Item 1. Financial Statements

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

			As of
			March 31, 2023						December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents			$	916,963					$	882,325
Receivables, net			488,237						486,710
Inventories			127,566						128,005
Prepaid expenses and other			165,778						209,727
Total current assets			1,698,544						1,706,767
Property, plant and equipment, net			372,956						371,451
Goodwill			1,377,625						1,374,268
Acquired intangibles, net			341,738						354,617
Deferred taxes			864,750						853,691
Other assets			516,006						476,277
Total assets			$	5,171,619					$	5,137,071
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Revolving credit facility			$	30,000					$	100,000
Accounts payable and accrued liabilities			430,135						557,158
Current portion of deferred revenue			721,246						690,538
Total current liabilities			1,181,381						1,347,696
Long-term liabilities:
Long-term portion of deferred revenue			102,515						91,524
Long-term debt			648,301						648,078
Other long-term liabilities			298,546						304,660
Total long-term liabilities			1,049,362						1,044,262
Commitments and contingencies (Note 11)
Stockholders’ equity:
Common stock and capital in excess of par value			2,878,749						2,765,673
Treasury stock, at cost			(3,987,528)						(3,824,163)
Retained earnings			4,137,044						3,895,240
Accumulated other comprehensive loss			(87,389)						(91,637)
Total stockholders’ equity			2,940,876						2,745,113
Total liabilities and stockholders’ equity			$	5,171,619					$	5,137,071

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
															March 31, 2023						April 2, 2022
Revenue:
Product and maintenance															$	963,742					$	846,244
Services															57,948						55,522
Total revenue															1,021,690						901,766
Costs and expenses:
Cost of product and maintenance															100,238						72,795
Cost of services															24,234						25,048
Marketing and sales															166,666						140,186
Research and development															350,295						290,895
General and administrative															53,527						48,937
Amortization of acquired intangibles															4,267						4,964
Restructuring															—						12
Total costs and expenses															699,227						582,837
Income from operations															322,463						318,929
Interest expense															(9,260)						(4,108)
Other income (expense), net															8,284						(4,900)
Income before provision for income taxes															321,487						309,921
Provision for income taxes															79,683						74,586
Net income															$	241,804					$	235,335
Net income per share – basic															$	0.90					$	0.86
Net income per share – diluted															$	0.89					$	0.85
Weighted average common shares outstanding – basic															269,501						272,431
Weighted average common shares outstanding – diluted															273,159						276,918

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

									Three Months Ended
															March 31, 2023						April 2, 2022
Net income															$	241,804					$	235,335
Other comprehensive income (loss), net of tax effects:
Foreign currency translation adjustments															3,955						(14,774)
Changes in defined benefit plan liabilities															263						166
Unrealized gain on investments															30						—
Total other comprehensive income (loss), net of tax effects															4,248						(14,608)
Comprehensive income															$	246,052					$	220,727

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

			Three Months Ended March 31, 2023
			Common Stock
									Par Value																		Accumulated
									and Capital																		Other
									in Excess						Treasury						Retained						Comprehensive
			Shares						of Par						Stock						Earnings						Loss						Total
Balance, December 31, 2022			272,675						$	2,765,673					$	(3,824,163)					$	3,895,240					$	(91,637)					$	2,745,113
Net income			—						—						—						241,804						—						$	241,804
Other comprehensive income, net of taxes			—						—						—						—						4,248						$	4,248
Purchase of treasury stock			(668)						—						(125,010)						—						—						$	(125,010)
Issuance of common stock and reissuance of treasury stock under equity incentive plans, net of forfeitures			972						47,246						20,899						—						—						$	68,145
Stock received for payment of employee taxes on vesting of restricted stock			(295)						(8,458)						(59,254)						—						—						$	(67,712)
Stock-based compensation expense			—						74,288						—						—						—						$	74,288
Balance, March 31, 2023			272,684						$	2,878,749					$	(3,987,528)					$	4,137,044					$	(87,389)					$	2,940,876
			Three Months Ended April 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			—						—						—						235,335						—						$	235,335
Other comprehensive loss, net of taxes			—						—						—						—						(14,608)						$	(14,608)
Purchase of treasury stock			(1,566)						—						(250,016)						—						—						$	(250,016)
Issuance of common stock and reissuance of treasury stock under equity incentive plans, net of forfeitures			874						31,402						14,269						—						—						$	45,671
Stock received for payment of employee taxes on vesting of restricted stock			(345)						(6,365)						(49,978)						—						—						$	(56,343)
Stock-based compensation expense			—						59,469						—						—						—						$	59,469
Balance, April 2, 2022			275,759						$	2,552,207					$	(3,025,728)					$	3,281,623					$	(47,919)					$	2,760,183

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

			Three Months Ended
			March 31, 2023						April 2, 2022
Cash and cash equivalents at beginning of period			$	882,325					$	1,088,940
Cash flows from operating activities:
Net income			241,804						235,335
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			34,400						34,825
Amortization of debt discount and fees			311						268
Stock-based compensation			74,288						59,469
(Gain) loss on investments, net			(123)						2,038
Deferred income taxes			(11,640)						(24,920)
Provisions for losses (recoveries) on receivables			214						(344)
ROU asset amortization and change in operating lease liabilities			(1,392)						926
Other non-cash items			99						88
Changes in operating assets and liabilities, net of effect of acquired businesses:
Receivables			(8,719)						(28,426)
Inventories			399						4,580
Prepaid expenses and other			56,212						44,419
Other assets			(42,084)						11,588
Accounts payable and accrued liabilities			(117,915)						(58,203)
Deferred revenue			40,650						56,225
Other long-term liabilities			897						(1,260)
Net cash provided by operating activities			267,401						336,608
Cash flows from investing activities:
Purchases of investments			(9,055)						(1,000)
Proceeds from the sale of investments			102						—
Purchases of property, plant and equipment			(26,719)						(18,130)
Purchases of intangible assets			—						(750)
Net cash used for investing activities			(35,672)						(19,880)
Cash flows from financing activities:
Proceeds from revolving credit facility			50,000						—
Payments on revolving credit facility			(120,000)						—
Proceeds from issuance of common stock			65,370						45,673
Stock received for payment of employee taxes on vesting of restricted stock			(67,712)						(56,343)
Payments for repurchases of common stock			(125,010)						(250,016)
Net cash used for financing activities			(197,352)						(260,686)
Effect of exchange rate changes on cash and cash equivalents			261						(10,230)
Increase in cash and cash equivalents			34,638						45,812
Cash and cash equivalents at end of period			$	916,963					$	1,134,752
Supplemental cash flow information:
Cash paid for interest			$	5,142					$	158
Cash paid for income taxes, net			19,814						10,018

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 December 31, 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.

Fiscal Year End

In fiscal 2022, Cadence’s Board of Directors approved a change in its fiscal year end from the Saturday closest to December 31 of each year to December 31 of each year. The fiscal year change became effective with Cadence’s 2023 fiscal year, which began on January 1, 2023. Cadence’s fiscal quarters now end on March 31, June 30, and September 30. No transition report is required in connection with this change.

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.

Despite continued 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 April 24, 2023, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change, as new events or developments occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

Recently Adopted Accounting Standards

There have been no recent accounting standard updates that are material or potentially material to Cadence.

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 months ended March 31, 2023 and April 2, 2022:

									Three Months Ended
															March 31, 2023						April 2, 2022
Custom Integrated Circuit (“IC”) Design and Simulation															20		%				22		%
Digital IC Design and Signoff															25		%				27		%
Functional Verification, including Emulation and Prototyping Hardware*															32		%				28		%
Intellectual Property (“IP”)															11		%				13		%
System Design and Analysis															12		%				10		%
Total															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 single customer accounted for 10% or more of total revenue during the three months ended March 31, 2023 or April 2, 2022.

Approximately 85% of Cadence’s annual revenue is characterized as recurring revenue. Recurring revenue includes revenue recognized over time from Cadence’s 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 is 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 months ended March 31, 2023 and April 2, 2022:

									Three Months Ended
															March 31, 2023						April 2, 2022
Revenue recognized over time															77		%				81		%
Revenue from arrangements with non-cancelable commitments															3		%				2		%
Recurring revenue															80		%				83		%
Up-front revenue															20		%				17		%
Total															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 stand-alone 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 March 31, 2023 and December 31, 2022 were as follows:

			As of
			March 31, 2023						December 31, 2022
			(In thousands)
Contract assets			$	17,167					$	22,766
Deferred revenue			823,761						782,062

Cadence recognized revenue of $363.2 million during the three months ended March 31, 2023, and $281.6 million during the three months ended April 2, 2022, 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 $5.4 billion as of March 31, 2023, which included $0.4 billion 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 March 31, 2023, Cadence expected to recognize 55% of the contracted but unsatisfied performance obligations, excluding non-cancelable commitments, as revenue over the next 12 months.

Cadence recognized revenue of $15.2 million during the three months ended March 31, 2023, and $12.2 million during the three months ended April 2, 2022, 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 March 31, 2023 and December 31, 2022 were as follows:

			As of
			March 31, 2023						December 31, 2022
			(In thousands)
Accounts receivable			$	346,968					$	314,666
Unbilled accounts receivable			143,773						174,334
Long-term receivables			9,994						2,735
Total receivables			500,735						491,735
Less allowance for doubtful accounts			(2,504)						(2,290)
Total receivables, net			$	498,231					$	489,445

Cadence’s customers are primarily concentrated within the semiconductor and electronics systems industries. As of March 31, 2023 and December 31, 2022, no single customer accounted for 10% or more of Cadence’s total receivables.

NOTE 4. DEBT

Cadence’s outstanding debt as of March 31, 2023 and December 31, 2022 was as follows:

			March 31, 2023																		December 31, 2022
			(In thousands)
			Principal						Unamortized Discount						Carrying Value						Principal						Unamortized Discount						Carrying Value
Revolving Credit Facility			$	30,000					$	—					$	30,000					$	100,000					$	—					$	100,000
2024 Notes			350,000						(1,368)						348,632						350,000						(1,581)						348,419
2025 Term Loan			300,000						(331)						299,669						300,000						(341)						299,659
Total outstanding debt			$	680,000					$	(1,699)					$	678,301					$	750,000					$	(1,922)					$	748,078

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”). In September 2022, Cadence amended the 2021 Credit Facility to, among other things, allow Cadence to change its fiscal year to match the calendar year commencing in 2023 and change the interest rate benchmark for loans under the 2021 Credit Facility from the London Inter-Bank Offered Rate (“LIBOR”) to Term Secured Overnight Financing Rate (“SOFR”). The material terms of the 2021 Credit Facility otherwise remain unchanged.

The 2021 Credit Facility provides for borrowings up to $700.0 million, with the right to request increased capacity up to an additional $350.0 million upon the receipt of lender commitments, for total maximum borrowings of $1.05 billion. The 2021 Credit Facility expires on June 30, 2026. Any outstanding loans drawn under 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. 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) SOFR plus a margin between 0.750% and 1.250% per annum, determined by reference to the credit rating of Cadence’s unsecured debt, plus a SOFR adjustment of 0.10% 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. As of March 31, 2023, the interest rate on the 2021 Credit Facility was 5.73%. 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. Borrowings bear interest at what is estimated to be current market rates of interest. Accordingly, the carrying value of the 2021 Credit Facility approximates fair value.

The 2021 Credit Facility contains customary negative covenants that, among other things, restrict Cadence’s ability to incur additional indebtedness, grant liens and make certain asset dispositions. 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 March 31, 2023, Cadence was in compliance with all financial covenants associated with the 2021 Credit Facility.

2024 Notes

In October 2014, Cadence issued a $350.0 million aggregate principal amount of 4.375% Senior Notes due October 15, 2024 (the “2024 Notes”). Cadence received net proceeds of $342.4 million from the issuance of the 2024 Notes, net of a discount of $1.4 million and issuance costs of $6.2 million. Both the discount and issuance costs are being amortized to interest expense over the term of the 2024 Notes using the effective interest method. Interest is payable in cash semi-annually in April and October. The 2024 Notes are unsecured and rank equal in right of payment to all of Cadence’s existing and future senior indebtedness. The fair value of the 2024 Notes was approximately $347.0 million as of March 31, 2023.

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.

2025 Term Loan

In September 2022, Cadence entered into a $300.0 million three-year senior non-amortizing term loan facility due on September 7, 2025 with a group of lenders led by Bank of America, N.A., as administrative agent (the “2025 Term Loan”). The 2025 Term Loan is unsecured and ranks equal in right of payment to all of Cadence’s unsecured indebtedness. Proceeds from the loan were used to fund Cadence’s acquisition of OpenEye Scientific Software, Inc. Debt issuance costs associated with the 2025 Term Loan were not material.

Amounts outstanding under the 2025 Term Loan accrue interest at a rate equal to, at Cadence’s option, either (1) Term SOFR plus a margin between 0.625% and 1.125% per annum, determined by reference to the credit rating of Cadence’s unsecured debt, plus a SOFR adjustment of 0.10% or (2) base rate plus a margin between 0.000% and 0.125% per annum, determined by reference to the credit rating of Cadence’s unsecured debt. As of March 31, 2023, the interest rate on the 2025 Term Loan was 5.80%. Interest is payable quarterly. Borrowings bear interest at what is estimated to be current market rates of interest. Accordingly, the carrying value of the 2025 Term Loan approximates fair value.

The 2025 Term Loan contains customary negative covenants that, among other things, restrict Cadence’s ability to incur additional indebtedness, grant liens and make certain asset dispositions. In addition, the 2025 Term Loan contains a financial covenant that requires 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 March 31, 2023, Cadence was in compliance with all financial covenants associated with the 2025 Term Loan.

NOTE 5. GOODWILL AND ACQUIRED INTANGIBLES

Goodwill

The changes in the carrying amount of goodwill during the three months ended March 31, 2023 were as follows:

			Gross Carrying Amount
			(In thousands)
Balance as of December 31, 2022			$	1,374,268
Effect of foreign currency translation			3,357
Balance as of March 31, 2023			$	1,377,625

Acquired Intangibles, Net

Acquired intangibles as of March 31, 2023 were as follows, excluding intangibles that were fully amortized as of December 31, 2022:

			Gross Carrying Amount						Accumulated Amortization						Acquired Intangibles, Net
			(In thousands)
Existing technology			$	300,259					$	(108,476)					$	191,783
Agreements and relationships			181,995						(48,664)						133,331
Tradenames, trademarks and patents			13,058						(3,234)						9,824
Total acquired intangibles with definite lives			495,312						(160,374)						334,938
In-process technology			6,800						—						6,800
Total acquired intangibles			$	502,112					$	(160,374)					$	341,738

In-process technology as of March 31, 2023 consisted of acquired projects that, if completed, will contribute to Cadence’s existing product offerings. As of March 31, 2023, these projects were expected to be completed during the fourth quarter of fiscal 2023. During the three months ended March 31, 2023, there were no transfers from in-process technology to existing technology.

Acquired intangibles as of December 31, 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			$	479,796					$	(278,851)					$	200,945
Agreements and relationships			274,624						(137,847)						136,777
Tradenames, trademarks and patents			12,979						(2,884)						10,095
Total acquired intangibles with definite lives			$	767,399					$	(419,582)					$	347,817
In-process technology			6,800						—						6,800
Total acquired intangibles			$	774,199					$	(419,582)					$	354,617

Amortization expense from existing technology and maintenance agreements is included in cost of product and maintenance. Amortization expense for the three months ended March 31, 2023 and April 2, 2022 by condensed consolidated income statement caption was as follows:

									Three Months Ended
															March 31, 2023						April 2, 2022
															(In thousands)
Cost of product and maintenance															$	10,260					$	11,971
Amortization of acquired intangibles															4,267						4,964
Total amortization of acquired intangibles															$	14,527					$	16,935

As of March 31, 2023, the estimated amortization expense for intangible assets with definite lives was as follows for the following five fiscal years and thereafter:

			(In thousands)
2023 - remaining period			$	44,102
2024			57,059
2025			44,352
2026			38,567
2027			36,113
2028			33,491
Thereafter			81,254
Total estimated amortization expense			$	334,938

NOTE 6. STOCK-BASED COMPENSATION

Stock-based compensation expense is reflected in Cadence’s condensed consolidated income statements for the three months ended March 31, 2023 and April 2, 2022 as follows:

									Three Months Ended
															March 31, 2023						April 2, 2022
															(In thousands)
Cost of product and maintenance															$	1,066					$	830
Cost of services															1,357						1,050
Marketing and sales															15,091						11,757
Research and development															44,322						35,122
General and administrative															12,452						10,710
Total stock-based compensation expense															$	74,288					$	59,469

Cadence had total unrecognized compensation expense related to stock option and restricted stock grants of $514.2 million as of March 31, 2023, which will be recognized over a weighted average vesting period of 2.2 years.

NOTE 7. STOCK REPURCHASE PROGRAM

In August 2022, Cadence’s Board of Directors increased the prior authorization to repurchase shares of Cadence common stock by authorizing an additional $1.0 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 March 31, 2023, approximately $952.0 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 months ended March 31, 2023 and April 2, 2022 were as follows:

									Three Months Ended
															March 31, 2023						April 2, 2022
															(In thousands)
Shares repurchased															668						1,566
Total cost of repurchased shares															$	125,010					$	250,016

NOTE 8. NET INCOME PER SHARE

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

The calculations for basic and diluted net income per share for the three months ended March 31, 2023 and April 2, 2022 are as follows:

									Three Months Ended
															March 31, 2023						April 2, 2022
															(In thousands, except per share amounts)
Net income															$	241,804					$	235,335
Weighted average common shares used to calculate basic net income per share															269,501						272,431
Stock-based awards															3,658						4,487
Weighted average common shares used to calculate diluted net income per share															273,159						276,918
Net income per share - basic															$	0.90					$	0.86
Net income per share - diluted															$	0.89					$	0.85

The following table presents shares of Cadence’s common stock outstanding for the three months ended March 31, 2023 and April 2, 2022 that were excluded from the computation of diluted net income per share because the effect of including these shares in the computation of diluted net income per share would have been anti-dilutive:

									Three Months Ended
															March 31, 2023						April 2, 2022
															(In thousands)
Long-term market-based awards															1,826						1,035
Options to purchase shares of common stock															332						663
Non-vested shares of restricted stock															50						82
Total potential common shares excluded															2,208						1,780

NOTE 9. FAIR VALUE

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

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

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

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

This hierarchy requires Cadence to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. Cadence recognizes transfers between levels of the hierarchy based on the fair values of the respective financial instruments at the end of the reporting period in which the transfer occurred. There were no transfers between levels of the fair value hierarchy during the three months ended March 31, 2023.

On a quarterly basis, Cadence measures at fair value certain financial assets and liabilities. The fair value of financial assets and liabilities was determined using the following levels of inputs as of March 31, 2023 and December 31, 2022:

			Fair Value Measurements as of March 31, 2023
			Total						Level 1						Level 2						Level 3
			(In thousands)
Assets
Cash equivalents:
Money market funds			$	555,088					$	555,088					$	—					$	—
Marketable securities:
Marketable equity securities			4,747						4,747						—						—
Mortgage-backed and asset-backed securities			8,983						—						8,983						—
Securities held in Non-Qualified Deferred Compensation (“NQDC”) trust			60,134						60,134						—						—
Total Assets			$	628,952					$	619,969					$	8,983					$	—
			Total						Level 1						Level 2						Level 3
			(In thousands)
Liabilities
Foreign currency exchange contracts			$	573					$	—					$	573					$	—
Total Liabilities			$	573					$	—					$	573					$	—

			Fair Value Measurements as of December 31, 2022
			Total						Level 1						Level 2						Level 3
			(In thousands)
Assets
Cash equivalents:
Money market funds			$	548,373					$	548,373					$	—					$	—
Marketable equity securities			4,490						4,490						—						—
Securities held in NQDC trust			55,605						55,605						—						—
Foreign currency exchange contracts			5,306						—						5,306						—
Total Assets			$	613,774					$	608,468					$	5,306					$	—
As of December 31, 2022, Cadence did not have any financial liabilities requiring a recurring fair value measurement.

Level 1 Measurements

Cadence’s cash equivalents held in money market funds, marketable equity securities and the trading securities held in Cadence’s NQDC trust are measured at fair value using Level 1 inputs.

Level 2 Measurements

The valuation techniques used to determine the fair value of Cadence’s investments in marketable debt securities, 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.

NOTE 10. INVENTORY

Cadence’s inventory balances as of March 31, 2023 and December 31, 2022 were as follows:

			As of
			March 31, 2023						December 31, 2022
			(In thousands)
Inventories:
Raw materials			$	117,975					$	113,982
Finished goods			9,591						14,023
Total inventories			$	127,566					$	128,005

NOTE 11. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

From time to time, Cadence is involved in various disputes and litigation that arise in the ordinary course of business. These include disputes and 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 litigation matters and may revise estimates.

Tax Proceedings

In December 2022, Cadence received a tax audit assessment of approximately $49 million from the Korea taxing authorities for years 2017-2019. The tax audit assessment is primarily related to value-added taxes (“VAT"). Cadence is required to pay these assessed taxes, prior to being allowed to contest or litigate the assessment in administrative and judicial proceedings. The assessment was paid by Cadence in January 2023 and recorded as a component of other assets in the condensed consolidated balance sheets. Payment of this amount is not an admission that Cadence is subject to such taxes, and Cadence continues to defend its position vigorously. Cadence did not record a reserve for this contingency as of March 31, 2023 or December 31, 2022 as Cadence does not believe a loss is probable because it believes it will ultimately prevail in full. The entire dispute resolution process may take from one to eight years.

Other Contingencies

Cadence provides its customers with a warranty on sales of hardware products, generally for a 90-day period. Cadence did not incur any significant costs related to warranty obligations during the three months ended March 31, 2023 and April 2, 2022.

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.

In connection with a litigation campaign launched by Bell Semiconductor LLC (“Bell Semi”), a patent monetization entity, some customers have requested defense and indemnification against claims of patent infringement asserted by Bell Semi in various district court litigation and at the U.S. International Trade Commission. Bell Semi alleges that the customers’ use of one or more features of certain Cadence products infringes one or more of six patents held by Bell Semi. Cadence has offered to defend some of its customers consistent with the terms of its license agreements. Cadence is unable to estimate the potential impact of these commitments on the future results of operations at this time.

Cadence did not incur any material losses from indemnification claims during the three months ended March 31, 2023 and April 2, 2022.

NOTE 12. ACCUMULATED OTHER COMPREHENSIVE LOSS

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

Accumulated other comprehensive loss was comprised of the following as of March 31, 2023 and December 31, 2022:

			As of
			March 31, 2023						December 31, 2022
			(In thousands)
Foreign currency translation loss			$	(81,908)					$	(85,863)
Changes in defined benefit plan liabilities			(5,511)						(5,774)
Unrealized gain on investments			30						—
Total accumulated other comprehensive loss			$	(87,389)					$	(91,637)

For the three months ended March 31, 2023 and April 2, 2022, there were no significant amounts related to foreign currency translation loss, changes in defined benefit plan liabilities or unrealized gains and losses on investments reclassified from accumulated other comprehensive loss to net income.

NOTE 13. SEGMENT REPORTING

Segment reporting is based on the “management approach,” following the method that management organizes the company’s reportable segments for which separate financial information is made available to, and evaluated regularly by, the chief operating decision maker in allocating resources and in assessing performance. Cadence’s chief operating decision maker is its 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 months ended March 31, 2023 and April 2, 2022:

									Three Months Ended
															March 31, 2023						April 2, 2022
															(In thousands)
Americas:
United States															$	434,346					$	413,538
Other Americas															16,118						11,802
Total Americas															450,464						425,340
Asia:
China															177,556						139,966
Other Asia															183,962						158,674
Total Asia															361,518						298,640
Europe, Middle East and Africa															154,270						130,634
Japan															55,438						47,152
Total															$	1,021,690					$	901,766

The following table presents a summary of long-lived assets by geography as of March 31, 2023 and December 31, 2022:

			As of
			March 31, 2023						December 31, 2022
			(In thousands)
Americas:
United States			$	346,662					$	347,822
Other Americas			7,948						7,548
Total Americas			354,610						355,370
Asia:
China			49,330						51,667
Other Asia			72,538						73,329
Total Asia			121,868						124,996
Europe, Middle East and Africa			55,017						56,959
Japan			3,973						4,505
Total			$	535,468					$	541,830