitions were not material and were expensed as incurred.

NOTE 6. GOODWILL AND ACQUIRED INTANGIBLES

Goodwill

The changes in the carrying amount of goodwill during the nine months ended October 2, 2021 were as follows:

			Gross Carrying Amount
			(In thousands)
Balance as of January 2, 2021			$	782,087
Goodwill resulting from acquisitions			150,021
Measurement period adjustments			(633)
Effect of foreign currency translation			(5,526)
Balance as of October 2, 2021			$	925,949

Measurement period adjustments are the result of new information obtained about assets or liabilities that existed as of the acquisition date and, if known, would have resulted in changes to the initial recognition of those assets or liabilities as of that date. During the three months ended October 2, 2021, Cadence finalized certain estimates impacting total purchase consideration for its acquisition of NUMECA and recorded the resulting measurement period adjustment which decreased goodwill.

Acquired Intangibles, Net

Acquired intangibles as of October 2, 2021 were as follows, excluding intangibles that were fully amortized as of January 2, 2021:

			Gross Carrying Amount						Accumulated Amortization						Acquired Intangibles, Net
			(In thousands)
Existing technology			$	402,640					$	(242,829)					$	159,811
Agreements and relationships			205,454						(125,436)						80,018
Tradenames, trademarks and patents			10,741						(2,942)						7,799
Total acquired intangibles with definite lives			$	618,835					$	(371,207)					$	247,628

Acquired intangibles as of January 2, 2021 were as follows, excluding intangibles that were fully amortized as of December 28, 2019:

			Gross Carrying Amount						Accumulated Amortization						Acquired Intangibles, Net
			(In thousands)
Existing technology			$	370,838					$	(230,654)					$	140,184
Agreements and relationships			180,023						(113,629)						66,394
Tradenames, trademarks and patents			10,590						(6,578)						4,012
Total acquired intangibles with definite lives			$	561,451					$	(350,861)					$	210,590

Amortization expense from existing technology and maintenance agreements is included in cost of product and maintenance. Amortization expense for the three and nine months ended October 2, 2021 and September 26, 2020 by condensed consolidated income statement caption was as follows:

			Three Months Ended												Nine Months Ended
			October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
			(In thousands)
Cost of product and maintenance			$	11,774					$	11,447					$	35,774					$	33,791
Amortization of acquired intangibles			5,000						4,438						14,661						13,234
Total amortization of acquired intangibles			$	16,774					$	15,885					$	50,435					$	47,025

As of October 2, 2021, the estimated amortization expense for acquired intangible assets with definite lives was as follows for the following five fiscal years and thereafter:

			(In thousands)
2021 - remaining period			$	16,724
2022			50,022
2023			34,492
2024			32,732
2025			22,092
2026			17,087
Thereafter			74,479
Total estimated amortization expense			$	247,628

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 October 2, 2021 and September 26, 2020 as follows:

			Three Months Ended												Nine Months Ended
			October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
			(In thousands)
Cost of product and maintenance			$	885					$	668					$	2,601					$	2,042
Cost of services			1,158						850						3,177						2,599
Marketing and sales			10,784						9,699						32,284						29,826
Research and development			32,957						28,652						97,101						87,688
General and administrative			6,962						5,465						20,697						16,568
Total stock-based compensation expense			$	52,746					$	45,334					$	155,860					$	138,723

Cadence had total unrecognized compensation expense related to stock option and restricted stock grants of $375.0 million as of October 2, 2021, which will be recognized over the remaining vesting period. The remaining weighted average vesting period of unvested awards is 2.1 years.

NOTE 8. STOCK REPURCHASE PROGRAM

As of the end of the second quarter of fiscal 2021, approximately $346 million remained available under Cadence’s previously announced authorization to repurchase shares of Cadence common stock. In August 2021, Cadence’s Board of Directors increased the prior authorization to repurchase shares of Cadence common stock by authorizing an additional $1 billion. The actual timing and amount of repurchases are subject to business and market conditions, corporate and regulatory requirements, stock price, acquisition opportunities and other factors. As of October 2, 2021, approximately $1.2 billion of the share repurchase authorization remained available to repurchase shares of Cadence common stock.

The shares repurchased under Cadence’s repurchase authorizations and the total cost of repurchased shares, including commissions, during the three and nine months ended October 2, 2021 and September 26, 2020 were as follows:

			Three Months Ended												Nine Months Ended
			October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
			(In thousands)
Shares repurchased			723						717						3,766						3,124
Total cost of repurchased shares			$	110,011					$	75,011					$	502,301					$	250,047

NOTE 9. RESTRUCTURING AND OTHER TERMINATION BENEFITS

Restructuring

Cadence has initiated restructuring plans in an effort to better align its resources with its business strategy. The charges associated with these restructuring plans have primarily been comprised of severance payments and termination benefits related to headcount reductions and charges related to impacted facilities and are included in restructuring and other charges on Cadence’s condensed consolidated income statements.

The following table presents activity for Cadence’s restructuring plans during the nine months ended October 2, 2021:

			Severance and Benefits						Facilities						Total
			(In thousands)
Balance, January 2, 2021			$	7,321					$	1,372					$	8,693
Restructuring and other credits			(1,379)						411						(968)
Cash payments			(5,715)						(1,596)						(7,311)
Effect of foreign currency translation			(67)						—						(67)
Balance, October 2, 2021			$	160					$	187					$	347

The remaining liability for Cadence’s restructuring plans is recorded in the condensed consolidated balance sheet as follows:

			As of
			October 2, 2021
			(In thousands)
Accounts payable and accrued liabilities			$	340
Other long-term liabilities			7
Total restructuring liabilities			$	347

All liabilities for severance and related benefits under Cadence’s restructuring plans are included in accounts payable and accrued liabilities on Cadence’s condensed consolidated balance sheets as of October 2, 2021. Restructuring liabilities included in other long-term liabilities represent liabilities from impacted facilities, and Cadence expects to make cash payments to settle these liabilities through fiscal 2022.

Other Termination Benefits

During the second quarter of fiscal 2021, Cadence offered a voluntary retirement program to eligible employees in the United States. This program resulted in a one-time charge of $26.8 million for voluntary termination and post-employment benefits. These charges are included in each category of costs and expenses on Cadence’s condensed consolidated income statements. As of October 2, 2021, liabilities related to the voluntary retirement program were $21.5 million and were included in accounts payable and accrued liabilities and other long-term liabilities on Cadence’s condensed consolidated balance sheet. Cadence expects to make cash payments to settle these liabilities through fiscal 2023, including $20.5 million that is expected to be paid within the next twelve months.

NOTE 10. NET INCOME PER SHARE

Basic net income per share is computed by dividing net income during the period by the weighted average number of shares of common stock outstanding during that period, less unvested restricted stock awards. Diluted net income per share is impacted by equity instruments considered to be potential common shares, if dilutive, computed using the treasury stock method of accounting.

The calculations for basic and diluted net income per share for the three and nine months ended October 2, 2021 and September 26, 2020 are as follows:

			Three Months Ended												Nine Months Ended
			October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
			(In thousands, except per share amounts)
Net income			$	176,307					$	161,630					$	519,376					$	416,906
Weighted average common shares used to calculate basic net income per share			273,194						273,996						273,636						273,633
Stock-based awards			5,117						6,028						5,410						5,822
Weighted average common shares used to calculate diluted net income per share			278,311						280,024						279,046						279,455
Net income per share - basic			$	0.65					$	0.59					$	1.90					$	1.52
Net income per share - diluted			$	0.63					$	0.58					$	1.86					$	1.49

The following table presents shares of Cadence’s common stock outstanding for the three and nine months ended October 2, 2021 and September 26, 2020 that were excluded from the computation of diluted net income per share because the effect of including these shares in the computation of diluted net income per share would have been anti-dilutive:

			Three Months Ended												Nine Months Ended
			October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
			(In thousands)
Long-term market-based awards			—						105						—						510
Options to purchase shares of common stock			331						23						267						258
Non-vested shares of restricted stock			5						21						46						75
Total potential common shares excluded			336						149						313						843

NOTE 11. FAIR VALUE

Inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Cadence’s market assumptions. These two types of inputs have created the following fair value hierarchy:

• Level 1 – Quoted prices for identical instruments in active markets;

• Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

• Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

This hierarchy requires Cadence to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. Cadence recognizes transfers between levels of the hierarchy based on the fair values of the respective financial instruments at the end of the reporting period in which the transfer occurred. There were no transfers between levels of the fair value hierarchy during the nine months ended October 2, 2021.

On a quarterly basis, Cadence measures at fair value certain financial assets and liabilities. The fair value of financial assets and liabilities was determined using the following levels of inputs as of October 2, 2021 and January 2, 2021:

			Fair Value Measurements as of October 2, 2021
			Total						Level 1						Level 2						Level 3
			(In thousands)
Assets
Cash equivalents:
Money market funds			$	384,958					$	384,958					$	—					$	—
Marketable equity securities			5,568						5,568						—						—
Securities held in Non-Qualified Deferred Compensation (“NQDC”) trust			51,653						51,653						—						—
Total Assets			$	442,179					$	442,179					$	—					$	—
			Total						Level 1						Level 2						Level 3
			(In thousands)
Liabilities
Foreign currency exchange contracts			$	2,831					$	—					$	2,831					$	—
Total Liabilities			$	2,831					$	—					$	2,831					$	—
			Fair Value Measurements as of January 2, 2021
			Total						Level 1						Level 2						Level 3
			(In thousands)
Assets
Cash equivalents:
Money market funds			$	541,386					$	541,386					$	—					$	—
Marketable equity securities			4,452						4,452						—						—
Securities held in NQDC trust			42,769						42,769						—						—
Foreign currency exchange contracts			8,868						—						8,868						—
Total Assets			$	597,475					$	588,607					$	8,868					$	—
As of January 2, 2021, Cadence did not have any financial liabilities requiring a recurring fair value measurement.

Level 1 Measurements

Cadence’s cash equivalents held in money market funds, 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 valuation techniques used to determine the fair value of Cadence’s foreign currency forward exchange contracts and 2024 Notes are classified within Level 2 of the fair value hierarchy. For additional information relating to Cadence’s debt arrangements, see Note 2 in the notes to condensed consolidated financial statements.

Level 3 Measurements

Cadence acquired intangible assets of $88.9 million with its acquisition of NUMECA and Pointwise during fiscal 2021. The fair value of the definite-lived intangible assets acquired with these acquisitions was determined using variations of the income approach and level 3 inputs.

For acquired existing technology, the fair value was determined by applying the relief-from-royalty method. This method is based on the application of a royalty rate to forecasted revenue to quantify the benefit of owning the intangible asset rather than paying a royalty for use of the asset. To estimate royalty savings over time, Cadence projected revenue from the acquired existing technology over the estimated remaining life of the technology, including the effect of assumed technological obsolescence, before applying an assumed royalty rate. For NUMECA, Cadence assumed technological obsolescence at a rate of 6.7% annually, before applying an assumed royalty rate of 22%. For Pointwise, Cadence assumed technological obsolescence at a rate of 10.0% annually, before applying an assumed royalty rate of 25%.

The fair value for acquired agreements and relationships was determined by using the multi-period excess earnings method. This method reflects the present value of the projected cash flows that are expected to be generated from existing customers, less charges representing the contribution of other assets to those cash flows. Projected income from existing customer relationships considered a customer retention rate of 95% for both NUMECA and Pointwise. The present value of operating cash flows from existing customers was determined using discount rates ranging from 10.5% to 12.0%.

Cadence believes that its estimates and assumptions related to the fair value of its acquired intangible assets are reasonable, but significant judgment is involved.

NOTE 12. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

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

Other Contingencies

Cadence provides its customers with a warranty on sales of hardware products, generally for a 90-day period. Cadence did not incur any significant costs related to warranty obligations during the three and nine months ended October 2, 2021 and September 26, 2020.

Cadence’s product license and services agreements typically include a limited indemnification provision for claims from third parties relating to Cadence’s intellectual property. If the potential loss from any indemnification claim is considered probable and the amount or the range of loss can be estimated, Cadence accrues a liability for the estimated loss. The indemnification is generally limited to the amount paid by the customer. Cadence did not incur any significant losses from indemnification claims during the three and nine months ended October 2, 2021 and September 26, 2020.

NOTE 13. ACCUMULATED OTHER COMPREHENSIVE LOSS

Cadence’s accumulated other comprehensive loss is comprised of the aggregate impact of foreign currency translation gains and losses and changes in defined benefit plan liabilities and is presented in Cadence’s condensed consolidated statements of comprehensive income.

Accumulated other comprehensive loss was comprised of the following as of October 2, 2021 and January 2, 2021:

			As of
			October 2, 2021						January 2, 2021
			(In thousands)
Foreign currency translation loss			$	(20,748)					$	(11,130)
Changes in defined benefit plan liabilities			(6,815)						(6,295)
Total accumulated other comprehensive loss			$	(27,563)					$	(17,425)

For the three and nine months ended October 2, 2021 and September 26, 2020 there were no significant amounts related to foreign currency translation loss or changes in defined benefit plan liabilities reclassified from accumulated other comprehensive loss to net income.

NOTE 14. SEGMENT REPORTING

Segment reporting is based on the “management approach,” following the method that management organizes the company’s reportable segments for which separate financial information is made available to, and evaluated regularly by, the chief operating decision maker in allocating resources and in assessing performance. Cadence’s chief operating decision maker is its CEO, who reviews Cadence’s consolidated results as one operating segment. In making operating decisions, the CEO primarily considers consolidated financial information, accompanied by disaggregated information about revenues by geographic region.

Outside the United States, Cadence markets and supports its products and services primarily through its subsidiaries. Revenue is attributed to geography based upon the country in which the product is used, or services are delivered. Long-lived assets are attributed to geography based on the country where the assets are located.

The following table presents a summary of revenue by geography for the three and nine months ended October 2, 2021 and September 26, 2020:

			Three Months Ended												Nine Months Ended
			October 2, 2021						September 26, 2020						October 2, 2021						September 26, 2020
			(In thousands)
Americas:
United States			$	331,463					$	269,057					$	970,925					$	794,545
Other Americas			11,487						10,956						31,353						29,913
Total Americas			342,950						280,013						1,002,278						824,458
Asia:
China			98,325						114,160						287,357						275,191
Other Asia			136,272						123,188						404,509						354,063
Total Asia			234,597						237,348						691,866						629,254
Europe, Middle East and Africa			129,606						107,913						384,341						340,173
Japan			43,742						41,333						136,723						129,097
Total			$	750,895					$	666,607					$	2,215,208					$	1,922,982

The following table presents a summary of long-lived assets by geography as of October 2, 2021 and January 2, 2021:

			As of
			October 2, 2021						January 2, 2021
			(In thousands)
Americas:
United States			$	239,200					$	248,292
Other Americas			616						753
Total Americas			239,816						249,045
Asia:
China			15,601						16,416
Other Asia			31,159						28,668
Total Asia			46,760						45,084
Europe, Middle East and Africa			16,245						16,304
Japan			492						692
Total			$	303,313					$	311,125