filings.toolsCadence Design Systems 10-Q 2023-09-30
Filed 2023-10-23. 8 sections, 193K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2023
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-15867
CADENCE DESIGN SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 00-0000000 | |||||||||||||
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| 2655 Seely Avenue, Building 5, | San Jose, | California | 95134 | |||||||||||
| (Address of Principal Executive Offices) | (Zip Code) |
(408) 943-1234
Registrant’s Telephone Number, including Area Code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, $0.01 par value per share | CDNS | Nasdaq Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☒ | Accelerated Filer | ☐ | Smaller Reporting Company | ☐ | |||||||||||||||||||||
| Non-accelerated Filer | ☐ | Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
On September 30, 2023, approximately 272,062,000 shares of the registrant’s common stock, $0.01 par value, were outstanding.
CADENCE DESIGN SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
| As of | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 961,982 | $ | 882,325 | |||||||
| Receivables, net | 426,505 | 486,710 | |||||||||
| Inventories | 163,693 | 128,005 | |||||||||
| Prepaid expenses and other | 272,283 | 209,727 | |||||||||
| Total current assets | 1,824,463 | 1,706,767 | |||||||||
| Property, plant and equipment, net | 379,776 | 371,451 | |||||||||
| Goodwill | 1,500,442 | 1,374,268 | |||||||||
| Acquired intangibles, net | 347,617 | 354,617 | |||||||||
| Deferred taxes | 874,805 | 853,691 | |||||||||
| Other assets | 504,272 | 476,277 | |||||||||
| Total assets | $ | 5,431,375 | $ | 5,137,071 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Revolving credit facility | $ | — | $ | 100,000 | |||||||
| Accounts payable and accrued liabilities | 598,261 | 557,158 | |||||||||
| Current portion of deferred revenue | 665,906 | 690,538 | |||||||||
| Total current liabilities | 1,264,167 | 1,347,696 | |||||||||
| Long-term liabilities: | |||||||||||
| Long-term portion of deferred revenue | 100,609 | 91,524 | |||||||||
| Long-term debt | 648,801 | 648,078 | |||||||||
| Other long-term liabilities | 303,904 | 304,660 | |||||||||
| Total long-term liabilities | 1,053,314 | 1,044,262 | |||||||||
| Commitments and contingencies (Note 15) | |||||||||||
| Stockholders’ equity: | |||||||||||
| Common stock and capital in excess of par value | 3,077,954 | 2,765,673 | |||||||||
| Treasury stock, at cost | (4,463,484) | (3,824,163) | |||||||||
| Retained earnings | 4,612,485 | 3,895,240 | |||||||||
| Accumulated other comprehensive loss | (113,061) | (91,637) | |||||||||
| Total stockholders’ equity | 3,113,894 | 2,745,113 | |||||||||
| Total liabilities and stockholders’ equity | $ | 5,431,375 | $ | 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 | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Product and maintenance | $ | 965,840 | $ | 845,788 | $ | 2,852,372 | $ | 2,494,317 | |||||||||||||||
| Services | 57,254 | 56,766 | 168,991 | 167,524 | |||||||||||||||||||
| Total revenue | 1,023,094 | 902,554 | 3,021,363 | 2,661,841 | |||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of product and maintenance | 85,813 | 62,351 | 260,269 | 203,863 | |||||||||||||||||||
| Cost of services | 23,768 | 25,249 | 70,642 | 74,245 | |||||||||||||||||||
| Marketing and sales | 176,215 | 152,925 | 509,951 | 432,407 | |||||||||||||||||||
| Research and development | 369,642 | 323,629 | 1,074,353 | 901,121 | |||||||||||||||||||
| General and administrative | 58,556 | 73,688 | 166,688 | 174,051 | |||||||||||||||||||
| Amortization of acquired intangibles | 4,612 | 3,946 | 13,181 | 13,543 | |||||||||||||||||||
| Restructuring | 11,582 | 14 | 11,582 | 42 | |||||||||||||||||||
| Total costs and expenses | 730,188 | 641,802 | 2,106,666 | 1,799,272 | |||||||||||||||||||
| Income from operations | 292,906 | 260,752 | 914,697 | 862,569 | |||||||||||||||||||
| Interest expense | (9,059) | (5,463) | (27,196) | (13,852) | |||||||||||||||||||
| Other income (expense), net | 16,106 | (3,017) | 32,363 | (13,879) | |||||||||||||||||||
| Income before provision for income taxes | 299,953 | 252,272 | 919,864 | 834,838 | |||||||||||||||||||
| Provision for income taxes | 45,632 | 65,967 | 202,619 | 226,278 | |||||||||||||||||||
| Net income | $ | 254,321 | $ | 186,305 | $ | 717,245 | $ | 608,560 | |||||||||||||||
| Net income per share – basic | $ | 0.94 | $ | 0.69 | $ | 2.66 | $ | 2.24 | |||||||||||||||
| Net income per share – diluted | $ | 0.93 | $ | 0.68 | $ | 2.63 | $ | 2.21 | |||||||||||||||
| Weighted average common shares outstanding – basic | 269,229 | 271,131 | 269,480 | 271,694 | |||||||||||||||||||
| Weighted average common shares outstanding – diluted | 272,427 | 274,957 | 272,859 | 275,683 |
See notes to condensed consolidated financial statements.
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| Net income | $ | 254,321 | $ | 186,305 | $ | 717,245 | $ | 608,560 | |||||||||||||||
| Other comprehensive loss, net of tax effects: | |||||||||||||||||||||||
| Foreign currency translation adjustments | (21,692) | (40,768) | (20,546) | (90,764) | |||||||||||||||||||
| Changes in defined benefit plan liabilities | 132 | 15 | 537 | 1,942 | |||||||||||||||||||
| Unrealized losses on investments | (991) | — | (1,415) | — | |||||||||||||||||||
| Total other comprehensive loss, net of tax effects | (22,551) | (40,753) | (21,424) | (88,822) | |||||||||||||||||||
| Comprehensive income | $ | 231,770 | $ | 145,552 | $ | 695,821 | $ | 519,738 |
See notes to condensed consolidated financial statements.
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q (this “Quarterly Report”) and in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (our “Annual Report”). This Quarterly Report contains statements that are not historical in nature, are predictive, or that depend upon or refer to future events or conditions or contain other forward-looking statements. Statements including, but not limited to, statements regarding the extent, timing and mix of future revenues and customer demand; the deployment of our products and services; the impact of the macroeconomic and geopolitical environment, including but not limited to, the expanded trade control laws and regulations, the conflicts in and around Ukraine, the Middle East and other areas of the world, volatility in foreign currency exchange rates, inflation and the rise in interest rates; the impact of government actions; future costs, expenses, tax rates and uses of cash; pending legal, administrative and tax proceedings; restructuring actions and associated charges and benefits; the accounting for acquisitions and integration of acquired businesses; and other statements using words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “plans,” “projects,” “should,” “targets,” “will” and “would,” and words of similar import and the negatives thereof, constitute forward-looking statements. These statements are predictions based upon our current expectations about future events. Actual results could vary materially as a result of certain factors, including, but not limited to, those expressed in these statements. We refer you to the “Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk,” and “Liquidity and Capital Resources” sections contained in this Quarterly Report, the "Risk Factors" section contained in our Annual Report and our subsequent Quarterly Reports on Form 10-Q, and the risks discussed in our other Securities and Exchange Commission (“SEC”) filings, which identify important risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements.
We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. We disclaim any obligation to update these forward-looking statements, except as required by law.
Business Overview
Cadence is a leader in electronic system design, building upon more than 30 years of computational software expertise. We apply our underlying Intelligent System Design strategy to deliver computational software, hardware and intellectual property (“IP”) that turn design concepts into reality. We enable our customers to develop electronic products. Our products and services are designed to give our customers a competitive edge in their development of integrated circuits (“ICs”), systems-on-chip (“SoCs”), and increasingly sophisticated electronic devices and systems. Our products and services do this by optimizing performance, minimizing power consumption, shortening the time to bring our customers’ products to market, improving engineering productivity and reducing their design, development and manufacturing costs.
Our strategy is to provide the technology necessary for our customers to develop products across a variety of vertical markets including consumer, hyperscale computing, mobile, 5G communications, automotive, aerospace and defense, industrial, healthcare and life sciences. Our products and services enable our customers to develop complex and innovative electronic products, so demand for our technology is driven by our customers’ investment in new designs and products. Historically, the industry that provided the tools used by IC engineers was referred to as Electronic Design Automation (“EDA”). Today, our offerings include and extend beyond EDA.
We group our products into categories related to major design activities:
-
Custom IC Design and Simulation;
-
Digital IC Design and Signoff;
-
Functional Verification;
-
IP; and
-
System Design and Analysis.
For additional information about our products, see the discussion in Item 1, “Business,” under the heading “Products and Product Categories,” in our Annual Report.
Management uses certain performance indicators to manage our business, including revenue, certain elements of operating expenses and cash flow from operations, and we describe these items further below under the headings “Results of Operations” and “Liquidity and Capital Resources.”
Fiscal Year End
In fiscal 2022, our Board of Directors approved a change in our 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 beginning with our 2023 fiscal year, which began on January 1, 2023. Our fiscal quarters now end on March 31, June 30, and September 30.
Macroeconomic and Geopolitical Environment
Because we operate globally, our business is subject to the effects of expanded trade control laws and regulations, geopolitical conflict in and around Ukraine, Israel and other areas of the world, volatility in foreign currency exchange rates relative to the United States (“U.S.”) dollar and the rise in interest rates.
We have been impacted by the continued expansion of trade control laws and regulations, that include certain export control restrictions concerning advanced node IC production in China, the inclusion of additional Chinese technology companies on the Bureau of Industry and Security (“BIS”) “Entity List” and regulations governing the sale of certain technologies. Based on our current assessments, we expect the impact of these expanded trade control laws and regulations on our business to be limited.
We also continuously monitor geopolitical conflicts around the world and their effects on our business. During the first half of fiscal 2022, due to the ongoing conflict between Russia and Ukraine and the corresponding sanctions imposed by the United States and other countries, we terminated our operations in Russia. The termination of our operations in Russia has not limited our ability to develop or support our products and has not had a material impact on our results of operations, financial condition, liquidity or cash flows. We do not have operations or employees in Ukraine.
More recently, the conflict in the Middle East has had an impact on our employees and our customers in that region of the world. It is too early to determine the full extent of the impact this conflict could have on our business and our operations, and our assessment of the potential impacts is ongoing.
While our business model provides some resilience against these factors, we will continue to monitor the direct and indirect impacts of these or similar circumstances on our business and financial results. For additional information on the potential impact of other macroeconomic and geopolitical conditions on our business, see the “Risk Factors” sections in our Annual Report and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (the “Q1 Report”). For additional information on the potential impact of foreign currency exchange rates and interest rates on our business, see the “Quantitative and Qualitative Disclosures About Market Risk” section of this Quarterly Report.
Critical Accounting Estimates
In preparing our condensed consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income and net income, as well as on the value of certain assets and liabilities on our condensed consolidated balance sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. At least quarterly, we evaluate our assumptions, judgments and estimates, and make changes as deemed necessary.
For additional information about our critical accounting estimates, see the discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Estimates” in our Annual Report.
New Accounting Standards
For additional information about the adoption of new accounting standards, see Note 1 in the notes to condensed consolidated financial statements.
Results of Operations
Financial results for the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, reflect the following:
-
Growth in revenue from our software and emulation and prototyping hardware offerings;
-
Continued investment in research and development activities and technical sales support; and
-
Restructuring activities designed to better align our resources with our business strategy.
Revenue
We primarily generate revenue from licensing our software and IP, selling or leasing our emulation and prototyping hardware technology, providing maintenance for our software, hardware and IP, providing engineering services and earning royalties generated from the use of our IP. The timing of our revenue is significantly affected by the mix of software, hardware and IP products generating revenue in any given period and whether the revenue is recognized over time or at a point in time, upon completion of delivery.
Approximately 85% of our annual revenue is characterized as recurring revenue. Recurring revenue includes revenue recognized over time from our software arrangements, services, royalties, maintenance on IP licenses and hardware, and operating leases of hardware. Recurring revenue also includes revenue recognized at varying points in time over the term of other arrangements with non-cancelable commitments, whereby the customer commits to a fixed dollar amount over a specified period of time that can be used to purchase from a list of products or services.
The remainder of our revenue is recognized at a point in time and is characterized as up-front revenue. Up-front revenue is primarily generated by our sales of emulation and prototyping hardware and individual IP licenses. The percentage of our recurring and up-front revenue and fluctuations in revenue within our geographies are impacted by delivery of hardware and IP products to our customers in any single fiscal period.
The following table shows the percentage of our revenue that is classified as recurring or up-front for the three and nine months ended September 30, 2023 and October 1, 2022:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| Revenue recognized over time | 83 | % | 81 | % | 80 | % | 82 | % | |||||||||||||||
| Revenue from arrangements with non-cancelable commitments | 2 | % | 3 | % | 3 | % | 2 | % | |||||||||||||||
| Recurring revenue | 85 | % | 84 | % | 83 | % | 84 | % | |||||||||||||||
| Up-front revenue | 15 | % | 16 | % | 17 | % | 16 | % | |||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % |
While the percentage of revenue characterized as recurring compared to revenue characterized as up-front may vary between fiscal quarters, the overall mix of revenue is relatively consistent on an annual basis or over the course of twelve consecutive months. The following table shows the percentage of recurring revenue for the twelve-month periods ending concurrently with our five most recent fiscal quarters:
| Trailing Twelve Months Ended | |||||||||||||||||||||||||||||
| September 30, 2023 | June 30, 2023 | March 31, 2023 | December 31, 2022 | October 1, 2022 | |||||||||||||||||||||||||
| Recurring revenue | 84 | % | 84 | % | 84 | % | 85 | % | 86 | % | |||||||||||||||||||
| Up-front revenue | 16 | % | 16 | % | 16 | % | 15 | % | 14 | % | |||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
Revenue by Period
The following table shows our revenue for the three months ended September 30, 2023 and October 1, 2022 and the change in revenue between periods:
| Three Months Ended | Change | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Product and maintenance | $ | 965.8 | $ | 845.8 | $ | 120.0 | 14 | % | |||||||||||||||
| Services | 57.3 | 56.8 | 0.5 | 1 | % | ||||||||||||||||||
| Total revenue | $ | 1,023.1 | $ | 902.6 | $ | 120.5 | 13 | % |
The following table shows our revenue for the nine months ended September 30, 2023 and October 1, 2022 and the change in revenue between periods:
| Nine Months Ended | Change | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Product and maintenance | $ | 2,852.4 | $ | 2,494.3 | $ | 358.1 | 14 | % | |||||||||||||||
| Services | 169.0 | 167.5 | 1.5 | 1 | % | ||||||||||||||||||
| Total revenue | $ | 3,021.4 | $ | 2,661.8 | $ | 359.6 | 14 | % |
Product and maintenance revenue growth during the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, was primarily due to our customers continuing to invest in new, complex designs for their products that include the design of electronic systems for consumer, hyperscale computing, mobile, 5G communications, automotive, aerospace and defense, industrial and healthcare.
Services revenue may fluctuate from period to period based on the timing of fulfillment of our services and IP performance obligations.
No single customer accounted for 10% or more of total revenue during the three and nine months ended September 30, 2023 or October 1, 2022.
Revenue by Product Category
The following table shows the percentage of revenue contributed by each of our five product categories and services for the past five consecutive quarters:
| Three Months Ended | |||||||||||||||||||||||||||||
| September 30, 2023 | June 30, 2023 | March 31, 2023 | December 31, 2022 | October 1, 2022 | |||||||||||||||||||||||||
| Custom IC Design and Simulation | 22 | % | 22 | % | 20 | % | 22 | % | 22 | % | |||||||||||||||||||
| Digital IC Design and Signoff | 28 | % | 27 | % | 25 | % | 28 | % | 29 | % | |||||||||||||||||||
| Functional Verification, including Emulation and Prototyping Hardware | 26 | % | 27 | % | 32 | % | 25 | % | 25 | % | |||||||||||||||||||
| IP | 11 | % | 11 | % | 11 | % | 12 | % | 12 | % | |||||||||||||||||||
| System Design and Analysis | 13 | % | 13 | % | 12 | % | 13 | % | 12 | % | |||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
Revenue by product category fluctuates from period to period based on demand for our products and services, our available resources and our ability to deliver and support them. For example, during the first quarter of fiscal 2023, we experienced growth in our Functional Verification product category due to increased production capacity and our ability to fulfill ongoing customer demand for our emulation and prototyping hardware. Certain of our licensing arrangements allow customers the ability to remix among software products. Additionally, we have arrangements with customers that include a combination of our products, with the actual product selection and number of licensed users to be determined at a later date. For these arrangements, we estimate the allocation of the revenue to product categories based upon the expected usage of our products. The actual usage of our products by these customers may differ and, if that proves to be the case, the revenue allocation in the table above would differ.
Revenue by Geography
| Three Months Ended | Change | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| United States | $ | 421.6 | $ | 392.2 | $ | 29.4 | 7 | % | |||||||||||||||
| Other Americas | 15.8 | 15.2 | 0.6 | 4 | % | ||||||||||||||||||
| China | 172.0 | 148.3 | 23.7 | 16 | % | ||||||||||||||||||
| Other Asia | 197.8 | 156.3 | 41.5 | 27 | % | ||||||||||||||||||
| Europe, Middle East and Africa (“EMEA”) | 158.2 | 143.0 | 15.2 | 11 | % | ||||||||||||||||||
| Japan | 57.7 | 47.6 | 10.1 | 21 | % | ||||||||||||||||||
| Total revenue | $ | 1,023.1 | $ | 902.6 | $ | 120.5 | 13 | % |
| Nine Months Ended | Change | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| United States | $ | 1,241.5 | $ | 1,174.7 | $ | 66.8 | 6 | % | |||||||||||||||
| Other Americas | 47.9 | 39.0 | 8.9 | 23 | % | ||||||||||||||||||
| China | 523.7 | 401.5 | 122.2 | 30 | % | ||||||||||||||||||
| Other Asia | 558.7 | 466.9 | 91.8 | 20 | % | ||||||||||||||||||
| EMEA | 479.3 | 431.6 | 47.7 | 11 | % | ||||||||||||||||||
| Japan | 170.3 | 148.1 | 22.2 | 15 | % | ||||||||||||||||||
| Total revenue | $ | 3,021.4 | $ | 2,661.8 | $ | 359.6 | 14 | % |
During the three months ended September 30, 2023, as compared to the three months ended October 1, 2022, revenue growth in each of our six geographies was primarily driven by increased revenue from our software offerings, resulting from our customers’ continued investment in new, complex designs for their products. Also, during the three months ended September 30, 2023, as compared to the three months ended October 1, 2022, revenue growth from our emulation and prototyping hardware offerings contributed to the growth experienced in the United States, China, Other Asia and Japan.
During the nine months ended September 30, 2023, as compared to the nine months ended October 1, 2022, revenue growth in the United States, Other Americas, Other Asia, EMEA and Japan was primarily driven by increased revenue from our software offerings. Revenue growth in China during the nine months ended September 30, 2023, as compared to the nine months ended October 1, 2022, was primarily due to increased revenue from our emulation and prototyping hardware offerings. This growth was driven by increased production capacity to address continued demand from our customers in China for our emulation and prototyping hardware offerings.
Revenue by Geography as a Percent of Total Revenue
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| United States | 41 | % | 43 | % | 41 | % | 44 | % | |||||||||||||||
| Other Americas | 2 | % | 2 | % | 2 | % | 1 | % | |||||||||||||||
| China | 17 | % | 17 | % | 17 | % | 15 | % | |||||||||||||||
| Other Asia | 19 | % | 17 | % | 18 | % | 18 | % | |||||||||||||||
| EMEA | 15 | % | 16 | % | 16 | % | 16 | % | |||||||||||||||
| Japan | 6 | % | 5 | % | 6 | % | 6 | % | |||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % |
Most of our revenue is transacted in the U.S. dollar. However, certain revenue transactions are denominated in foreign currencies. For an additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see the discussion under Item 3, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”
Cost of Revenue
The following tables show our cost of revenue for the three and nine months ended September 30, 2023 and October 1, 2022 and the change in cost of revenue between periods:
| Three Months Ended | Change | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Cost of product and maintenance | $ | 85.8 | $ | 62.4 | $ | 23.4 | 38 | % | |||||||||||||||
| Cost of services | 23.8 | 25.2 | (1.4) | (6) | % |
| Nine Months Ended | Change | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Cost of product and maintenance | $ | 260.3 | $ | 203.9 | $ | 56.4 | 28 | % | |||||||||||||||
| Cost of services | 70.6 | 74.2 | (3.6) | (5) | % |
Cost of Product and Maintenance
Cost of product and maintenance includes costs associated with the sale and lease of our emulation and prototyping hardware and licensing of our software and IP products, certain employee salary and benefits and other employee-related costs, cost of our customer support services, amortization of technology-related and maintenance-related acquired intangibles, costs of technical documentation and royalties payable to third-party vendors. Cost of product and maintenance depends primarily on our hardware product sales in any given period, but is also affected by employee salary and benefits and other employee-related costs, reserves for inventory, and the timing and extent to which we acquire intangible assets, license third-party technology or IP, and sell our products that include such acquired or licensed technology or IP.
A summary of cost of product and maintenance is as follows:
| Three Months Ended | Change | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Product and maintenance-related costs | $ | 74.8 | $ | 53.5 | $ | 21.3 | 40 | % | |||||||||||||||
| Amortization of acquired intangibles | 11.0 | 8.9 | 2.1 | 24 | % | ||||||||||||||||||
| Total cost of product and maintenance | $ | 85.8 | $ | 62.4 | $ | 23.4 | 38 | % |
| Nine Months Ended | Change | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Product and maintenance-related costs | $ | 228.4 | $ | 173.0 | $ | 55.4 | 32 | % | |||||||||||||||
| Amortization of acquired intangibles | 31.9 | 30.9 | 1.0 | 3 | % | ||||||||||||||||||
| Total cost of product and maintenance | $ | 260.3 | $ | 203.9 | $ | 56.4 | 28 | % |
The changes in product and maintenance-related costs for the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, were due to the following:
| Change | |||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||
| (In millions) | |||||||||||
| Emulation and prototyping hardware costs | $ | 20.1 | $ | 47.8 | |||||||
| Salary, benefits and other employee-related costs | 1.0 | 5.5 | |||||||||
| Other items | 0.2 | 2.1 | |||||||||
| Total change in product and maintenance-related costs | $ | 21.3 | $ | 55.4 |
Costs associated with our emulation and prototyping hardware products include components, assembly, testing, applicable reserves and overhead. These costs make our cost of emulation and prototyping hardware products higher, as a percentage of revenue, than our cost of software and IP products. Emulation and prototyping hardware costs increased during the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, primarily due to increased revenue from emulation and prototyping hardware products.
Amortization of acquired intangibles included in cost of product and maintenance may fluctuate from period to period depending on the timing of newly acquired assets relative to assets becoming fully amortized in any given period.
Cost of Services
Cost of services primarily includes employee salary, benefits and other employee-related costs to perform work on revenue-generating projects and costs to maintain the infrastructure necessary to manage a services organization. Cost of services may fluctuate from period to period based on our utilization of design services engineers on revenue-generating projects rather than internal development projects.
Operating Expenses
Our operating expenses include marketing and sales, research and development, and general and administrative expenses. Factors that tend to cause our operating expenses to fluctuate include changes in the number of employees due to hiring and acquisitions, our annual mid-year promotion and pay raise cycle, stock-based compensation, foreign exchange rate movements, acquisition-related costs, volatility in variable compensation programs that are driven by operating results, and charitable donations.
Many of our operating expenses are transacted in various foreign currencies. We recognize lower expenses in periods when the United States dollar strengthens in value against other currencies and we recognize higher expenses when the United States dollar weakens against other currencies. For an additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see the discussion in Item 3, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”
Our operating expenses for the three and nine months ended September 30, 2023 and October 1, 2022 were as follows:
| Three Months Ended | Change | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Marketing and sales | $ | 176.2 | $ | 152.9 | $ | 23.3 | 15 | % | |||||||||||||||
| Research and development | 369.6 | 323.6 | 46.0 | 14 | % | ||||||||||||||||||
| General and administrative | 58.6 | 73.7 | (15.1) | (20) | % | ||||||||||||||||||
| Total operating expenses | $ | 604.4 | $ | 550.2 | $ | 54.2 | 10 | % |
| Nine Months Ended | Change | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Marketing and sales | $ | 510.0 | $ | 432.4 | $ | 77.6 | 18 | % | |||||||||||||||
| Research and development | 1,074.4 | 901.1 | 173.3 | 19 | % | ||||||||||||||||||
| General and administrative | 166.7 | 174.1 | (7.4) | (4) | % | ||||||||||||||||||
| Total operating expenses | $ | 1,751.1 | $ | 1,507.6 | $ | 243.5 | 16 | % |
Our operating expenses, as a percentage of total revenue, for the three and nine months ended September 30, 2023 and October 1, 2022 were as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| Marketing and sales | 17 | % | 17 | % | 17 | % | 16 | % | |||||||||||||||
| Research and development | 36 | % | 36 | % | 35 | % | 34 | % | |||||||||||||||
| General and administrative | 6 | % | 8 | % | 6 | % | 7 | % | |||||||||||||||
| Total operating expenses | 59 | % | 61 | % | 58 | % | 57 | % |
Marketing and Sales
The increase in marketing and sales expense for the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, was due to the following:
| Change | |||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||
| (In millions) | |||||||||||
| Salary, benefits and other employee-related costs | $ | 15.2 | $ | 45.5 | |||||||
| Marketing programs and events | 0.4 | 9.6 | |||||||||
| Stock-based compensation | 3.1 | 9.2 | |||||||||
| Facilities and other infrastructure costs | 2.3 | 6.9 | |||||||||
| Travel and sales meetings | 1.2 | 5.7 | |||||||||
| Other items | 1.1 | 0.7 | |||||||||
| Total change in marketing and sales expense | $ | 23.3 | $ | 77.6 |
Salary, benefits and other employee-related costs and stock-based compensation included in marketing and sales expense increased during the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, primarily due to our continued investment in attracting and retaining talent dedicated to technical sales support, including additional headcount from the acquisitions completed in both fiscal 2022 and fiscal 2023. Costs related to marketing programs and events, travel and sales meetings increased during the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, primarily due to an increased number of in-person meetings and events. We expect to continue attracting and retaining talent dedicated to technical sales support through hiring and acquisitions.
Research and Development
The increase in research and development expense for the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, was due to the following:
| Change | |||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||
| (In millions) | |||||||||||
| Salary, benefits and other employee-related costs | $ | 26.6 | $ | 119.4 | |||||||
| Stock-based compensation | 9.7 | 26.6 | |||||||||
| Facilities and other infrastructure costs | 4.6 | 14.3 | |||||||||
| Professional services | 2.2 | 5.1 | |||||||||
| Materials and other pre-production costs | 2.1 | 4.5 | |||||||||
| Travel | 0.6 | 4.0 | |||||||||
| Other items | 0.2 | (0.6) | |||||||||
| Total change in research and development expense | $ | 46.0 | $ | 173.3 |
Salary, benefits and other employee-related costs and stock-based compensation included in research and development expense increased during the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, primarily due to our continued investment in attracting and retaining talent for research and development activities, including additional headcount from the acquisitions completed in both fiscal 2022 and fiscal 2023. Facilities and other infrastructure costs included in research and development expense increased during the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, primarily due to our growing workforce. We expect to continue attracting and retaining talent dedicated to research and development activities through hiring and acquisitions.
General and Administrative
The decrease in general and administrative expense for the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, was due to the following:
| Change | |||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||
| (In millions) | |||||||||||
| Salary, benefits and other employee-related costs | $ | 3.2 | $ | 15.9 | |||||||
| Stock-based compensation | 1.5 | 4.7 | |||||||||
| Foreign service tax | 4.0 | 4.1 | |||||||||
| Professional services | 1.8 | (4.6) | |||||||||
| Contributions to non-profit organizations | (25.0) | (29.0) | |||||||||
| Other items | (0.6) | 1.5 | |||||||||
| Total change in general and administrative expense | $ | (15.1) | $ | (7.4) |
Salary, benefits and other employee-related costs and stock-based compensation included in general and administrative expense increased during the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, primarily due to additional headcount. Also during the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, we experienced an increase in foreign service tax, primarily because we did not benefit from any foreign service tax refunds like we did during the same period in fiscal 2022.
During the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, contributions to non-profit organizations decreased, primarily due to the timing of our periodic contributions to support charitable initiatives, including the Cadence Giving Foundation.
Restructuring
In August 2023, we initiated a restructuring plan (the “2023 Restructuring Plan”) designed to better align our resources with our business strategy. During the three and nine months ended September 30, 2023, we incurred $11.6 million of costs comprised of severance and other termination benefits related to headcount reductions. These costs are included in restructuring in our condensed consolidated income statements.
Inclusive of the 2023 Restructuring Plan, we are evaluating certain facilities for closure. Restructuring charges for the facilities under consideration are not expected to exceed $5 million. Restructuring costs related to facility closures will be primarily comprised of accelerated Right-of-Use (“ROU”) asset amortization, interest accretion on lease liabilities after the facility is vacated, lease buyout costs and certain contractual costs to maintain facilities during the period after abandonment. We record accelerated ROU asset amortization over the period beginning from when the decision is made to abandon the facility until the facility is fully vacated and we have no intention to further utilize the leased space. Other facilities-related restructuring charges are generally recorded in the period in which the affected facilities are vacated.
Because the restructuring charges and related benefits are derived from management’s estimates made during the formulation of the restructuring plans, based on then-currently available information, our restructuring plans may not achieve the benefits anticipated on the timetable or at the level contemplated. Additional actions, including further restructuring of our operations, may be required in the future.
Operating Margin
Operating margin represents income from operations as a percentage of total revenue. Our operating margin for the three and nine months ended September 30, 2023, and the three and nine months ended October 1, 2022 was as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| Operating margin | 29 | % | 29 | % | 30 | % | 32 | % |
Operating margin decreased during the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, primarily due to the mix of products and services sold during each respective period. In addition, our fiscal 2022 acquisitions resulted in incremental expenses, including acquisition of acquired intangibles, that exceeded incremental revenue during the three and nine months ended September 30, 2023.
Interest Expense
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Contractual cash interest expense: | |||||||||||||||||||||||
| 2024 Notes | 3.8 | 3.8 | $ | 11.4 | $ | 11.4 | |||||||||||||||||
| 2025 Term Loan | 4.6 | 0.9 | 13.0 | 0.9 | |||||||||||||||||||
| Revolving credit facility | 0.2 | 0.7 | 1.9 | 1.1 | |||||||||||||||||||
| Amortization of debt discount: | |||||||||||||||||||||||
| 2024 Notes | 0.3 | 0.2 | 0.7 | 0.6 | |||||||||||||||||||
| 2025 Term Loan | 0.1 | — | 0.2 | — | |||||||||||||||||||
| Other | 0.1 | (0.1) | — | (0.1) | |||||||||||||||||||
| Total interest expense | $ | 9.1 | $ | 5.5 | $ | 27.2 | $ | 13.9 |
Interest expense increased during the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, primarily due to borrowings under our 2025 Term Loan, which are subject to variable interest rates. For additional information relating to our debt arrangements, see Note 4 in the notes to condensed consolidated financial statements.
Income Taxes
The following table presents the provision for income taxes and the effective tax rate for the three and nine months ended September 30, 2023 and October 1, 2022:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Provision for income taxes | $ | 45.6 | $ | 66.0 | $ | 202.6 | $ | 226.3 | |||||||||||||||
| Effective tax rate | 15.2 | % | 26.1 | % | 22.0 | % | 27.1 | % |
Our provision for income taxes for the three and nine months ended September 30, 2023 was primarily attributable to federal, state and foreign income taxes on our anticipated fiscal 2023 income. We also recognized tax benefits of $21.0 million and $46.8 million related to stock-based compensation that vested or was exercised during each period.
Our provision for income taxes for the three and nine months ended October 1, 2022 was primarily attributable to federal, state and foreign income taxes on our then anticipated fiscal 2022 income. We also recognized a tax benefit of $18.0 million and $36.9 million related to stock-based compensation that vested or was exercised during each period.
Our future effective tax rates may also be materially impacted by tax amounts associated with our foreign earnings at rates different from the United States federal statutory rate, research credits, the tax impact of stock-based compensation, accounting for uncertain tax positions, business combinations, closure of statutes of limitations or settlement of tax audits and changes in tax law. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and Hungary. Our future effective tax rates may be adversely affected if our earnings were to be lower in countries where we have lower statutory tax rates. We currently expect that our fiscal 2023 effective tax rate will be approximately 23%. We expect that our quarterly effective tax rates will vary from our fiscal 2023 effective tax rate as a result of recognizing the income tax effects of stock-based awards in the quarterly periods that the awards vest or are settled and other items that we cannot anticipate. For additional discussion about how our effective tax rate could be affected by various risks, see Part I, Item 1A, “Risk Factors,” in our Annual Report.
Liquidity and Capital Resources
| As of | |||||||||||||||||
| September 30, 2023 | December 31, 2022 | Change | |||||||||||||||
| (In millions) | |||||||||||||||||
| Cash and cash equivalents | $ | 962.0 | $ | 882.3 | $ | 79.7 | |||||||||||
| Net working capital | 560.3 | 359.1 | 201.2 |
Cash and Cash Equivalents
As of September 30, 2023, our principal sources of liquidity consisted of approximately $962.0 million of cash and cash equivalents as compared to $882.3 million as of December 31, 2022.
Our primary sources of cash and cash equivalents during the nine months ended September 30, 2023 were cash generated from operations, proceeds from the issuance of common stock resulting from stock purchases under our employee stock purchase plan and stock options exercised during the period, proceeds from the sale of investments, and proceeds from our revolving credit facility.
Our primary uses of cash and cash equivalents during the nine months ended September 30, 2023 were payments related to employee salaries and benefits, operating expenses, repurchases of our common stock, cash paid for acquired businesses, payments on our revolving credit facility, purchases of investments, payment of employee taxes on vesting of restricted stock, and purchases of property, plant and equipment.
Approximately 66% of our cash and cash equivalents were held by our foreign subsidiaries as of September 30, 2023. Our cash and cash equivalents held by our foreign subsidiaries may vary from period to period due to the timing of collections and repatriation of foreign earnings. We expect that current cash and cash equivalent balances and cash flows that are generated from operations and financing activities will be sufficient to meet the needs of our domestic and international operating activities and other capital and liquidity requirements, including acquisitions, investments and share repurchases, for at least the next 12 months and thereafter for the foreseeable future.
Net Working Capital
Net working capital is comprised of current assets less current liabilities, as shown on our condensed consolidated balance sheets. The increase in our net working capital as of September 30, 2023, as compared to December 31, 2022, is primarily due to the timing of cash receipts from customers and disbursements made for operating and financing activities.
Cash Flows from Operating Activities
| Nine Months Ended | |||||||||||||||||
| September 30, 2023 | October 1, 2022 | Change | |||||||||||||||
| (In millions) | |||||||||||||||||
| Cash provided by operating activities | $ | 1,077.1 | $ | 978.3 | $ | 98.8 |
Cash flows from operating activities include net income, adjusted for certain non-cash items, as well as changes in the balances of certain assets and liabilities. Our cash flows provided by operating activities are significantly influenced by business levels and the payment terms set forth in our customer agreements. The increase in cash flows from operating activities for the nine months ended September 30, 2023, as compared to the nine months ended October 1, 2022, was primarily due to improved results from operations and the timing of cash receipts from customers and the timing of cash disbursements, including cash used for interest and taxes.
Cash Flows Used for Investing Activities
| Nine Months Ended | |||||||||||||||||
| September 30, 2023 | October 1, 2022 | Change | |||||||||||||||
| (In millions) | |||||||||||||||||
| Cash used for investing activities | $ | (313.6) | $ | (674.5) | $ | 360.9 |
Cash used for investing activities decreased during the nine months ended September 30, 2023, as compared to the nine months ended October 1, 2022, primarily due to decreases in cash used for business combinations, partially offset by increases in cash used for purchases of equity and debt securities. We expect to continue our investing activities, including purchasing property, plant and equipment, purchasing intangible assets, acquiring other companies and businesses, and making investments.
Cash Flows Used for Financing Activities
| Nine Months Ended | |||||||||||||||||
| September 30, 2023 | October 1, 2022 | Change | |||||||||||||||
| (In millions) | |||||||||||||||||
| Cash used for financing activities | $ | (666.0) | $ | (299.9) | $ | (366.1) |
Cash used for financing activities increased during the nine months ended September 30, 2023, as compared to the nine months ended October 1, 2022, primarily due to a decrease in proceeds from debt, partially offset by a decrease in payments for repurchases of our common stock.
Other Factors Affecting Liquidity and Capital Resources
Stock Repurchase Program
In August 2023, our Board of Directors increased the prior authorization to repurchase shares of our 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 September 30, 2023, approximately $1.5 billion of the share repurchase authorization remained available to repurchase shares of our common stock. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” for additional information on share repurchases.
Revolving Credit Facility
In June 2021, we entered into a five-year senior unsecured revolving credit facility with a group of lenders led by Bank of America, N.A., as administrative agent, as amended in September 2022 (the “2021 Credit Facility”). The 2021 Credit Facility provides for borrowings up to $700.0 million, with the right to request increased capacity up to an additional $350.0 million upon receipt of lender commitments, for total maximum borrowings of $1.05 billion. The 2021 Credit Facility expires on June 30, 2026. Any outstanding loans drawn under the 2021 Credit Facility are due at maturity on June 30, 2026, subject to an option to extend the maturity date. Outstanding borrowings may be repaid at any time prior to maturity. Interest rates associated with the 2021 Credit Facility are variable, so interest expense is impacted by changes in the interest rates, particularly for periods when there are outstanding borrowings under the revolving credit facility. Interest is payable quarterly. As of September 30, 2023, there were no borrowings outstanding under the 2021 Credit Facility, and we were in compliance with all financial covenants associated with such credit facility.
2024 Notes
In October 2014, we issued a $350.0 million aggregate principal amount of 4.375% Senior Notes due October 15, 2024 (the “2024 Notes”). We received net proceeds of $342.4 million from the issuance of the 2024 Notes, net of a discount of $1.4 million and issuance costs of $6.2 million. Interest is payable in cash semi-annually. The 2024 Notes are unsecured and rank equal in right of payment to all of our existing and future senior indebtedness. As of September 30, 2023, we were in compliance with all covenants associated with the 2024 Notes.
2025 Term Loan
In September 2022, we 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 our unsecured indebtedness. Interest rates associated with the 2025 Term Loan are variable, so interest expense is impacted by changes in interest rates. Interest is payable quarterly. As of September 30, 2023, we were in compliance with all financial covenants associated with the 2025 Term Loan.
For additional information relating to our debt arrangements, see Note 4 in the notes to condensed consolidated financial statements.
Other Liquidity Requirements
During the nine months ended September 30, 2023, there were no material changes to our other liquidity requirements as reported in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
A material portion of our revenue, expenses and business activities are transacted in the U.S. dollar. In certain foreign countries where we price our products and services in U.S. dollars, a decrease in value of the local currency relative to the U.S. dollar results in an increase in the prices for our products and services compared to those products of our competitors that are priced in local currency. This could result in our prices being uncompetitive in certain markets.
In certain countries where we may invoice customers in the local currency, our revenue benefits from a weaker dollar and is adversely affected by a stronger dollar. The opposite impact occurs in countries where we record expenses in local currencies. In those cases, our costs and expenses benefit from a stronger dollar and are adversely affected by a weaker dollar. The fluctuations in our operating expenses outside the United States resulting from volatility in foreign exchange rates are not generally moderated by corresponding fluctuations in revenue from existing contracts.
We enter into foreign currency forward exchange contracts to protect against currency exchange risks associated with existing assets and liabilities. A foreign currency forward exchange contract acts as a hedge by increasing in value when underlying assets decrease in value or underlying liabilities increase in value due to changes in foreign exchange rates. Conversely, a foreign currency forward exchange contract decreases in value when underlying assets increase in value or underlying liabilities decrease in value due to changes in foreign exchange rates. These forward contracts are not designated as accounting hedges, so the unrealized gains and losses are recognized in other income (expense), net, in advance of the actual foreign currency cash flows with the fair value of these forward contracts being recorded as accrued liabilities or other current assets.
We do not use forward contracts for trading purposes. Our forward contracts generally have maturities of 90 days or less. We enter into foreign currency forward exchange contracts based on estimated future asset and liability exposures, and the effectiveness of our hedging program depends on our ability to estimate these future asset and liability exposures. Recognized gains and losses with respect to our current hedging activities will ultimately depend on how accurately we are able to match the amount of foreign currency forward exchange contracts with actual underlying asset and liability exposures.
The following table provides information about our foreign currency forward exchange contracts as of September 30, 2023. The information is provided in U.S. dollar equivalent amounts. The table presents the notional amounts, at contract exchange rates, and the weighted average contractual foreign currency exchange rates expressed as units of the foreign currency per U.S. dollar, which in some cases may not be the market convention for quoting a particular currency. All of these forward contracts mature before or during November 2023.
| Notional Principal | Weighted Average Contract Rate | ||||||||||
| (In millions) | |||||||||||
| Forward Contracts: | |||||||||||
| European Union euro | $ | 173.9 | 0.91 | ||||||||
| Japanese yen | 87.5 | 143.68 | |||||||||
| British pound | 67.3 | 0.79 | |||||||||
| Israeli shekel | 59.6 | 3.73 | |||||||||
| South Korean won | 41.0 | 1308 | |||||||||
| Canadian dollar | 31.7 | 1.34 | |||||||||
| Indian rupee | 29.0 | 83.09 | |||||||||
| Swedish krona | 22.9 | 10.78 | |||||||||
| Chinese renminbi | 17.8 | 7.25 | |||||||||
| Taiwan dollar | 11.8 | 31.85 | |||||||||
| Other | 4.3 | N/A | |||||||||
| Total | $ | 546.8 | |||||||||
| Estimated fair value | $ | 10.1 |
As of December 31, 2022, our foreign currency exchange contracts had an aggregate principal amount of $489.0 million, and an estimated fair value of $5.3 million.
We have performed sensitivity analyses as of September 30, 2023 and December 31, 2022, using a modeling technique that measures the change in the fair values arising from a hypothetical 10% change in the value of the U.S. dollar relative to applicable foreign currency exchange rates, with all other variables held constant. The foreign currency exchange rates we used in performing the sensitivity analysis were based on market rates in effect at each respective date. The sensitivity analyses indicated that a hypothetical 10% decrease in the value of the U.S. dollar would result in a decrease to the fair value of our foreign currency forward exchange contracts of $3.9 million and $4.2 million as of September 30, 2023 and December 31, 2022, respectively, while a hypothetical 10% increase in the value of the U.S. dollar would result in an increase to the fair value of our foreign currency forward exchange contracts of $6.3 million and $7.2 million as of September 30, 2023 and December 31, 2022, respectively.
We actively monitor our foreign currency risks, but our foreign currency hedging activities may not substantially offset the impact of fluctuations in currency exchange rates on our results of operations, cash flows and financial position.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our portfolio of cash, cash equivalents, investments in debt securities and any balances outstanding on our 2021 Credit Facility and 2025 Term Loan. We are exposed to interest rate fluctuations in many of the world’s leading industrialized countries, but our interest income and expense is most sensitive to fluctuations in the general level of United States interest rates. In this regard, changes in United States interest rates affect the interest earned on our cash and cash equivalents and the costs associated with foreign currency hedges. All highly liquid securities with a maturity of three months or less at the date of purchase are considered to be cash equivalents. The carrying value of our interest-bearing instruments approximated fair value as of September 30, 2023.
Our investments in debt securities had a fair value of approximately $42.6 million as of September 30, 2023, that may decline in value if market interest rates rise. Such variability in market interest rates may result in a negative impact on the results of our investment activities. As of September 30, 2023, an increase in the market rates of interest of 1% would result in a decrease in the fair values of our marketable debt securities by approximately $2.3 million. As of December 31, 2022, we did not hold investments in debt securities.
Interest rates under our 2021 Credit Facility and 2025 Term Loan are variable, so interest expense could be adversely affected by changes in interest rates, particularly for periods when we maintain a balance outstanding under the revolving credit facility. As of September 30, 2023, there were no borrowings outstanding under our 2021 Credit Facility and $300.0 million of borrowings outstanding under our 2025 Term Loan.
Interest rates for our 2021 Credit Facility and 2025 Term Loan can fluctuate based on changes in market interest rates and in interest rate margins that vary based on the credit ratings of our unsecured debt. Assuming all loans were fully drawn and we were to fully exercise our right to increase borrowing capacity under our 2021 Credit Facility and made no prepayments on our 2025 Term Loan, each quarter point change in interest rates would result in a $3.4 million change in annual interest expense on our indebtedness under our 2021 Credit Facility and 2025 Term Loan. For an additional description of the 2021 Credit Facility and 2025 Term Loan, see Note 4 in the notes to condensed consolidated financial statements.
Equity Price Risk
Equity Investments
We have a portfolio of equity investments that includes marketable equity securities and non-marketable investments. Our equity investments are made primarily in connection with our strategic investment program. Under our strategic investment program, from time to time, we make cash investments in companies with technologies that are potentially strategically important to us.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2023.
Based on their evaluation as of September 30, 2023, our CEO and CFO have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that the information required to be disclosed by us in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. Internal control over financial reporting, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of internal control are met. Further, the design of internal control must reflect the fact that there are resource constraints, and the benefits of the control must be considered relative to their costs. While our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Cadence, have been detected.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are 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, we review the status of each significant matter and assess 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, we accrue 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 our judgments using the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and legal proceedings and may revise estimates. For additional information regarding pending legal proceedings and associated risks, see the “Risk Factors” sections in our Annual Report and our Q1 Report.
On April 27, 2022, Bell Semiconductor LLC (“Bell Semi“), a patent monetization entity, began filing a series of patent infringement lawsuits against certain technology companies alleging that certain semiconductor devices designed using certain design tools offered by EDA vendors, including Cadence, infringe upon one or more patents held by Bell Semi and Bell Semi seeking monetary damages, attorneys’ fees and costs, and a permanent injunction prohibiting the defendants from using allegedly infringing EDA design tools.
On April 29, 2022, Bell Semi also began filing a series of complaints with the U.S. International Trade Commission (“ITC“) alleging violations of Section 337 of the Tariff Act of 1930 and seeking limited exclusion orders preventing the respondents from importing into the United States semiconductor devices designed using certain design tools offered by EDA vendors, including Cadence, and cease-and-desist orders prohibiting respondents from importing, selling, offering for sale, marketing, advertising, distributing, or transferring products (except for exportation) made using certain design tools offered by EDA vendors, including Cadence. The ITC instituted three investigations but Bell Semi subsequently terminated one of the investigations. On May 8, 2023, Bell Semi filed motions to voluntarily withdraw the pending ITC investigations.
Cadence was not named as a respondent or defendant in any of the aforementioned actions; however, certain respondents and defendants are Cadence customers and sought defense and indemnity from Cadence regarding Bell Semi’s allegations. Cadence offered to defend some of its customers consistent with the terms of the applicable license agreements.
On November 18, 2022, Cadence and another EDA vendor jointly filed an action in the U.S. District Court for the District of Delaware for declaratory judgment of invalidity and non-infringement as to each of the six patents asserted by Bell Semi in the aforementioned actions. Bell Semi’s motion to dismiss the declaratory judgment actions was denied on April 27, 2023. On November 28, 2022, Cadence and another EDA vendor also filed a motion for preliminary injunction in the U.S. District Court for the District of Delaware seeking to enjoin Bell Semi from proceeding with its litigation campaign. Motions for preliminary injunction were denied without prejudice on April 27, 2023. Bell Semi responded to the declaratory judgment complaint on May 11, 2023.
On July 25, 2023, Cadence and Bell Semi reached a settlement agreement involving the six patents-in-suit, and on August 1, 2023, Cadence dismissed its action against Bell Semi.
Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including those described in the “Risk Factors” sections in our Annual Report and our Q1 Report, that could adversely affect our business, financial condition, results of operations, cash flows, liquidity, revenue, growth, prospects, demand, reputation, and the trading price of our common stock, and make an investment in us speculative or risky. The “Risk Factors” section in our Annual Report, as updated in our Q1 Report, remains current in all material respects. The risk factors described in our Annual Report and subsequent SEC filings do not include all of the risks that we face, and there may be additional risks or uncertainties that are currently unknown or not believed to be material that occur or become material.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We are authorized to repurchase shares of our common stock under a publicly announced program that was most recently increased by our Board of Directors on August 2, 2023. Pursuant to this authorization, we may repurchase shares from time to time through open market repurchases, in privately negotiated transactions or by other means, including accelerated share repurchase transactions or other structured repurchase transactions, block trades or pursuant to trading plans intended to comply with Rule 10b5-1 of the Exchange Act. 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 September 30, 2023, we repurchased approximately 0.5 million shares on the open market, for an aggregate purchase price of $125 million.
In June 2023, we also entered into an accelerated share repurchase (“ASR”) agreement with HSBC Bank USA, National Association (“HSBC”) to repurchase an aggregate of $200 million of our 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 our stock. Under the ASR agreement, we received an initial share delivery of approximately 0.6 million shares, which represented the number of shares at a market price equal to $140 million. An equity-linked contract for $60 million, representing the remaining shares to be delivered by HSBC under the ASR agreement, was recorded to stockholders’ equity as of September 30, 2023. In August 2023, the ASR agreement settled and resulted in a delivery to us of approximately 0.3 million additional shares. In total, we repurchased approximately 0.9 million shares under the ASR agreement at an average price per share of $228.26.
As of September 30, 2023, approximately $1.5 billion of the share repurchase authorization remained available to repurchase shares of our common stock.
The following table presents repurchases made under our publicly announced repurchase authorizations and shares surrendered by employees to satisfy income tax withholding obligations during the three months ended September 30, 2023:
| Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share (2) | Total Number of Shares Purchased as Part of Publicly Announced Plan or Program (3) | Approximate Dollar Value of Shares that May Yet Be Purchased Under Publicly Announced Plan or Program (1) (In millions) | ||||||||||||||||||||||
| July 1, 2023 - July 31, 2023 | 163,423 | $ | 237.44 | 155,640 | $ | 590 | ||||||||||||||||||||
| August 1, 2023 - August 31, 2023 | 603,921 | $ | 223.80 | 482,370 | $ | 1,543 | ||||||||||||||||||||
| September 1, 2023 - September 30, 2023 | 191,029 | $ | 237.21 | 172,622 | $ | 1,502 | ||||||||||||||||||||
| Total | 958,373 | $ | 228.80 | 810,632 |
(1)Shares purchased that were not part of our publicly announced repurchase programs represent shares of restricted stock surrendered by employees to satisfy employee income tax withholding obligations due upon vesting, and do not reduce the dollar value that may yet be purchased under our publicly announced repurchase programs.
(2)The weighted average price paid per share of common stock does not include the cost of commissions.
(3)Our publicly announced share repurchase program was originally announced on February 1, 2017 and most recently increased by an additional $1.0 billion on August 2, 2023.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Insider Trading Arrangements
During the fiscal quarter ended September 30, 2023, our directors and officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted or terminated the contracts, instructions or written plans for the purchase or sale of our securities set forth in the table below.
| Type of Trading Arrangement | ||||||||||||||||||||||||||||||||
| Name and Position | Action | Adoption/ Termination Date | Rule 10b5-1* | Total Shares of Common Stock to be Sold | Expiration Date | |||||||||||||||||||||||||||
| Karna Nisewaner, CVP, General Counsel and Corporate Secretary | Adoption | 8/9/2023 | X | Up to 7,072 | 9/30/2024 | |||||||||||||||||||||||||||
| Anirudh Devgan, President and Chief Executive Officer | Termination(1) | 9/13/2023 | X | Up to 109,381(2) | 5/30/2024 | |||||||||||||||||||||||||||
| Anirudh Devgan, President and Chief Executive Officer | Adoption(1) | 9/13/2023 | X | Up to 203,474(3) | 12/31/2024 | |||||||||||||||||||||||||||
| Alberto Sangiovanni-Vincentelli, Director | Adoption | 9/13/2023 | X | Up to 37,000 | 12/19/2024 | |||||||||||||||||||||||||||
| * Contract, instruction or written plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act. |
(1) Represents the modification, as described in Rule 10b5-1(c)(1)(iv) under the Exchange Act, of a Rule 10b5-1 trading plan adopted on June 14, 2023. As a result of this modification, the subject plan is deemed terminated and a new plan is deemed adopted as of the modification date.
(2) Includes up to 109,381 shares subject to Performance Stock Awards previously granted to Dr. Devgan subject to vesting and release to Dr. Devgan during the period from August 25, 2023 to March 15, 2024 upon the satisfaction of the applicable total shareholder return hurdles and relative total shareholder return threshold. The actual number of shares that will vest in connection with these awards is not yet determinable. In addition, the actual number of shares that will be released to Dr. Devgan in connection with these awards and could have been sold under the Rule 10b5-1 trading arrangement would have been net of the number of shares withheld to satisfy tax withholding obligations arising from the vesting of such shares.
(3) Includes up to 100,766 shares subject to Performance Stock Awards previously granted to Dr. Devgan subject to vesting and release to Dr. Devgan during the period from September 15, 2023 to March 15, 2024 upon the satisfaction of the applicable total shareholder return hurdles and relative total shareholder return threshold. The actual number of shares that will vest in connection with these awards is not yet determinable. In addition, the actual number of shares that will be released to Dr. Devgan in connection with these awards and sold under the Rule 10b5-1 trading arrangement will be net of the number of shares withheld to satisfy tax withholding obligations arising from the vesting of such shares and is not yet determinable.
Item 6. Exhibits
| * | Filed herewith. | |||||||
| † | Furnished herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CADENCE DESIGN SYSTEMS, INC. (Registrant) | |||||||||||||||||
| DATE: | October 23, 2023 | By: | /s/ Anirudh Devgan | ||||||||||||||
| Anirudh Devgan | |||||||||||||||||
| President and Chief Executive Officer | |||||||||||||||||
| DATE: | October 23, 2023 | By: | /s/ John M. Wall | ||||||||||||||
| John M. Wall | |||||||||||||||||
| Senior Vice President and Chief Financial Officer |