Item 1. Financial Statements

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

			As of
			July 2, 2022						January 1, 2022
ASSETS
Current assets:
Cash and cash equivalents			$	1,029,544					$	1,088,940
Receivables, net			391,738						337,596
Inventories			106,372						115,721
Prepaid expenses and other			129,966						173,512
Total current assets			1,657,620						1,715,769
Property, plant and equipment, net			316,741						305,911
Goodwill			924,460						928,358
Acquired intangibles, net			215,781						233,265
Deferred taxes			802,886						763,770
Other assets			443,786						439,226
Total assets			$	4,361,274					$	4,386,299
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities			$	437,195					$	417,283
Current portion of deferred revenue			605,296						553,942
Total current liabilities			1,042,491						971,225
Long-term liabilities:
Long-term portion of deferred revenue			114,573						101,148
Long-term debt			347,999						347,588
Other long-term liabilities			230,982						225,663
Total long-term liabilities			693,554						674,399
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock and capital in excess of par value			2,590,893						2,467,701
Treasury stock, at cost			(3,352,827)						(2,740,003)
Retained earnings			3,468,543						3,046,288
Accumulated other comprehensive loss			(81,380)						(33,311)
Total stockholders’ equity			2,625,229						2,740,675
Total liabilities and stockholders’ equity			$	4,361,274					$	4,386,299

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												Six Months Ended
			July 2, 2022						July 3, 2021						July 2, 2022						July 3, 2021
Revenue:
Product and maintenance			$	802,285					$	687,884					$	1,648,529					$	1,386,938
Services			55,236						40,401						110,758						77,375
Total revenue			857,521						728,285						1,759,287						1,464,313
Costs and expenses:
Cost of product and maintenance			68,717						55,842						141,512						120,748
Cost of services			23,948						20,917						48,996						39,978
Marketing and sales			139,296						135,967						279,482						268,793
Research and development			286,597						285,227						577,492						556,219
General and administrative			51,426						40,333						100,363						80,285
Amortization of acquired intangibles			4,633						5,030						9,597						9,661
Restructuring			16						(469)						28						(746)
Total costs and expenses			574,633						542,847						1,157,470						1,074,938
Income from operations			282,888						185,438						601,817						389,375
Interest expense			(4,281)						(4,316)						(8,389)						(8,533)
Other income (expenses), net			(5,962)						2,143						(10,862)						4,844
Income before provision for income taxes			272,645						183,265						582,566						385,686
Provision for income taxes			85,725						27,365						160,311						42,617
Net income			$	186,920					$	155,900					$	422,255					$	343,069
Net income per share – basic			$	0.69					$	0.57					$	1.55					$	1.25
Net income per share – diluted			$	0.68					$	0.56					$	1.53					$	1.23
Weighted average common shares outstanding – basic			271,520						273,565						272,028						273,843
Weighted average common shares outstanding – diluted			275,172						278,558						276,097						279,399

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

			Three Months Ended												Six Months Ended
			July 2, 2022						July 3, 2021						July 2, 2022						July 3, 2021
Net income			$	186,920					$	155,900					$	422,255					$	343,069
Other comprehensive income (loss), net of tax effects:
Foreign currency translation adjustments			(35,222)						5,788						(49,996)						(4,136)
Changes in defined benefit plan liabilities			1,761						(543)						1,927						(231)
Total other comprehensive income (loss), net of tax effects			(33,461)						5,245						(48,069)						(4,367)
Comprehensive income			$	153,459					$	161,145					$	374,186					$	338,702

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

			Three Months Ended July 2, 2022
			Common Stock
									Par Value																		Accumulated
									and Capital																		Other
									in Excess						Treasury						Retained						Comprehensive
			Shares						of Par						Stock						Earnings						Loss						Total
Balance, April 2, 2022			275,759						$	2,552,207					$	(3,025,728)					$	3,281,623					$	(47,919)					$	2,760,183
Net income			—						—						—						186,920						—						$	186,920
Other comprehensive loss, net of taxes			—						—						—						—						(33,461)						$	(33,461)
Purchase of treasury stock			(2,138)						—						(320,033)						—						—						$	(320,033)
Equity forward contract			—						(30,000)						—						—						—						$	(30,000)
Issuance of common stock and reissuance of treasury stock under equity incentive plans, net of forfeitures			288						5,829						(1,278)						—						—						$	4,551
Stock received for payment of employee taxes on vesting of restricted stock			(39)						(1,413)						(5,788)						—						—						$	(7,201)
Stock-based compensation expense			—						64,270						—						—						—						$	64,270
Balance, July 2, 2022			273,870						$	2,590,893					$	(3,352,827)					$	3,468,543					$	(81,380)					$	2,625,229
			Three Months Ended July 3, 2021
			Common Stock
									Par Value																		Accumulated
									and Capital																		Other
									in Excess						Treasury						Retained						Comprehensive
			Shares						of Par						Stock						Earnings						Loss						Total
Balance, April 3, 2021			278,265						$	2,307,965					$	(2,275,998)					$	2,537,502					$	(27,037)					$	2,542,432
Net income			—						—						—						155,900						—						$	155,900
Other comprehensive income, net of taxes			—						—						—						—						5,245						$	5,245
Purchase of treasury stock			(1,720)						—						(220,023)						—						—						$	(220,023)
Issuance of common stock and reissuance of treasury stock under equity incentive plans, net of forfeitures			367						791						3,548						—						—						$	4,339
Stock received for payment of employee taxes on vesting of restricted stock			(132)						(4,473)						(17,195)						—						—						$	(21,668)
Stock-based compensation expense			—						50,518						—						—						—						$	50,518
Balance, July 3, 2021			276,780						$	2,354,801					$	(2,509,668)					$	2,693,402					$	(21,792)					$	2,516,743

			Six Months Ended July 2, 2022
			Common Stock
									Par Value																		Accumulated
									and Capital																		Other
									in Excess						Treasury						Retained						Comprehensive
			Shares						of Par						Stock						Earnings						Loss						Total
Balance, January 1, 2022			276,796						$	2,467,701					$	(2,740,003)					$	3,046,288					$	(33,311)					$	2,740,675
Net income			—						—						—						422,255						—						$	422,255
Other comprehensive loss, net of taxes			—						—						—						—						(48,069)						$	(48,069)
Purchase of treasury stock			(3,704)						—						(570,049)						—						—						$	(570,049)
Equity forward contract			—						(30,000)						—						—						—						$	(30,000)
Issuance of common stock and reissuance of treasury stock under equity incentive plans, net of forfeitures			1,163						37,232						12,990						—						—						$	50,222
Stock received for payment of employee taxes on vesting of restricted stock			(385)						(7,779)						(55,765)						—						—						$	(63,544)
Stock-based compensation expense			—						123,739						—						—						—						$	123,739
Balance, July 2, 2022			273,870						$	2,590,893					$	(3,352,827)					$	3,468,543					$	(81,380)					$	2,625,229
			Six Months Ended July 3, 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			—						—						—						343,069						—						$	343,069
Other comprehensive loss, net of taxes			—						—						—						—						(4,367)						$	(4,367)
Purchase of treasury stock			(3,043)						—						(392,290)						—						—						$	(392,290)
Issuance of common stock and reissuance of treasury stock under equity incentive plans, net of forfeitures			1,391						42,917						9,335						—						—						$	52,252
Stock received for payment of employee taxes on vesting of restricted stock			(509)						(9,169)						(68,884)						—						—						$	(78,053)
Stock-based compensation expense			—						103,114						—						—						—						$	103,114
Balance, July 3, 2021			276,780						$	2,354,801					$	(2,509,668)					$	2,693,402					$	(21,792)					$	2,516,743

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

			Six Months Ended
			July 2, 2022						July 3, 2021
Cash and cash equivalents at beginning of period			$	1,088,940					$	928,432
Cash flows from operating activities:
Net income			422,255						343,069
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			67,690						71,799
Amortization of debt discount and fees			539						687
Stock-based compensation			123,739						103,114
(Gain) loss on investments, net			3,124						(795)
Deferred income taxes			(41,597)						1,710
Provisions for losses on receivables			133						242
ROU asset amortization and change in operating lease liabilities			1,742						(2,483)
Other non-cash items			88						183
Changes in operating assets and liabilities, net of effect of acquired businesses:
Receivables			(64,036)						(48,016)
Inventories			367						(14,527)
Prepaid expenses and other			40,571						7,690
Other assets			14,476						6,991
Accounts payable and accrued liabilities			17,470						(14,771)
Deferred revenue			80,460						127,286
Other long-term liabilities			(5,872)						6,639
Net cash provided by operating activities			661,149						588,818
Cash flows from investing activities:
Purchases of non-marketable investments			(1,000)						—
Purchases of property, plant and equipment			(42,202)						(31,139)
Purchases of intangible assets			(750)						—
Cash paid in business combinations, net of cash acquired			(25,000)						(220,660)
Net cash used for investing activities			(68,952)						(251,799)
Cash flows from financing activities:
Payment of debt issuance costs			—						(1,285)
Proceeds from issuance of common stock			50,224						52,252
Stock received for payment of employee taxes on vesting of restricted stock			(63,544)						(78,053)
Payments for repurchases of common stock			(600,049)						(392,290)
Net cash used for financing activities			(613,369)						(419,376)
Effect of exchange rate changes on cash and cash equivalents			(38,224)						1,085
Decrease in cash and cash equivalents			(59,396)						(81,272)
Cash and cash equivalents at end of period			$	1,029,544					$	847,160
Supplemental cash flow information:
Cash paid for interest			$	7,973					$	7,920
Cash paid for taxes, net			79,277						28,619

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 1, 2022.

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 and rising tensions in the geopolitical climate, there continues to be 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 July 25, 2022, 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

Lessors - Certain Leases with Variable Lease Payments

In July 2021, the Financial Accounting Standards Board (“FASB”), issued ASU 2021-05, “Lessors - Certain Leases with Variable Lease Payments,” which allows lessors to classify and account for a lease with variable payments that do not depend on a reference index or a rate as an operating lease if both of the following criteria are met: (1) the lease would have been classified as a sales-type lease or a direct financing lease in accordance with the classification criteria as defined in ASC Topic 842 and (2) the lessor would have otherwise recognized a day-one loss on the lease arrangement. This standard better aligns the accounting with the underlying economics of these arrangements as lessors are not permitted to include most variable payments which do not depend on a reference index or a rate in the lease receivable while assets are derecognized at lease commencement. This standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Cadence adopted this standard on January 2, 2022, the first day of fiscal 2022, on a prospective basis. The adoption of this standard did not have a material impact on Cadence’s condensed consolidated financial statements and related disclosures.

Business Combinations

In October 2021, the FASB issued ASU 2021-08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with “Revenue from Contracts with Customers (Topic 606)” as if the acquiring entity had originated the contracts. This approach differs from the previous requirement to measure contract assets and contract liabilities acquired in a business combination at fair value. The standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and early adoption is permitted. Cadence adopted this standard on January 2, 2022, the first day of fiscal 2022. The impact of the standard on Cadence’s condensed consolidated financial statements is dependent on the size and frequency of future acquisitions and does not affect contract assets or contract liabilities related to acquisitions completed prior to the adoption date.

NOTE 2. REVENUE

Cadence groups its products and services into five categories related to major design activities. The following table shows the percentage of revenue contributed by each of Cadence’s five product categories for the three and six months ended July 2, 2022 and July 3, 2021:

			Three Months Ended												Six Months Ended
			July 2, 2022						July 3, 2021						July 2, 2022						July 3, 2021
Custom Integrated Circuit (“IC”) Design and Simulation			23		%				23		%				22		%				23		%
Digital IC Design and Signoff			27		%				28		%				27		%				28		%
Functional Verification, including Emulation and Prototyping Hardware*			24		%				25		%				26		%				26		%
Intellectual Property (“IP”)			14		%				13		%				14		%				13		%
System Design and Analysis			12		%				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. No one customer accounted for 10% or more of total revenue during the three and six months ended July 2, 2022 or the three and six months ended July 3, 2021.

Generally, between 85% and 90% of Cadence’s 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. 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 arrangement is treated as an individual contract and accounted for based on the respective performance obligations.

The remainder of Cadence’s revenue is recognized at a point in time and is characterized as up-front revenue. Up-front revenue is primarily generated by sales of emulation and prototyping hardware and individual IP licenses. The percentage of Cadence’s recurring and up-front revenue may be impacted by delivery of hardware and IP products to its customers in any single fiscal period. The following table shows the percentage of Cadence’s revenue that is classified as recurring or up-front for the three and six months ended July 2, 2022 and July 3, 2021:

			Three Months Ended												Six Months Ended
			July 2, 2022						July 3, 2021						July 2, 2022						July 3, 2021
Revenue recognized over time			84		%				84		%				82		%				83		%
Revenue from arrangements with non-cancelable commitments			2		%				3		%				2		%				3		%
Recurring revenue			86		%				87		%				84		%				86		%
Up-front revenue			14		%				13		%				16		%				14		%
Total			100		%				100		%				100		%				100		%

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 a 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 sheets 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 July 2, 2022 and January 1, 2022 were as follows:

			As of
			July 2, 2022						January 1, 2022
			(In thousands)
Contract assets			$	23,273					$	6,811
Deferred revenue			719,869						655,090

Cadence recognized revenue of $143.4 million and $425.0 million during the three and six months ended July 2, 2022, and $103.4 million and $330.0 million during the three and six months ended July 3, 2021, that was included in the deferred revenue balance at the beginning of each respective 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.

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 $5.6 billion as of July 2, 2022, which included $171.3 million of non-cancelable 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 July 2, 2022, Cadence expected to recognize 51% of the contracted but unsatisfied performance obligations, excluding non-cancelable commitments, as revenue over the next 12 months and the remainder thereafter.

Cadence recognized revenue of $10.9 million and $23.1 million during the three and six months ended July 2, 2022, and $11.5 million and $21.7 million during the three and six months ended July 3, 2021, 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 3. RECEIVABLES, NET

Cadence’s current and long-term receivables balances as of July 2, 2022 and January 1, 2022 were as follows:

			As of
			July 2, 2022						January 1, 2022
			(In thousands)
Accounts receivable			$	241,342					$	185,599
Unbilled accounts receivable			153,451						155,689
Long-term receivables			6,223						5,098
Total receivables			401,016						346,386
Less allowance for doubtful accounts			(3,055)						(3,692)
Total receivables, net			$	397,961					$	342,694

Cadence’s customers are primarily concentrated within the semiconductor and electronics systems industries. As of July 2, 2022, one customer accounted for 11% of Cadence’s total receivables. As of January 1, 2022, no customer accounted for 10% or more of Cadence’s total receivables.

NOTE 4. DEBT

Revolving Credit Facility

In June 2021, Cadence 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 million, with the right to request increased capacity up to an additional $350 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 July 2, 2022, 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 carrying value of the 2024 Notes was $348.0 million and $347.6 million as of July 2, 2022 and January 1, 2022, respectively. The fair value of the 2024 Notes was approximately $355.3 million as of July 2, 2022.

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 5. ACQUISITIONS

During the second quarter of fiscal 2022, Cadence completed one business combination for aggregate cash consideration of $25.0 million. The total purchase consideration was allocated to assets acquired based on their respective estimated fair values on the acquisition date. Cadence recorded $15.0 million of acquired intangible assets, which consisted of $8.2 million of existing technology and $6.8 million of in-process technology. Cadence also recognized $10.0 million of goodwill, which is primarily attributed to an assembled workforce. The goodwill recognized is expected to be deductible for tax purposes.

Transaction costs associated with acquisitions are included in general and administrative expense in Cadence’s condensed consolidated income statement. During the three and six months ended July 2, 2022, transaction costs associated with acquisitions were $6.3 million and $6.5 million, respectively. During the three and six months ended July 3, 2021, transaction costs associated with acquisitions were $0.3 million and $1.9 million, respectively. For additional information relating to Cadence’s acquisitions subsequent to the period end date covered by this quarterly report, see Note 15 in the notes to condensed consolidated financial statements.

NOTE 6. GOODWILL AND ACQUIRED INTANGIBLES

Goodwill

The changes in the carrying amount of goodwill during the six months ended July 2, 2022 were as follows:

			Gross Carrying Amount
			(In thousands)
Balance as of January 1, 2022			$	928,358
Goodwill resulting from acquisitions			9,984
Effect of foreign currency translation			(13,882)
Balance as of July 2, 2022			$	924,460

Acquired Intangibles, Net

Acquired intangibles as of July 2, 2022 were as follows, excluding intangibles that were fully amortized as of January 1, 2022:

			Gross Carrying Amount						Accumulated Amortization						Acquired Intangibles, Net
			(In thousands)
Existing technology			$	397,401					$	(259,372)					$	138,029
Agreements and relationships			193,674						(129,517)						64,157
Tradenames, trademarks and patents			9,048						(2,253)						6,795
Total acquired intangibles with definite lives			600,123						(391,142)						208,981
In-process technology			6,800						—						6,800
Total acquired intangibles			$	606,923					$	(391,142)					$	215,781

In-process technology as of July 2, 2022 consisted of acquired projects that, if completed, will contribute to Cadence’s existing product offerings. As of July 2, 2022, these projects were expected to be completed during the second quarter of fiscal 2023. During the three and six months ended July 2, 2022, there were no transfers from in-process technology to existing technology.

Acquired intangibles as of January 1, 2022 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			$	405,481					$	(254,599)					$	150,882
Agreements and relationships			205,057						(130,187)						74,870
Tradenames, trademarks and patents			10,666						(3,153)						7,513
Total acquired intangibles			$	621,204					$	(387,939)					$	233,265

Amortization expense from existing technology and maintenance agreements is included in cost of product and maintenance. Amortization expense for the three and six months ended July 2, 2022 and July 3, 2021 by condensed consolidated income statement caption was as follows:

			Three Months Ended												Six Months Ended
			July 2, 2022						July 3, 2021						July 2, 2022						July 3, 2021
			(In thousands)
Cost of product and maintenance			$	10,068					$	12,232					$	22,039					$	24,000
Amortization of acquired intangibles			4,633						5,030						9,597						9,661
Total amortization of acquired intangibles			$	14,701					$	17,262					$	31,636					$	33,661

As of July 2, 2022, the estimated amortization expense for intangible assets with definite lives was as follows for the following five fiscal years and thereafter:

			(In thousands)
2022 - remaining period			$	20,763
2023			37,432
2024			35,672
2025			23,744
2026			18,379
2027			16,862
Thereafter			56,129
Total estimated amortization expense			$	208,981

NOTE 7. STOCK-BASED COMPENSATION

Stock-based compensation expense is reflected in Cadence’s condensed consolidated income statements for the three and six months ended July 2, 2022 and July 3, 2021 as follows:

			Three Months Ended												Six Months Ended
			July 2, 2022						July 3, 2021						July 2, 2022						July 3, 2021
			(In thousands)
Cost of product and maintenance			$	875					$	909					$	1,705					$	1,716
Cost of services			1,113						992						2,163						2,019
Marketing and sales			12,902						10,294						24,659						21,500
Research and development			37,067						31,286						72,189						64,144
General and administrative			12,313						7,037						23,023						13,735
Total stock-based compensation expense			$	64,270					$	50,518					$	123,739					$	103,114

Cadence had total unrecognized compensation expense related to stock option and restricted stock grants of $408.7 million as of July 2, 2022, which will be recognized over the remaining vesting period. The remaining weighted average vesting period of unvested awards is 2.3 years.

NOTE 8. STOCK REPURCHASE PROGRAM

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.

During the three months ended July 2, 2022, Cadence repurchased approximately 1.6 million shares on the open market, for an aggregate purchase price of $250.0 million.

In June 2022, Cadence also entered into an accelerated share repurchase (“ASR”) agreement with Royal Bank of Canada to repurchase an aggregate of $100.0 million of Cadence common stock. The ASR agreement was accounted for as two separate transactions (1) a repurchase of common stock and (2) an equity-linked contract on Cadence’s own stock. Under the ASR agreement, Cadence received an initial share delivery of approximately 0.5 million shares, which represented the number of shares at a market price equal to $70.0 million. An equity-linked contract for $30.0 million, representing the remaining shares to be delivered by Royal Bank of Canada under the ASR agreement, was recorded to stockholders’ equity as of July 2, 2022 and is expected to settle in the third quarter of fiscal 2022 upon completion of the repurchases. The shares Cadence receives are treated as a repurchase of common stock for purposes of calculating earnings per share. The final number of shares that Cadence will repurchase under the ASR agreement will be based on Cadence’s daily volume-weighted average share prices during the term of the ASR agreement, less a discount.

As of July 2, 2022, approximately $527 million of Cadence’s 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 six months ended July 2, 2022 and July 3, 2021 were as follows:

			Three Months Ended												Six Months Ended
			July 2, 2022						July 3, 2021						July 2, 2022						July 3, 2021
			(In thousands)
Shares repurchased			2,138						1,720						3,704						3,043
Total cost of repurchased shares			$	320,033					$	220,023					$	570,049					$	392,290

NOTE 9. NET INCOME PER SHARE

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

The calculations for basic and diluted net income per share for the three and six months ended July 2, 2022 and July 3, 2021 are as follows:

			Three Months Ended												Six Months Ended
			July 2, 2022						July 3, 2021						July 2, 2022						July 3, 2021
			(In thousands, except per share amounts)
Net income			$	186,920					$	155,900					$	422,255					$	343,069
Weighted average common shares used to calculate basic net income per share			271,520						273,565						272,028						273,843
Stock-based awards			3,652						4,993						4,069						5,556
Weighted average common shares used to calculate diluted net income per share			275,172						278,558						276,097						279,399
Net income per share - basic			$	0.69					$	0.57					$	1.55					$	1.25
Net income per share - diluted			$	0.68					$	0.56					$	1.53					$	1.23

The following table presents shares of Cadence’s common stock outstanding for the three and six months ended July 2, 2022 and July 3, 2021 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												Six Months Ended
			July 2, 2022						July 3, 2021						July 2, 2022						July 3, 2021
			(In thousands)
Long-term market-based awards			1,658						—						1,347						—
Options to purchase shares of common stock			857						331						760						235
Non-vested shares of restricted stock			81						75						82						67
Total potential common shares excluded			2,596						406						2,189						302

NOTE 10. FAIR VALUE

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

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

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

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

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 six months ended July 2, 2022.

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 July 2, 2022 and January 1, 2022:

			Fair Value Measurements as of July 2, 2022
			Total						Level 1						Level 2						Level 3
			(In thousands)
Assets
Cash equivalents:
Money market funds			$	501,795					$	501,795					$	—					$	—
Marketable equity securities			4,371						4,371						—						—
Securities held in Non-Qualified Deferred Compensation (“NQDC”) trust			49,196						49,196						—						—
Total Assets			$	555,362					$	555,362					$	—					$	—
			Total						Level 1						Level 2						Level 3
			(In thousands)
Liabilities
Foreign currency exchange contracts			$	6,915					$	—					$	6,915					$	—
Total Liabilities			$	6,915					$	—					$	6,915					$	—
			Fair Value Measurements as of January 1, 2022
			Total						Level 1						Level 2						Level 3
			(In thousands)
Assets
Cash equivalents:
Money market funds			$	658,474					$	658,474					$	—					$	—
Marketable equity securities			5,956						5,956						—						—
Securities held in NQDC trust			56,165						56,165						—						—
Total Assets			$	720,595					$	720,595					$	—					$	—
			Total						Level 1						Level 2						Level 3
			(In thousands)
Liabilities
Foreign currency exchange contracts			$	306					$	—					$	306					$	—
Total Liabilities			$	306					$	—					$	306					$	—

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 4 in the notes to condensed consolidated financial statements.

Level 3 Measurements

During the second quarter of fiscal 2022, Cadence acquired intangible assets of $15.0 million. The fair value of the intangible assets acquired with this acquisition was determined using the multi-period excess earnings method, a variation of the income approach that utilizes unobservable inputs classified as level 3 measurements. This method estimates the revenues and cash flows derived from the acquired assets, net of investment in supporting assets. The resulting cash flow, which is attributable solely to the assets acquired, is then discounted at a rate of return commensurate with the associated risk of the asset to calculate the present value. Cadence assumed discount rates between 23% and 25%.

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

NOTE 11. INVENTORY

Cadence’s inventory balances as of July 2, 2022 and January 1, 2022 were as follows:

			As of
			July 2, 2022						January 1, 2022
			(In thousands)
Inventories:
Raw materials			$	96,769					$	88,629
Finished goods			9,603						27,092
Total inventories			$	106,372					$	115,721

NOTE 12. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

From time to time, Cadence is involved in various disputes and legal proceedings that arise in the ordinary course of business. These include disputes and legal proceedings related to intellectual property, indemnification obligations, mergers and acquisitions, licensing, contracts, customers, products, distribution and other commercial 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 legal proceedings 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 six months ended July 2, 2022 and July 3, 2021.

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 six months ended July 2, 2022 and July 3, 2021.

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 July 2, 2022 and January 1, 2022:

			As of
			July 2, 2022						January 1, 2022
			(In thousands)
Foreign currency translation loss			$	(76,549)					$	(26,553)
Changes in defined benefit plan liabilities			(4,831)						(6,758)
Total accumulated other comprehensive loss			$	(81,380)					$	(33,311)

For the three and six months ended July 2, 2022 and July 3, 2021 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 six months ended July 2, 2022 and July 3, 2021:

			Three Months Ended												Six Months Ended
			July 2, 2022						July 3, 2021						July 2, 2022						July 3, 2021
			(In thousands)
Americas:
United States			$	368,974					$	313,138					$	782,512					$	639,462
Other Americas			12,043						10,190						23,845						19,866
Total Americas			381,017						323,328						806,357						659,328
Asia:
China			113,169						99,591						253,135						189,032
Other Asia			151,967						134,389						310,641						268,237
Total Asia			265,136						233,980						563,776						457,269
Europe, Middle East and Africa			158,043						124,502						288,677						254,735
Japan			53,325						46,475						100,477						92,981
Total			$	857,521					$	728,285					$	1,759,287					$	1,464,313

The following table presents a summary of long-lived assets by geography as of July 2, 2022 and January 1, 2022:

			As of
			July 2, 2022						January 1, 2022
			(In thousands)
Americas:
United States			$	282,027					$	267,202
Other Americas			1,174						975
Total Americas			283,201						268,177
Asia:
China			57,774						56,403
Other Asia			69,487						54,677
Total Asia			127,261						111,080
Europe, Middle East and Africa			55,116						53,748
Japan			1,771						3,030
Total			$	467,349					$	436,035

NOTE 15. SUBSEQUENT EVENTS

On July 14, 2022, Cadence acquired all of the outstanding equity of FFG Holdings Limited (“Future Facilities”), a provider of electronics cooling analysis and energy performance optimization solutions for data center design and operations using physics-based 3D digital twins, for total cash consideration of approximately $110 million. The addition of Future Facilities’ technologies and expertise supports Cadence’s Intelligent System Design™ strategy and broadens its System Design and Analysis technology portfolio with the addition of solutions that enable companies to make informed business decisions about data center design, operations and lifecycle management that reduce their carbon footprint. The consideration paid, adjusted for working capital and other customary adjustments, will be allocated to the assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date. Due to the timing of this acquisition, the initial accounting is incomplete. As such, Cadence is not able to disclose certain information relating to this acquisition, including the preliminary fair value of assets acquired and liabilities assumed. Cadence expects to complete the initial accounting for its acquisition of Future Facilities during the third quarter of fiscal 2022. The acquisition of Future Facilities was funded through cash on hand.

On July 22, 2022, Cadence entered into a definitive agreement to acquire OpenEye Scientific Software, Inc. (“OpenEye”), a leading provider of computational molecular modeling and simulation software used by pharmaceutical and biotech companies for drug discovery. The addition of OpenEye’s technologies and experienced team with its deep scientific expertise will accelerate Cadence’s Intelligent System Design strategy through leveraging its computational software expertise to apply proven algorithmic, simulation and solver advances to the Life Sciences end market. The aggregate consideration will be approximately $500 million, subject to customary adjustments and holdbacks outlined in the agreement. The acquisition of OpenEye is expected to close during the third quarter of fiscal 2022, subject to regulatory review and customary closing conditions, and is expected to be funded through a combination of cash on hand and borrowings.