filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
46K characters. Original on sec.gov · Markdown
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 (this “Quarterly Report”) and in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 1, 2022. 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 other forward-looking statements. Statements including, but not limited to, statements regarding the extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of our products and services, statements regarding our reliance on third parties, statements regarding the impact on our business of the COVID-19 pandemic and related public health measures or mandates, and other statements using words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “plans,” “projects,” “should,” “targets,” “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 “Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk,” and “Liquidity and Capital Resources” sections contained in this Quarterly Report, the "Risk Factors" section contained in our Annual Report on Form 10-K for the fiscal year ended January 1, 2022, and the risks discussed in our other Securities and Exchange Commission (“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.
Business Overview
We enable our customers to develop electronic products. Our products and services are designed to give our customers a competitive edge in their development of integrated circuits (“ICs”), systems-on-chip (“SoCs”), and increasingly sophisticated electronic devices and systems. Our products and services do this by optimizing performance, minimizing power consumption, shortening the time to bring our customers’ products to market, improving engineering productivity 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 (“IP”).
Our strategy, which we call Intelligent System Design™, is to provide the technology necessary for our customers to develop electronic products across a variety of vertical markets including consumer, hyperscale computing, mobile, 5G communications, automotive, aerospace and defense, industrial and healthcare. Our products and services enable our customers to develop complex and innovative electronic products, so demand for our technology is driven by our customers’ investment in new designs and products. Historically, the industry that provided the tools used by IC engineers was referred to as Electronic Design Automation (“EDA”). Today, our offerings include and extend beyond EDA.
We group our products into categories related to major design activities:
-
Custom IC Design and Simulation;
-
Digital IC Design and Signoff;
-
Functional Verification;
-
IP; and
-
System Design and Analysis.
For additional information about our products, see the discussion in Item 1, “Business,” under the heading “Products and Product Strategy,” in our Annual Report on Form 10-K for the fiscal year ended January 1, 2022.
Management uses certain 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.”
COVID-19 Pandemic
The effects of the ongoing COVID-19 pandemic have been widespread and have resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders and business limitations and shutdowns. We are unable to accurately predict the full impact that COVID-19 will have on our results of operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures and the distribution, acceptance and effectiveness of vaccines. Our efforts to comply with these containment measures have impacted our day-to-day operations and could disrupt our business and operations, as well as that of our key customers, suppliers (including contract manufacturers) and other counterparties, for an indefinite period of time.
To support the health and well-being of our employees, customers, partners and communities, a majority of our employees are still working remotely as of April 25, 2022. In April 2022, we reopened many of our facilities in multiple regions to allow our employees the option of using our facilities, as an alternative to working from home. As a result, we currently have a large number of employees who operate in a hybrid work environment, choosing to alternate between working from home and working from our facilities.
Since its inception, the COVID-19 pandemic has caused some volatility in our delivery timing for our hardware and IP products to certain customers. Many of our customers’ employees are working remotely, and, in some cases, we have experienced delivery lead times that are longer than normal because of delays in getting access to customer sites to complete our deliveries. In other cases, the amount of our hardware and IP products that we have been able to deliver has been greater than we originally anticipated at the beginning of the respective period. Despite the challenges the COVID-19 pandemic has posed to our operations, it has not had a material, adverse impact on our results of operations, financial condition, liquidity or cash flows. We will continue to evaluate the nature and extent of the impact of COVID-19 on our business.
Russia-Ukraine Conflict
During the first quarter of fiscal 2022, due to the ongoing conflict between Russia and Ukraine and the corresponding sanctions imposed by the United States and other countries, we suspended our operations in Russia. The suspension of our operations in Russia has not limited our ability to develop or support our products and did not have a material impact on our results of operations, financial condition, liquidity or cash flows. We do not have operations or employees in Ukraine. We will continue to monitor the future developments relative to this conflict and the potential impacts it could have on our employees and our ability to provide products and services to our global customer base.
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 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 January 1, 2022.
New Accounting Standards
For additional information about the adoption of new accounting standards, see Note 1 in the notes to condensed consolidated financial statements.
Results of Operations
Financial results for the three months ended April 2, 2022, as compared to the three months ended April 3, 2021, reflect the following:
-
revenue growth that exceeded the growth of our costs and expenses;
-
increased revenue from software, IP and other arrangements where revenue is recognized over time;
-
growth in revenue from emulation and prototyping hardware where revenue is recognized up-front;
-
continued investment in research and development activities and technical sales support; and
-
increased provision for income taxes primarily due to changes to tax laws in the United States.
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 time or at a point in time, upon completion of delivery.
Generally, between 85% and 90% of our annual revenue is characterized as recurring revenue. Recurring revenue includes revenue recognized over time from our software arrangements, services, royalties, maintenance on IP licenses and hardware, and operating leases of hardware. Recurring revenue also includes revenue recognized at varying points in time over the term of other arrangements with non-cancelable commitments, 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 products or services.
The remainder of our revenue is recognized at a point in time and is characterized as up-front revenue. Up-front revenue is primarily generated by our sales of emulation and prototyping hardware and individual IP licenses. The percentage of our recurring and up-front revenue and fluctuations in revenue within our geographies are impacted by delivery of hardware and IP products to our customers in any single fiscal period.
The following table shows the percentage of our revenue that is classified as recurring or up-front for the three months ended April 2, 2022 and April 3, 2021:
| Three Months Ended | |||||||||||||||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||||||||||||||
| Revenue recognized over time | 81 | % | 82 | % | |||||||||||||||||||
| Revenue from arrangements with non-cancelable commitments | 2 | % | 4 | % | |||||||||||||||||||
| Recurring revenue | 83 | % | 86 | % | |||||||||||||||||||
| Up-front revenue | 17 | % | 14 | % | |||||||||||||||||||
| Total | 100 | % | 100 | % |
While the percentage of revenue characterized as recurring compared to revenue characterized as up-front may vary between fiscal quarters, the overall mix of revenue is relatively consistent on an annual basis or over the course of twelve consecutive months. The following table shows the percentage of recurring revenue for the twelve-month periods ending concurrently with our five most recent fiscal quarters:
| Trailing Twelve Months Ended | |||||||||||||||||||||||||||||
| April 2, 2022 | January 1, 2022 | October 2, 2021 | July 3, 2021 | April 3, 2021 | |||||||||||||||||||||||||
| Recurring revenue | 87 | % | 88 | % | 87 | % | 87 | % | 87 | % | |||||||||||||||||||
| Up-front revenue | 13 | % | 12 | % | 13 | % | 13 | % | 13 | % | |||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
Revenue by Period
The following table shows our revenue for the three months ended April 2, 2022 and April 3, 2021 and the change in revenue between periods:
| Three Months Ended | Change | ||||||||||||||||||||||
| April 2, 2022 | April 3, 2021 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Product and maintenance | $ | 846.3 | $ | 699.0 | $ | 147.3 | 21 | % | |||||||||||||||
| Services | 55.5 | 37.0 | 18.5 | 50 | % | ||||||||||||||||||
| Total revenue | $ | 901.8 | $ | 736.0 | $ | 165.8 | 23 | % |
Product and maintenance revenue increased during the three months ended April 2, 2022, as compared to the three months ended April 3, 2021, due to increased revenue in each of our five product categories, with strong growth in emulation and prototyping hardware. This growth was driven by our customers investing in new, complex designs for their products that include the design of electronic systems for consumer, hyperscale computing, mobile, 5G communications, automotive, aerospace and defense, industrial and healthcare.
Services revenue may fluctuate from period to period based on the timing of fulfillment of our services and IP performance obligations.
No one customer accounted for 10% or more of total revenue during the three months ended April 2, 2022 or April 3, 2021.
Revenue by Product Category
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 | |||||||||||||||||||||||||||||
| April 2, 2022 | January 1, 2022 | October 2, 2021 | July 3, 2021 | April 3, 2021 | |||||||||||||||||||||||||
| Custom IC Design and Simulation | 22 | % | 24 | % | 23 | % | 23 | % | 23 | % | |||||||||||||||||||
| Digital IC Design and Signoff | 27 | % | 29 | % | 29 | % | 28 | % | 27 | % | |||||||||||||||||||
| Functional Verification, including Emulation and Prototyping Hardware | 28 | % | 21 | % | 23 | % | 25 | % | 26 | % | |||||||||||||||||||
| IP | 13 | % | 14 | % | 14 | % | 13 | % | 14 | % | |||||||||||||||||||
| System Design and Analysis | 10 | % | 12 | % | 11 | % | 11 | % | 10 | % | |||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
Revenue by product category fluctuates from period to period based on demand for our products and services, our available resources and our ability to deliver and support them. 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 categories 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 | ||||||||||||||||||||||
| April 2, 2022 | April 3, 2021 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| United States | $ | 413.5 | $ | 326.3 | $ | 87.2 | 27 | % | |||||||||||||||
| Other Americas | 11.8 | 9.7 | 2.1 | 22 | % | ||||||||||||||||||
| China | 140.0 | 89.5 | 50.5 | 56 | % | ||||||||||||||||||
| Other Asia | 158.7 | 133.8 | 24.9 | 19 | % | ||||||||||||||||||
| Europe, Middle East and Africa | 130.6 | 130.2 | 0.4 | — | % | ||||||||||||||||||
| Japan | 47.2 | 46.5 | 0.7 | 2 | % | ||||||||||||||||||
| Total revenue | $ | 901.8 | $ | 736.0 | $ | 165.8 | 23 | % |
The increase in revenue in the United States, China and Other Asia during the three months ended April 2, 2022, as compared to the three months ended April 3, 2021, was primarily due to increased revenue from our software, hardware and IP offerings.
Revenue by Geography as a Percent of Total Revenue
| Three Months Ended | |||||||||||||||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||||||||||||||
| United States | 46 | % | 45 | % | |||||||||||||||||||
| Other Americas | 1 | % | 1 | % | |||||||||||||||||||
| China | 16 | % | 12 | % | |||||||||||||||||||
| Other Asia | 18 | % | 18 | % | |||||||||||||||||||
| Europe, Middle East and Africa | 14 | % | 18 | % | |||||||||||||||||||
| Japan | 5 | % | 6 | % | |||||||||||||||||||
| Total | 100 | % | 100 | % |
During the three months ended April 2, 2022, as compared to the three months ended April 3, 2021, revenue from China was higher as a percentage of total revenue due to an increase in up-front revenue.
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.”
Cost of Revenue
| Three Months Ended | Change | ||||||||||||||||||||||
| April 2, 2022 | April 3, 2021 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Cost of product and maintenance | $ | 72.8 | $ | 64.9 | $ | 7.9 | 12 | % | |||||||||||||||
| Cost of services | 25.0 | 19.1 | 5.9 | 31 | % |
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. Cost of product and maintenance depends primarily on our hardware product sales in any given period, but is also affected by employee salary and benefits and other employee-related costs, reserves for inventory, and the timing and extent to which we acquire intangible assets, license third-party technology or IP, and sell our products that include such acquired or licensed technology or IP.
A summary of cost of product and maintenance is as follows:
| Three Months Ended | Change | ||||||||||||||||||||||
| April 2, 2022 | April 3, 2021 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Product and maintenance-related costs | $ | 60.8 | $ | 53.1 | $ | 7.7 | 15 | % | |||||||||||||||
| Amortization of acquired intangibles | 12.0 | 11.8 | 0.2 | 2 | % | ||||||||||||||||||
| Total cost of product and maintenance | $ | 72.8 | $ | 64.9 | $ | 7.9 | 12 | % |
The changes in product and maintenance-related costs for the three months ended April 2, 2022, as compared to the three months ended April 3, 2021, were due to the following:
| Change | |||||||||||
| Three Months Ended | |||||||||||
| (In millions) | |||||||||||
| Emulation and prototyping hardware costs | $ | 7.1 | |||||||||
| Other items | 0.6 | ||||||||||
| Total change in product and maintenance-related costs | $ | 7.7 |
Costs associated with our emulation and prototyping hardware products include components, assembly, testing, applicable reserves and overhead. These costs make our cost of emulation and prototyping hardware products higher, as a percentage of revenue, than our cost of software and IP products. Emulation and prototyping hardware costs increased during the three months ended April 2, 2022, as compared to the three months ended April 3, 2021, primarily due to increased revenue from emulation and prototyping hardware products.
Cost of Services
Cost of services primarily includes employee salary, benefits and other employee-related costs to perform work on revenue-generating projects and costs to maintain the infrastructure necessary to manage a services organization. Cost of services may fluctuate from period to period based on our utilization of design services engineers on revenue-generating projects rather than internal development projects.
Operating Expenses
Our operating expenses include marketing and sales, research and development, and general and administrative expenses. Factors that tend to cause our operating expenses to fluctuate include changes in the number of employees due to hiring and acquisitions, our annual merit cycle, stock-based compensation, restructuring and other employment separation activities, foreign exchange rate movements, volatility in variable compensation programs that are driven by operating results, and charitable donations.
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.”
Our operating expenses for the three months ended April 2, 2022 and April 3, 2021 were as follows:
| Three Months Ended | Change | ||||||||||||||||||||||
| April 2, 2022 | April 3, 2021 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Marketing and sales | $ | 140.2 | $ | 132.8 | $ | 7.4 | 6 | % | |||||||||||||||
| Research and development | 290.9 | 271.0 | 19.9 | 7 | % | ||||||||||||||||||
| General and administrative | 48.9 | 40.0 | 8.9 | 22 | % | ||||||||||||||||||
| Total operating expenses | $ | 480.0 | $ | 443.8 | $ | 36.2 | 8 | % |
Our operating expenses, as a percentage of total revenue, for the three months ended April 2, 2022 and April 3, 2021 were as follows:
| Three Months Ended | |||||||||||||||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||||||||||||||
| Marketing and sales | 16 | % | 18 | % | |||||||||||||||||||
| Research and development | 32 | % | 37 | % | |||||||||||||||||||
| General and administrative | 5 | % | 5 | % | |||||||||||||||||||
| Total operating expenses | 53 | % | 60 | % |
Marketing and Sales
The increase in marketing and sales expense for the three months ended April 2, 2022, as compared to the three months ended April 3, 2021, was due to the following:
| Change | |||||||||||
| Three Months Ended | |||||||||||
| (In millions) | |||||||||||
| Salary, benefits and other employee-related costs | $ | 6.1 | |||||||||
| Other items | 1.3 | ||||||||||
| Total change in marketing and sales expense | $ | 7.4 |
Salary, benefits and other employee-related costs included in marketing and sales expense increased during the three months ended April 2, 2022, as compared to the three months ended April 3, 2021, primarily due to additional headcount from hiring and increased variable compensation.
Research and Development
The increase in research and development expense for the three months ended April 2, 2022, as compared to the three months ended April 3, 2021, was due to the following:
| Change | |||||||||||
| Three Months Ended | |||||||||||
| (In millions) | |||||||||||
| Salary, benefits and other employee-related costs | $ | 13.8 | |||||||||
| Stock-based compensation | 2.3 | ||||||||||
| Professional services | 2.1 | ||||||||||
| Facilities and other infrastructure costs | 2.0 | ||||||||||
| Other items | (0.3) | ||||||||||
| Total change in research and development expense | $ | 19.9 |
Salary, benefits and other employee-related costs included in research and development expense increased during the three months ended April 2, 2022, as compared to the three months ended April 3, 2021, primarily due to additional headcount from hiring.
General and Administrative
The increase in general and administrative expense for the three months ended April 2, 2022, as compared to the three months ended April 3, 2021, was due to the following:
| Change | |||||||||||
| Three Months Ended | |||||||||||
| (In millions) | |||||||||||
| Stock-based compensation | $ | 4.0 | |||||||||
| Contributions to non-profit organizations | 3.5 | ||||||||||
| Other items | 1.4 | ||||||||||
| Total change in general and administrative expense | $ | 8.9 |
Stock-based compensation included in general and administrative expense increased during the three months ended April 2, 2022, as compared to the three months ended April 3, 2021, primarily due to equity awards granted to executives. The increase in contributions to non-profit organizations is the result of our continued commitment to support charitable initiatives, including the Cadence Giving Foundation.
Operating Margin
Operating margin represents income from operations as a percentage of total revenue. Our operating margin for the three months ended April 2, 2022, and the three months ended April 3, 2021 was as follows:
| Three Months Ended | |||||||||||||||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||||||||||||||
| Operating margin | 35 | % | 28 | % |
Operating margin increased during the three months ended April 2, 2022, as compared to the three months ended April 3, 2021, primarily because revenue growth in each of our five product categories exceeded growth in cost of revenue and operating expense. During the remainder of fiscal 2022, we do not expect operating margin to grow at the same level it has during the first quarter of fiscal 2022, because we expect up-front revenue to be lower as a percentage of total revenue for the remainder of fiscal 2022 than it was during the first quarter of fiscal 2022.
Interest Expense
| Three Months Ended | |||||||||||||||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Contractual interest expense: | |||||||||||||||||||||||
| 2024 Notes | $ | 3.8 | $ | 3.8 | |||||||||||||||||||
| Revolving credit facility | 0.2 | 0.2 | |||||||||||||||||||||
| Amortization of debt discount: | |||||||||||||||||||||||
| 2024 Notes | 0.2 | 0.2 | |||||||||||||||||||||
| Other | (0.1) | — | |||||||||||||||||||||
| Total interest expense | $ | 4.1 | $ | 4.2 |
Income Taxes
The following table presents the provision for income taxes and the effective tax rate for the three months ended April 2, 2022 and April 3, 2021:
| Three Months Ended | |||||||||||||||||||||||
| April 2, 2022 | April 3, 2021 | ||||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Provision for income taxes | $ | 74.6 | $ | 15.3 | |||||||||||||||||||
| Effective tax rate | 24.1 | % | 7.5 | % |
The United States enacted the Tax Cuts and Jobs Act in December 2017, which requires companies to capitalize all of their R&D costs, including software development costs, incurred in tax years beginning after December 31, 2021. Beginning in fiscal 2022, we must capitalize and amortize R&D costs over five years for domestic research and 15 years for international research rather than expensing these costs as incurred. If the United States doesn’t repeal the law or defer the effective date of the law in the future, then we expect our fiscal 2022 effective tax rate and our cash tax payments to increase significantly as compared to fiscal 2021. We also expect to recognize increases to our deferred tax assets as we begin to capitalize domestic research costs.
Our provision for income taxes for the three months ended April 2, 2022 was primarily attributable to federal, state and foreign income taxes on our anticipated fiscal 2022 income, partially offset by the tax benefit of $24.3 million related to stock-based compensation that vested or was exercised during the period. Our provision for income taxes for the three months ended April 2, 2022, reflected the impact of the Tax Cuts and Jobs Act, which requires the capitalization and amortization of R&D costs incurred after December 31, 2021.
Our provision for income taxes for the three months ended April 3, 2021 was primarily attributable to federal, state and foreign income taxes on our anticipated fiscal 2021 income, partially offset by the tax benefit of $29.0 million for the three months ended April 3, 2021, related to stock-based compensation that vested or was exercised during the period.
Our future effective tax rates may also be materially impacted by tax amounts associated with our foreign earnings at rates different from the United States federal statutory rate, research credits, the tax impact of stock-based compensation, accounting for uncertain tax positions, business combinations, closure of statutes of limitations or settlement of tax audits, changes in valuation allowance and changes in tax law. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and Hungary. Our future effective tax rates may be adversely affected if our earnings were to be lower in countries where we have lower statutory tax rates. We currently expect that our fiscal 2022 effective tax rate will be approximately 28%. We expect that our quarterly effective tax rates will vary from our fiscal 2022 effective tax rate as a result of recognizing the income tax effects of stock-based awards in the quarterly periods that the awards vest or are settled and other items that we cannot anticipate. For additional discussion about how our effective tax rate could be affected by various risks, see Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended January 1, 2022.
Liquidity and Capital Resources
| As of | |||||||||||||||||
| April 2, 2022 | January 1, 2022 | Change | |||||||||||||||
| (In millions) | |||||||||||||||||
| Cash and cash equivalents | $ | 1,134.8 | $ | 1,088.9 | $ | 45.9 | |||||||||||
| Net working capital | 774.1 | 744.5 | 29.6 |
Cash and Cash Equivalents
As of both April 2, 2022 and January 1, 2022, our principal sources of liquidity consisted of approximately $1.1 billion of cash and cash equivalents.
Our primary sources of cash and cash equivalents during the three months ended April 2, 2022 were cash generated from operations and proceeds from the issuance of common stock resulting from stock purchases under our employee stock purchase plan and stock options exercised during the period.
Our primary uses of cash and cash equivalents during the three months ended April 2, 2022 were payments related to employee salaries and benefits, operating expenses, repurchases of our common stock, payment of employee taxes on vesting of restricted stock, and purchases of property, plant and equipment.
Approximately 63% of our cash and cash equivalents were held by our foreign subsidiaries as of April 2, 2022. Our cash and cash equivalents held by our foreign subsidiaries may vary from period to period due to the timing of collections and repatriation of foreign earnings. We expect that current cash and cash equivalent balances and cash flows that are generated from operations and financing activities will be sufficient to meet the needs of our domestic and international operating activities and other capital and liquidity requirements, including acquisitions and share repurchases, for at least the next 12 months and thereafter for the foreseeable future.
Net Working Capital
Net working capital is comprised of current assets less current liabilities, as shown on our condensed consolidated balance sheets. The increase in our net working capital as of April 2, 2022, as compared to January 1, 2022, is primarily due to the timing of cash receipts from customers and disbursements made to vendors.
Cash Flows from Operating Activities
| Three Months Ended | |||||||||||||||||
| April 2, 2022 | April 3, 2021 | Change | |||||||||||||||
| (In millions) | |||||||||||||||||
| Cash provided by operating activities | $ | 336.6 | $ | 208.4 | $ | 128.2 |
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 provided by 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 three months ended April 2, 2022, as compared to the three months ended April 3, 2021, was primarily due to improved results from operations and timing of cash receipts from customers and disbursements made to vendors.
Cash Flows from Investing Activities
| Three Months Ended | |||||||||||||||||
| April 2, 2022 | April 3, 2021 | Change | |||||||||||||||
| (In millions) | |||||||||||||||||
| Cash used for investing activities | $ | (19.9) | $ | (206.2) | $ | 186.3 |
Cash used for investing activities decreased during the three months ended April 2, 2022, as compared to the three months ended April 3, 2021, primarily due to a decrease in payments for business combinations. We expect to continue our investing activities, including purchasing property, plant and equipment, purchasing intangible assets, business combinations, purchasing software licenses, and making strategic investments.
Cash Flows from Financing Activities
| Three Months Ended | |||||||||||||||||
| April 2, 2022 | April 3, 2021 | Change | |||||||||||||||
| (In millions) | |||||||||||||||||
| Cash used for financing activities | $ | (260.7) | $ | (182.3) | $ | (78.4) |
Cash flows used for financing activities increased during the three months ended April 2, 2022, as compared to the three months ended April 3, 2021, primarily due to an increase in payments for repurchases of our common stock and employee taxes on vesting of restricted stock.
Other Factors Affecting Liquidity and Capital Resources
Stock Repurchase Program
In August 2021, our Board of Directors increased the prior authorization to repurchase shares of our 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 April 2, 2022, approximately $877 million of the share repurchase authorization remained available to repurchase shares of our common stock. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” for additional information on share repurchases.
Revolving Credit Facility
In June 2021, we 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 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 the 2021 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. As of April 2, 2022, there were no borrowings outstanding under the 2021 Credit Facility, and we were in compliance with all financial covenants associated with such credit facility.
2024 Notes
In October 2014, we issued $350.0 million aggregate principal amount of 4.375% Senior Notes due October 15, 2024 (the “2024 Notes”). We received net proceeds of $342.4 million from the issuance of the 2024 Notes, net of a discount of $1.4 million and issuance costs of $6.2 million. Interest is payable in cash semi-annually. The 2024 Notes are unsecured and rank equal in right of payment to all of our existing and future senior indebtedness. As of April 2, 2022, we were in compliance with all covenants associated with the 2024 Notes.
For additional information relating to our debt arrangements, see Note 4 in the notes to condensed consolidated financial statements.
Other Liquidity Requirements
During the three months ended April 2, 2022, there were no material changes to our other liquidity requirements as reported in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended January 1, 2022.
Previous: Item 1. Financial Statements · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk