Item 1. Financial Statements

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Item 1. Financial Statements

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

As of
March 31, 2024December 31, 2023
ASSETS
Current assets:
Cash and cash equivalents$1,012,418$1,008,152
Receivables, net389,865489,224
Inventories185,784181,661
Prepaid expenses and other341,865297,180
Total current assets1,929,9321,976,217
Property, plant and equipment, net433,016403,213
Goodwill1,575,1071,535,845
Acquired intangibles, net334,644336,843
Deferred taxes886,576880,001
Other assets562,855537,372
Total assets$5,722,130$5,669,491
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt$349,507$349,285
Accounts payable and accrued liabilities456,608576,558
Current portion of deferred revenue659,628665,024
Total current liabilities1,465,7431,590,867
Long-term liabilities:
Long-term portion of deferred revenue87,00398,931
Long-term debt299,805299,771
Other long-term liabilities301,983275,651
Total long-term liabilities688,791674,353
Commitments and contingencies (Note 14)
Stockholders’ equity:
Common stock and capital in excess of par value3,331,5473,166,964
Treasury stock, at cost(4,840,181)(4,604,323)
Retained earnings5,184,0274,936,384
Accumulated other comprehensive loss(107,797)(94,754)
Total stockholders’ equity3,567,5963,404,271
Total liabilities and stockholders’ equity$5,722,130$5,669,491

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, 2024March 31, 2023
Revenue:
Product and maintenance$913,385$963,742
Services95,71857,948
Total revenue1,009,1031,021,690
Costs and expenses:
Cost of product and maintenance75,395100,238
Cost of services49,80224,234
Marketing and sales180,589166,666
Research and development378,958350,295
General and administrative68,71653,527
Amortization of acquired intangibles5,4074,267
Restructuring280—
Total costs and expenses759,147699,227
Income from operations249,956322,463
Interest expense(8,692)(9,260)
Other income, net68,7798,284
Income before provision for income taxes310,043321,487
Provision for income taxes62,40079,683
Net income$247,643$241,804
Net income per share – basic$0.92$0.90
Net income per share – diluted$0.91$0.89
Weighted average common shares outstanding – basic269,606269,501
Weighted average common shares outstanding – diluted273,544273,159

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, 2024March 31, 2023
Net income$247,643$241,804
Other comprehensive income (loss), net of tax effects:
Foreign currency translation adjustments(12,630)3,955
Changes in defined benefit plan liabilities(21)263
Unrealized gains (losses) on investments(392)30
Total other comprehensive income (loss), net of tax effects(13,043)4,248
Comprehensive income$234,600$246,052

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, 2024
Common Stock
Par ValueAccumulated
and CapitalOther
in ExcessTreasuryRetainedComprehensive
Sharesof ParStockEarningsLossTotal
Balance, December 31, 2023271,706$3,166,964$(4,604,323)$4,936,384$(94,754)$3,404,271
Net income———247,643—$247,643
Other comprehensive loss, net of taxes————(13,043)$(13,043)
Purchase of treasury stock(425)—(125,006)——$(125,006)
Issuance of common stock and reissuance of treasury stock under equity incentive plans, net of forfeitures1,31989,15927,566——$116,725
Stock received for payment of employee taxes on vesting of restricted stock(466)(12,705)(138,418)——$(151,123)
Stock-based compensation expense—88,129———$88,129
Balance, March 31, 2024272,134$3,331,547$(4,840,181)$5,184,027$(107,797)$3,567,596
Three Months Ended March 31, 2023
Common Stock
Par ValueAccumulated
and CapitalOther
in ExcessTreasuryRetainedComprehensive
Sharesof ParStockEarningsLossTotal
Balance, December 31, 2022272,675$2,765,673$(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 forfeitures97247,24620,899——$68,145
Stock received for payment of employee taxes on vesting of restricted stock(295)(8,458)(59,254)——$(67,712)
Stock-based compensation expense—74,288———$74,288
Balance, March 31, 2023272,684$2,878,749$(3,987,528)$4,137,044$(87,389)$2,940,876

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, 2024March 31, 2023
Cash and cash equivalents at beginning of period$1,008,152$882,325
Cash flows from operating activities:
Net income247,643241,804
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization39,55634,400
Amortization of debt discount and fees320311
Stock-based compensation88,12974,288
Gain on investments, net(55,394)(123)
Deferred income taxes(1,523)(11,640)
Provisions for losses on receivables158214
ROU asset amortization and change in operating lease liabilities(917)(1,392)
Other non-cash items7899
Changes in operating assets and liabilities, net of effect of acquired businesses:
Receivables102,991(8,719)
Inventories(10,689)399
Prepaid expenses and other(15,073)56,212
Other assets(7,535)(42,084)
Accounts payable and accrued liabilities(117,291)(117,915)
Deferred revenue(23,941)40,650
Other long-term liabilities6,720897
Net cash provided by operating activities253,232267,401
Cash flows from investing activities:
Purchases of investments(2,095)(9,055)
Proceeds from the sale and maturity of investments43,377102
Purchases of property, plant and equipment(49,601)(26,719)
Cash paid in business combinations, net of cash acquired(71,450)—
Net cash used for investing activities(79,769)(35,672)
Cash flows from financing activities:
Proceeds from revolving credit facility—50,000
Payments on revolving credit facility—(120,000)
Proceeds from issuance of common stock116,72565,370
Stock received for payment of employee taxes on vesting of restricted stock(151,123)(67,712)
Payments for repurchases of common stock(125,006)(125,010)
Net cash used for financing activities(159,404)(197,352)
Effect of exchange rate changes on cash and cash equivalents(9,793)261
Increase in cash and cash equivalents4,26634,638
Cash and cash equivalents at end of period$1,012,418$916,963
Supplemental cash flow information:
Cash paid for interest$4,903$5,142
Cash paid for income taxes, net23,85019,814

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, 2023.

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 or other periods. 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

Cadence’s fiscal year end is December 31, and its fiscal quarters end on March 31, June 30, and September 30.

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 macroeconomic and geopolitical environment, 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 23, 2024, 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

Cadence has not recently adopted any accounting standard updates that are material or potentially material to its condensed consolidated financial statements.

New Accounting Standards Not Yet Adopted

Segment Reporting

In November 2023, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”) No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” intended to improve reportable segment disclosure requirements, primarily through enhanced annual and interim disclosures about significant segment expenses. This standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. Cadence is currently evaluating the impact of adopting this standard on its financial statement disclosures.

Income Taxes

In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which requires disclosure of disaggregated income taxes paid, prescribes standard categories for the components of the effective tax rate reconciliation, and modifies other income tax-related disclosures. This standard is effective for fiscal years beginning after December 15, 2024, and may be applied on a retrospective or prospective basis. Cadence is currently evaluating the impact of adopting this standard on its financial statement disclosures.

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, 2024 and March 31, 2023:

Three Months Ended
March 31, 2024March 31, 2023
Custom Integrated Circuit (“IC”) Design and Simulation22%20%
Digital IC Design and Signoff29%25%
Functional Verification, including Emulation and Prototyping Hardware*25%32%
Intellectual Property (“IP”)12%11%
System Design and Analysis12%12%
Total100%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, 2024 or March 31, 2023.

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, 2024 and March 31, 2023:

Three Months Ended
March 31, 2024March 31, 2023
Revenue recognized over time87%77%
Revenue from arrangements with non-cancelable commitments3%3%
Recurring revenue90%80%
Up-front revenue10%20%
Total100%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, 2024 and December 31, 2023 were as follows:

As of
March 31, 2024December 31, 2023
(In thousands)
Contract assets$49,895$17,554
Deferred revenue746,631763,955

Cadence recognized revenue of $324.4 million during the three months ended March 31, 2024, and $363.2 million during the three months ended March 31, 2023, that was included in the deferred revenue balance at the beginning of each respective fiscal year. All other activity in deferred revenue, with the exception of deferred revenue assumed from acquisitions, 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 $6.0 billion as of March 31, 2024, 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.

Cadence estimates its remaining performance obligations at a point in time. Actual amounts and timing of revenue recognition may differ from these estimates largely due to changes in actual installation and delivery dates, as well as contract renewals, modifications and terminations. As of March 31, 2024, Cadence expected to recognize 56% of the contracted but unsatisfied performance obligations, excluding non-cancelable commitments, as revenue over the next 12 months, 38% over the next 13 to 36 months and the remainder thereafter.

Cadence recognized revenue of $15.0 million during the three months ended March 31, 2024, and $15.2 million during the three months ended March 31, 2023, 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, 2024 and December 31, 2023 were as follows:

As of
March 31, 2024December 31, 2023
(In thousands)
Accounts receivable$219,937$299,814
Unbilled accounts receivable174,169193,963
Long-term receivables12,89810,755
Total receivables407,004504,532
Less allowance for doubtful accounts(4,241)(4,553)
Total receivables, net$402,763$499,979

Cadence’s customers are primarily concentrated within the semiconductor and electronics systems industries. As of March 31, 2024 and December 31, 2023, no single customer accounted for 10% or more of Cadence’s total receivables.

NOTE 4. DEBT

Cadence’s outstanding debt was as follows:

March 31, 2024December 31, 2023
(In thousands)
PrincipalUnamortized DiscountCarrying ValuePrincipalUnamortized DiscountCarrying Value
2024 Notes$350,000$(493)$349,507$350,000$(715)$349,285
2025 Term Loan300,000(195)299,805300,000(229)299,771
Total outstanding debt$650,000$(688)$649,312$650,000$(944)$649,056

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. As of March 31, 2024, there were no outstanding borrowings under 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. 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, 2024, 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. As of March 31, 2024 and December 31, 2023, the carrying value of the 2024 Notes was classified as a current liability on Cadence’s condensed consolidated balance sheet. As of March 31, 2024, the fair value of the 2024 Notes was approximately $347.4 million.

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 in fiscal 2022. 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, 2024, the interest rate on the 2025 Term Loan was 6.17%. 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, 2024, Cadence was in compliance with all financial covenants associated with the 2025 Term Loan.

NOTE 5. ACQUISITIONS

On January 8, 2024, Cadence acquired all of the outstanding equity of Invecas, Inc. (“Invecas”), a provider of design engineering, embedded software and system-level solutions. The aggregate cash consideration for Cadence’s acquisition of Invecas, net of cash acquired of $23.8 million, was $71.5 million. The acquisition adds a skilled system design engineering team to Cadence, with expertise in providing customers with custom solutions across chip design, product engineering, advanced packaging and embedded software. Subject to service and other conditions, Cadence expects to recognize expense for consideration paid to certain former Invecas shareholders, now employed by Cadence, through the first quarter of fiscal 2028.

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

Fair Value
(In thousands)
Current assets$50,608
Goodwill42,480
Acquired intangibles15,500
Other long-term assets24,402
Total assets acquired132,990
Current liabilities17,114
Long-term liabilities20,635
Total liabilities assumed37,749
Total purchase consideration$95,241

As of March 31, 2024, the allocation of purchase consideration to certain assets and liabilities was preliminary. Cadence will continue to evaluate certain estimates and assumptions, primarily related to assumed tax liabilities, during the measurement period (up to one year from the acquisition date). The allocation of purchase consideration may change materially as additional information about conditions existing at the acquisition date becomes available.

The recorded goodwill is attributed to intangible assets that do not qualify for separate recognition, including the acquired assembled workforce, and will not be deductible for tax purposes.

The definite-lived intangible assets acquired with Cadence’s acquisition of Invecas include agreements and relationships of $15.0 million and tradenames of $0.5 million. These assets will be amortized over a weighted average life of 6.8 years.

Pro Forma Financial Information

Cadence has not presented pro forma financial information for its acquisition of Invecas because the results of operations for Invecas are not material to Cadence’s condensed consolidated financial statements.

Acquisition-Related Transaction Costs

Transaction costs associated with acquisitions, which consist of professional fees and administrative costs, are expensed as incurred and are included in general and administrative expense in Cadence’s condensed consolidated income statement. During the three months ended March 31, 2024 and March 31, 2023, transaction costs associated with acquisitions were $9.0 million and $2.9 million, respectively.

NOTE 6. GOODWILL AND ACQUIRED INTANGIBLES

Goodwill

The changes in the carrying amount of goodwill during the three months ended March 31, 2024 were as follows:

Gross Carrying Amount
(In thousands)
Balance as of December 31, 2023$1,535,845
Goodwill resulting from acquisitions42,480
Effect of foreign currency translation(3,218)
Balance as of March 31, 2024$1,575,107

Acquired Intangibles, Net

Acquired intangibles as of March 31, 2024 were as follows:

Gross Carrying AmountAccumulated AmortizationAcquired Intangibles, Net
(In thousands)
Existing technology$329,816$(150,929)$178,887
Agreements and relationships203,417(56,766)146,651
Tradenames, trademarks and patents13,899(4,793)9,106
Total acquired intangibles$547,132$(212,488)$334,644

During the three months ended March 31, 2024, Cadence completed certain projects previously included in in-process technology and transferred $6.8 million to existing technology.

Acquired intangibles as of December 31, 2023 were as follows:

Gross Carrying AmountAccumulated AmortizationAcquired Intangibles, Net
(In thousands)
Existing technology$325,710$(141,659)$184,051
Agreements and relationships198,259(61,395)136,864
Tradenames, trademarks and patents13,460(4,332)9,128
Total acquired intangibles with definite lives$537,429$(207,386)$330,043
In-process technology6,800—6,800
Total acquired intangibles$544,229$(207,386)$336,843

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, 2024 and March 31, 2023 by condensed consolidated income statement caption was as follows:

Three Months Ended
March 31, 2024March 31, 2023
(In thousands)
Cost of product and maintenance$11,348$10,260
Amortization of acquired intangibles5,4074,267
Total amortization of acquired intangibles$16,755$14,527

As of March 31, 2024, the estimated amortization expense for intangible assets with definite lives was as follows for the following five fiscal years and thereafter:

(In thousands)
2024 - remaining period$50,873
202554,698
202649,102
202746,595
202842,441
202927,957
Thereafter62,978
Total estimated amortization expense$334,644

NOTE 7. STOCK-BASED COMPENSATION

Stock-based compensation expense is reflected in Cadence’s condensed consolidated income statements for the three months ended March 31, 2024 and March 31, 2023 as follows:

Three Months Ended
March 31, 2024March 31, 2023
(In thousands)
Cost of product and maintenance$1,280$1,066
Cost of services1,6291,357
Marketing and sales17,83615,091
Research and development53,63744,322
General and administrative13,74712,452
Total stock-based compensation expense$88,129$74,288

Cadence had total unrecognized compensation expense related to stock option and restricted stock grants of $567.5 million as of March 31, 2024, which will be recognized over a weighted average vesting period of 2.0 years.

NOTE 8. STOCK REPURCHASE PROGRAM

In August 2023, 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, 2024, approximately $1.3 billion 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, 2024 and March 31, 2023 were as follows:

Three Months Ended
March 31, 2024March 31, 2023
(In thousands)
Shares repurchased425668
Total cost of repurchased shares$125,006$125,010

NOTE 9. OTHER INCOME, NET

Cadence’s other income, net, for the three months ended March 31, 2024 and March 31, 2023 were as follows:

Three Months Ended
March 31, 2024March 31, 2023
(In thousands)
Interest income$9,512$6,373
Gains on investments55,394123
Gains on securities in Non-Qualified Deferred Compensation (“NQDC”) trust4,5883,150
Losses on foreign exchange(331)(1,043)
Other expense, net(384)(319)
Total other income, net$68,779$8,284

For additional information relating to Cadence’s investments and the gains on investments, see Note 11 in the notes to condensed consolidated financial statements.

NOTE 10. NET INCOME PER SHARE

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

The calculations for basic and diluted net income per share for the three months ended March 31, 2024 and March 31, 2023 are as follows:

Three Months Ended
March 31, 2024March 31, 2023
(In thousands, except per share amounts)
Net income$247,643$241,804
Weighted average common shares used to calculate basic net income per share269,606269,501
Stock-based awards3,9383,658
Weighted average common shares used to calculate diluted net income per share273,544273,159
Net income per share - basic$0.92$0.90
Net income per share - diluted$0.91$0.89

The following table presents shares of Cadence’s common stock outstanding for the three months ended March 31, 2024 and March 31, 2023 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, 2024March 31, 2023
(In thousands)
Long-term market-based awards—1,826
Options to purchase shares of common stock59332
Non-vested shares of restricted stock850
Total potential common shares excluded672,208

NOTE 11. INVESTMENTS

Investments in Equity Securities

Marketable Equity Investments

Cadence’s investments in marketable equity securities consist of purchased shares of publicly held companies and are included in prepaid expenses and other in Cadence’s condensed consolidated balance sheets. Changes in the fair value of these investments are recorded to other income (expense), net in Cadence’s condensed consolidated income statements. The carrying value of marketable equity investments was $93.6 million and $80.6 million as of March 31, 2024 and December 31, 2023, respectively.

Non-Marketable Equity Investments

Cadence’s investments in non-marketable equity securities generally consist of stock or other instruments of privately held entities and are included in other assets on Cadence’s condensed consolidated balance sheets. Cadence holds a 16% interest in a privately held company that is accounted for using the equity method of accounting. The carrying value of this investment was $109.6 million and $111.1 million as of March 31, 2024 and December 31, 2023, respectively.

Cadence records its proportionate share of net income from the investee, offset by amortization of basis differences, to other income (expense), net in Cadence’s condensed consolidated income statements. For the three months ended March 31, 2024 and March 31, 2023, Cadence recognized losses of $0.4 million and $0.1 million, respectively.

Cadence also holds other non-marketable investments in privately held companies where Cadence does not have the ability to exercise significant influence and the fair value of the investments is not readily determinable. The carrying value of these investments was $27.1 million and $27.2 million as of March 31, 2024 and December 31, 2023, respectively. Gains and losses on these investments were not material to Cadence’s condensed consolidated financial statements for the periods presented.

The portion of gains and losses included in Cadence’s condensed consolidated income statements related to equity securities still held at the end of the period were as follows:

Three Months Ended
March 31, 2024March 31, 2023
(In thousands)
Net gains recognized on equity securities$55,398$123
Less: Net gains recognized on equity securities sold(20,367)—
Net gains recognized on equity securities still held$35,031$123

Investments in Debt Securities

The following is a summary of Cadence’s available-for-sale debt securities recorded within prepaid expenses and other on its condensed consolidated balance sheets:

As of March 31, 2024
Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
(In thousands)
Available-for-sale debt securities
Mortgage-backed and asset-backed securities$51,268$206$(466)$51,008
Total available-for-sale securities$51,268$206$(466)$51,008
As of December 31, 2023
Amortized CostGross Unrealized GainsGross Unrealized LossesEstimated Fair Value
(In thousands)
Available-for-sale debt securities
Mortgage-backed and asset-backed securities$49,653$375$(243)$49,785
Total available-for-sale securities$49,653$375$(243)$49,785

Gross unrealized gains and losses are recorded as a component of accumulated other comprehensive loss on Cadence's condensed consolidated balance sheets.

As of March 31, 2024, the fair values of available-for-sale debt securities, by remaining contractual maturity, were as follows:

(In thousands)
Due within 1 year$—
Due after 1 year through 5 years10,856
Due after 5 years through 10 years16,564
Due after 10 years23,588
Total$51,008

As of March 31, 2024, Cadence did not intend to sell any of its available-for-sale debt securities in an unrealized loss position, and it was more likely than not that Cadence will hold the securities until maturity or a recovery of the cost basis.

NOTE 12. 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, 2024.

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, 2024 and December 31, 2023:

Fair Value Measurements as of March 31, 2024
TotalLevel 1Level 2Level 3
(In thousands)
Assets
Cash equivalents:
Money market funds$472,883$472,883$—$—
Marketable securities:
Marketable equity securities93,59193,591——
Mortgage-backed and asset-backed securities51,008—51,008—
Securities held in NQDC trust81,46481,464——
Total Assets$698,946$647,938$51,008$—
TotalLevel 1Level 2Level 3
(In thousands)
Liabilities
Foreign currency exchange contracts$345$—$345$—
Total Liabilities$345$—$345$—
Fair Value Measurements as of December 31, 2023
TotalLevel 1Level 2Level 3
(In thousands)
Assets
Cash equivalents:
Money market funds$490,983$490,983$—$—
Marketable securities:
Marketable equity securities80,57580,575——
Mortgage-backed and asset-backed securities49,785—49,785—
Securities held in NQDC trust75,67175,671——
Foreign currency exchange contracts9,327—9,327—
Total Assets$706,341$647,229$59,112$—
As of December 31, 2023, 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.

Level 3 Measurements

During the three months ended March 31, 2024, Cadence acquired intangible assets of $15.5 million. The fair value of the intangible assets acquired was determined using variations of the income approach that utilizes unobservable inputs classified as Level 3 measurements.

For agreements and relationships, the fair value was determined by using the multi-period excess earnings method. This method reflects the present value of the projected cash flows that are expected to be generated from existing customers, less charges representing the contribution of other assets to those cash flows. Projected income from existing customer relationships was determined using a customer retention rate of 85%. The present value of operating cash flows from existing customers was determined using a discount rate of 14.0%.

NOTE 13. INVENTORY

Cadence’s inventory balances as of March 31, 2024 and December 31, 2023 were as follows:

As of
March 31, 2024December 31, 2023
(In thousands)
Inventories:
Raw materials$163,531$162,754
Work-in-process626—
Finished goods21,62718,907
Total inventories$185,784$181,661

NOTE 14. COMMITMENTS AND CONTINGENCIES

Acquisition of BETA CAE Systems International AG

On March 2, 2024, Cadence entered into a definitive agreement to acquire all of the outstanding equity of BETA CAE Systems International AG (“BETA CAE”), a system analysis platform provider of multi-domain, engineering simulation solutions. The addition of BETA CAE’s technologies and talent is intended to accelerate Cadence’s Intelligent System Design™ strategy by expanding its multiphysics system analysis portfolio and enabling entry into the structural analysis space. The acquisition is expected to close during Cadence’s second quarter of fiscal 2024.

At close, Cadence will pay aggregate consideration based on an enterprise value of $1.24 billion (the “Purchase Price”), with 60% of the Purchase Price to be paid in cash and 40% to be paid through the issuance of Cadence common stock to current BETA CAE shareholders. Cadence intends to fund the cash consideration through a combination of cash on hand and borrowings under existing and/or new debt facilities.

The agreement contains warranties, covenants, closing conditions and indemnities customary for acquisitions of this nature. Among other conditions, the transaction is conditioned on the expiration or termination of the applicable waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, and receipt of other required approvals under antitrust and foreign direct investment laws of certain other specified jurisdictions.

The agreement also provides for customary termination rights for the parties, including the right to terminate the agreement due to the failure to obtain required regulatory approvals on or prior to May 31, 2024 (subject to two automatic extensions until November 29, 2024, the “Longstop Date”). Under the terms of the agreement, Cadence will be required to pay a reverse termination fee of up to $60 million in the event the agreement is terminated due to the failure to obtain such required regulatory approvals on or prior to the Longstop Date.

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. Cadence is also subject from time to time to inquiries, investigations and regulatory proceedings involving governments and regulatory agencies in the jurisdictions in which Cadence operates. 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. Cadence was 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, 2024 or December 31, 2023 as Cadence does not believe a loss is probable. The entire dispute resolution process may take up 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, 2024 and March 31, 2023.

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.

Cadence did not incur any material losses from indemnification claims during the three months ended March 31, 2024 and March 31, 2023.

NOTE 15. 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, 2024 and December 31, 2023:

As of
March 31, 2024December 31, 2023
(In thousands)
Foreign currency translation loss$(103,308)$(90,678)
Changes in defined benefit plan liabilities(4,229)(4,208)
Unrealized gains (losses) on investments(260)132
Total accumulated other comprehensive loss$(107,797)$(94,754)

For the three months ended March 31, 2024 and March 31, 2023, 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 16. 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, 2024 and March 31, 2023:

Three Months Ended
March 31, 2024March 31, 2023
(In thousands)
Americas:
United States$435,523$434,346
Other Americas27,34716,118
Total Americas462,870450,464
Asia:
China117,229177,556
Other Asia208,531183,962
Total Asia325,760361,518
Europe, Middle East and Africa169,056154,270
Japan51,41755,438
Total$1,009,103$1,021,690

The following table presents a summary of long-lived assets by geography as of March 31, 2024 and December 31, 2023:

As of
March 31, 2024December 31, 2023
(In thousands)
Americas:
United States$404,492$383,807
Other Americas9,46510,219
Total Americas413,957394,026
Asia:
China27,94929,598
Other Asia84,45471,365
Total Asia112,403100,963
Europe, Middle East and Africa55,58356,449
Japan2,0002,572
Total$583,943$554,010

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