Cadence Design Systems 10-Q 2024-06-30

Filed 2024-07-24. 8 sections, 216K 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 June 30, 2024

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

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CADENCE DESIGN SYSTEMS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware00-0000000
(State or Other Jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification No.)
2655 Seely Avenue, Building 5,San Jose,California95134
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per shareCDNSNasdaq 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 June 30, 2024, approximately 273,820,000 shares of the registrant’s common stock, $0.01 par value, were outstanding.

CADENCE DESIGN SYSTEMS, INC.

INDEX

Page
PART I.FINANCIAL INFORMATION
Item 1.Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2024 and December 31, 20231
Condensed Consolidated Income Statements for the three and six months ended June 30, 2024 and June 30, 20232
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2024 and June 30, 20233
Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2024 and June 30, 20234
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2024 and June 30, 20236
Notes to Condensed Consolidated Financial Statements6
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations22
Item 3.Quantitative and Qualitative Disclosures About Market Risk34
Item 4.Controls and Procedures36
PART II.OTHER INFORMATION
Item 1.Legal Proceedings37
Item 1A.Risk Factors37
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds40
Item 3.Defaults Upon Senior Securities41
Item 4.Mine Safety Disclosures41
Item 5.Other Information41
Item 6.Exhibits42
Signatures44

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

As of
June 30, 2024December 31, 2023
ASSETS
Current assets:
Cash and cash equivalents$1,058,955$1,008,152
Receivables, net564,851489,224
Inventories171,508181,661
Prepaid expenses and other401,074297,180
Total current assets2,196,3881,976,217
Property, plant and equipment, net449,422403,213
Goodwill2,417,7471,535,845
Acquired intangibles, net664,038336,843
Deferred taxes892,963880,001
Other assets605,183537,372
Total assets$7,225,741$5,669,491
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt$349,732$349,285
Accounts payable and accrued liabilities505,392576,558
Current portion of deferred revenue678,598665,024
Total current liabilities1,533,7221,590,867
Long-term liabilities:
Long-term portion of deferred revenue88,82398,931
Long-term debt998,935299,771
Other long-term liabilities343,369275,651
Total long-term liabilities1,431,127674,353
Commitments and contingencies (Note 14)
Stockholders’ equity:
Common stock and capital in excess of par value3,928,4773,166,964
Treasury stock, at cost(4,971,955)(4,604,323)
Retained earnings5,413,5474,936,384
Accumulated other comprehensive loss(109,177)(94,754)
Total stockholders’ equity4,260,8923,404,271
Total liabilities and stockholders’ equity$7,225,741$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 EndedSix Months Ended
June 30, 2024June 30, 2023June 30, 2024June 30, 2023
Revenue:
Product and maintenance$960,457$922,790$1,873,842$1,886,532
Services100,22453,789195,942111,737
Total revenue1,060,681976,5792,069,7841,998,269
Costs and expenses:
Cost of product and maintenance94,36374,218169,758174,456
Cost of services44,90722,64094,70946,874
Marketing and sales186,725167,070367,314333,736
Research and development370,740354,416749,698704,711
General and administrative63,43654,605132,152108,132
Amortization of acquired intangibles6,6674,30212,0748,569
Restructuring(33)—247—
Total costs and expenses766,805677,2511,525,9521,376,478
Income from operations293,876299,328543,832621,791
Interest expense(12,905)(8,877)(21,597)(18,137)
Other income, net34,7397,973103,51816,257
Income before provision for income taxes315,710298,424625,753619,911
Provision for income taxes86,19077,304148,590156,987
Net income$229,520$221,120$477,163$462,924
Net income per share – basic$0.85$0.82$1.77$1.72
Net income per share – diluted$0.84$0.81$1.74$1.70
Weighted average common shares outstanding – basic270,912269,714270,259269,607
Weighted average common shares outstanding – diluted273,520272,996273,532273,078

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

Three Months EndedSix Months Ended
June 30, 2024June 30, 2023June 30, 2024June 30, 2023
Net income$229,520$221,120$477,163$462,924
Other comprehensive income (loss), net of tax effects:
Foreign currency translation adjustments(1,338)(2,809)(13,967)1,146
Changes in defined benefit plan liabilities145142123405
Unrealized losses on investments(187)(454)(579)(424)
Total other comprehensive income (loss), net of tax effects(1,380)(3,121)(14,423)1,127
Comprehensive income$228,140$217,999$462,740$464,051

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

**(In th

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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, 2023 (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, 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 benefits; pending acquisitions, the accounting for acquisitions and the 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,” “Liquidity and Capital Resources” and "Risk Factors" sections contained in this Quarterly Report, the "Risk Factors" section contained in our Annual Report, 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 leading pioneer in electronic system design software and intellectual property (“IP”), building upon more than 35 years of computational software expertise. Since our inception, we have been at the forefront of technology innovation, solving highly complex challenges in the semiconductor and electronic systems industries. We are a global company that provides computational software, special-purpose computational hardware, IP and services to multiple vertical sectors including automotive, artificial intelligence (“AI”), aerospace and defense, high-performance and mobile computing, hyperscalers, wireless communications, industrial internet of things and life sciences.

Our Intelligent System DesignTM strategy allows us to deliver essential computational software, hardware and IP that our customers use to turn their design concepts into reality. Our customers include many of the world's most innovative companies that design and build highly sophisticated semiconductor and electronic systems found in products used in everyday life. Our Intelligent System Design strategy allows us to quickly adapt to our customers' dynamic design requirements. Our products and services enable our customers to develop complex and innovative semiconductor and electronic systems, so demand for our technology and expertise is driven by increasing complexity and our customers’ need to invest in new designs and products that are highly differentiated. 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.”

Recent Acquisitions

Consistent with our Intelligent System Design strategy, during the first quarter of fiscal 2024, we completed our acquisition of Invecas, Inc. (“Invecas”), a leading provider of design engineering, embedded software and system-level solutions. We believe the addition of a skilled engineering team with vast experience in delivering end-to-end system solutions with deep expertise in advanced nodes, mixed-signal, verification, embedded software, packaging and turnkey custom silicon production will enhance our ability to pursue attractive opportunities in the markets we serve. Revenue and cost of revenue associated with contracts assumed with our acquisition of Invecas is primarily classified as services revenue and cost of services in our condensed consolidated income statements.

During the second quarter of fiscal 2024, we completed our acquisition of BETA CAE Systems International AG (“BETA CAE”), a system analysis platform provider of multi-domain, engineering simulation solutions. The acquisition of BETA CAE expands our multiphysics system analysis suite with highly complementary products, enabling us to offer a more comprehensive portfolio to customers in the automotive sector and at companies in the aerospace, industrial and healthcare industries. Revenue associated with contracts assumed with our acquisition of BETA CAE is primarily classified as product and maintenance revenue in our System Design and Analysis product category. Cost of revenue associated with these contracts is primarily classified as cost of product and maintenance in our condensed consolidated income statements.

Macroeconomic and Geopolitical Environment

Because we operate globally, our business is subject to the effects of economic downturns or recessions in the regions in which we do business, volatility in foreign currency exchange rates relative to the U.S. dollar, the rise in interest rates, expanded trade control laws and regulations, and geopolitical conflicts.

We have been impacted by the continued expansion of trade control laws and regulations, including 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 “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, including the ongoing conflict between Russia and Ukraine and the conflict in the Middle East, and assess their impact on our business. These conflicts have not materially limited our ability to develop or support our products and have not had a material impact on our results of operations, financial condition, liquidity or cash flows.

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” section in our Annual 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 six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, reflect the following:

  • Growth in revenue from our software, services and IP offerings;

  • Decreased revenue from our emulation and prototyping hardware offerings;

  • Continued investment in research and development activities and technical sales support, including headcount from acquisitions;

  • Incremental costs for professional services associated with acquisitions; and

  • Gains from our investments in equity securities.

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.

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, individual IP licenses and certain software licenses. The percentage of our recurring and up-front revenue and fluctuations in revenue within our geographies in any single fiscal period are primarily impacted by delivery of hardware and IP products to our customers.

The following table shows the percentage of our revenue that is classified as recurring or up-front for the three and six months ended June 30, 2024 and June 30, 2023:

Three Months EndedSix Months Ended
June 30, 2024June 30, 2023June 30, 2024June 30, 2023
Revenue recognized over time85%82%86%79%
Revenue from arrangements with non-cancelable commitments3%3%3%3%
Recurring revenue88%85%89%82%
Up-front revenue12%15%11%18%
Total100%100%100%100%

The percentage of revenue characterized as recurring compared to revenue characterized as up-front may vary between fiscal quarters. On an annual basis, or over the course of twelve consecutive months, the overall mix of revenue has historically been relatively consistent, but we expect revenue characterized as up-front to increase as a percentage of total annual revenue due to growth from arrangements where revenue is recognized at a point in time. 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
June 30, 2024March 31, 2024December 31, 2023September 30, 2023June 30, 2023
Recurring revenue87%87%84%84%84%
Up-front revenue13%13%16%16%16%
Total100%100%100%100%100%

For additional information about the fluctuations in our revenue, see the discussion under the heading “Revenue by Period” below.

Revenue by Period

The following table shows our revenue for the three months ended June 30, 2024 and June 30, 2023 and the change in revenue between periods:

Three Months EndedChange
June 30, 2024June 30, 2023AmountPercentage
(In millions, except percentages)
Product and maintenance$960.5$922.8$37.74%
Services100.253.846.486%
Total revenue$1,060.7$976.6$84.19%

The following table shows our revenue for the six months ended June 30, 2024 and June 30, 2023 and the change in revenue between periods:

Six Months EndedChange
June 30, 2024June 30, 2023AmountPercentage
(In millions, except percentages)
Product and maintenance$1,873.9$1,886.5$(12.6)(1)%
Services195.9111.884.175%
Total revenue$2,069.8$1,998.3$71.54%

Our revenue in any given period is significantly affected by the mix of software, hardware and IP products generating revenue and whether the revenue is recognized over time or at a point in time, primarily upon completion of delivery. During the three and six months ended June 30, 2023, hardware installations were relatively high in comparison to historical levels due to increased production capacity and our ability to fulfill customer orders that had been subject to longer than normal lead times. As a result, up-front revenue from our emulation and prototyping offerings classified as product and maintenance revenue decreased during the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023.

During the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, the decrease in up-front revenue from our emulation and prototyping hardware offerings was offset by growth in revenue from our software and IP offerings driven by new and existing customers' continued investment in complex designs for their products.

Services revenue increased during the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, primarily due to increased revenue from our design service offerings, which were supplemented by our acquisition of Invecas. 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 six months ended June 30, 2024 or June 30, 2023.

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
June 30, 2024March 31, 2024December 31, 2023September 30, 2023June 30, 2023
Custom IC Design and Simulation21%22%22%22%22%
Digital IC Design and Signoff27%29%29%28%27%
Functional Verification, including Emulation and Prototyping Hardware25%25%24%26%27%
IP13%12%13%11%11%
System Design and Analysis14%12%12%13%13%
Total100%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 half 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 EndedChange
June 30, 2024June 30, 2023AmountPercentage
(In millions, except percentages)
United States$507.2$385.6$121.632%
Other Americas11.716.0(4.3)(27)%
China127.8174.1(46.3)(27)%
Other Asia197.9176.921.012%
Europe, Middle East and Africa (“EMEA”)152.5166.8(14.3)(9)%
Japan63.657.26.411%
Total revenue$1,060.7$976.6$84.19%
Six Months EndedChange
June 30, 2024June 30, 2023AmountPercentage
(In millions, except percentages)
United States$942.7$819.9$122.815%
Other Americas39.032.16.921%
China245.0351.7(106.7)(30)%
Other Asia406.5360.945.613%
EMEA321.6321.10.5—%
Japan115.0112.62.42%
Total revenue$2,069.8$1,998.3$71.54%

During the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, revenue in the United States increased as the result of growth in revenue from our hardware, IP and software offerings, while revenue growth in Other Asia was primarily driven by growth in revenue from our software and IP offerings. Revenue in China decreased primarily due to a decrease in revenue from our hardware offerings.

Revenue by Geography as a Percent of Total Revenue

Three Months EndedSix Months Ended
June 30, 2024June 30, 2023June 30, 2024June 30, 2023
United States48%39%45%41%
Other Americas1%2%2%2%
China12%18%12%17%
Other Asia19%18%20%18%
EMEA14%17%15%16%
Japan6%6%6%6%
Total100%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

Three Months EndedChange
June 30, 2024June 30, 2023AmountPercentage
(In millions, except percentages)
Cost of product and maintenance$94.4$74.2$20.227%
Cost of services44.922.622.399%
Six Months EndedChange
June 30, 2024June 30, 2023AmountPercentage
(In millions, except percentages)
Cost of product and maintenance$169.8$174.5$(4.7)(3)%
Cost of services94.746.947.8102%

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 EndedChange
June 30, 2024June 30, 2023AmountPercentage
(In millions, except percentages)
Product and maintenance-related costs$80.9$63.6$17.327%
Amortization of acquired intangibles13.510.62.927%
Total cost of product and maintenance$94.4$74.2$20.227%
Six Months EndedChange
June 30, 2024June 30, 2023AmountPercentage
(In millions, except percentages)
Product and maintenance-related costs$145.0$153.6$(8.6)(6)%
Amortization of acquired intangibles24.820.93.919%
Total cost of product and maintenance$169.8$174.5$(4.7)(3)%

The changes in product and maintenance-related costs for the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, were due to the following:

Change
Three Months EndedSix Months Ended
(In millions)
Emulation and prototyping hardware costs$17.0$(8.8)
Other items0.30.2
Total change in product and maintenance-related costs$17.3$(8.6)

Costs associated with our emulation and prototyping hardware products include components, assembly, testing, applicable reserves and overhead. These costs make our cost of emulation and prototyping hardware products higher, as a percentage of revenue, than our cost of software and IP products. Emulation and prototyping hardware costs increased during the three months ended June 30, 2024, as compared to the three months ended June 30, 2023, primarily due to increased reserves for inventory. Emulation and prototyping hardware costs decreased during the six months ended June 30, 2024, as compared to the six months ended June 30, 2023, primarily due to decreased installations of emulation and prototyping hardware products, partially offset by an increase in reserves for inventory.

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, costs to maintain the infrastructure necessary to manage a services organization, and direct costs associated with certain design services. 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 and the timing of design service projects being completed.

Operating Expenses

Our operating expenses include marketing and sales, research and development, and general and administrative expenses. Factors that tend to cause our operating expenses to fluctuate include changes in the number of employees due to hiring and acquisitions, our annual merit compensation 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 six months ended June 30, 2024 and June 30, 2023 were as follows:

Three Months EndedChange
June 30, 2024June 30, 2023AmountPercentage
(In millions, except percentages)
Marketing and sales$186.7$167.1$19.612%
Research and development370.7354.416.35%
General and administrative63.454.68.816%
Total operating expenses$620.8$576.1$44.78%
Six Months EndedChange
June 30, 2024June 30, 2023AmountPercentage
(In millions, except percentages)
Marketing and sales$367.3$333.7$33.610%
Research and development749.7704.745.06%
General and administrative132.2108.124.122%
Total operating expenses$1,249.2$1,146.5$102.79%

Our operating expenses, as a percentage of total revenue, for the three and six months ended June 30, 2024 and June 30, 2023 were as follows:

Three Months EndedSix Months Ended
June 30, 2024June 30, 2023June 30, 2024June 30, 2023
Marketing and sales18%17%18%17%
Research and development35%36%36%35%
General and administrative6%6%6%5%
Total operating expenses59%59%60%57%

Marketing and Sales

The increase in marketing and sales expense for the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, was due to the following:

Change
Three Months EndedSix Months Ended
(In millions)
Salary, benefits and other employee-related costs$12.7$23.2
Facilities and other infrastructure costs2.14.3
Professional services2.93.7
Stock-based compensation0.33.1
Other items1.6(0.7)
Total change in marketing and sales expense$19.6$33.6

Salary, benefits and other employee-related costs and stock-based compensation included in marketing and sales expense increased during the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, 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 2023 and the first half of fiscal 2024. Facilities and other infrastructure costs included in marketing and sales expense increased during the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, primarily due to our growing workforce. 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 six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, was due to the following:

Change
Three Months EndedSix Months Ended
(In millions)
Stock-based compensation$9.7$19.0
Salary, benefits and other employee-related costs2.115.5
Facilities and other infrastructure costs4.08.3
Professional services1.63.4
Other items(1.1)(1.2)
Total change in research and development expense$16.3$45.0

Salary, benefits and other employee-related costs and stock-based compensation included in research and development expense increased during the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, primarily due to our continued investment in attracting and retaining talent for research and development activities, including additional headcount from the acquisitions completed in fiscal 2023 and the first half of fiscal 2024. Facilities and other infrastructure costs included in research and development expense increased during the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, 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 increase in general and administrative expense for the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, was due to the following:

Change
Three Months EndedSix Months Ended
(In millions)
Professional services$9.3$15.4
Foreign service tax—5.0
Salary, benefits and other employee-related costs(0.9)2.2
Other items0.41.5
Total change in general and administrative expense$8.8$24.1

Professional services increased during the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, primarily due to increased legal and consulting services associated with acquisition-related activities. Also during the six months ended June 30, 2024, as compared to the six months ended June 30, 2023, we experienced an increase in foreign service tax, primarily because we did not benefit from foreign service tax refunds as we did during the same period in fiscal 2023.

Restructuring

We have initiated restructuring plans in recent years, most recently in fiscal 2023, to better align our resources with our business strategy. 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 six months ended June 30, 2024, and the three and six months ended June 30, 2023 was as follows:

Three Months EndedSix Months Ended
June 30, 2024June 30, 2023June 30, 2024June 30, 2023
Operating margin28%31%26%31%

Operating margin decreased during the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, primarily due to the mix of products and services sold during each respective period. In addition, our acquisitions in fiscal 2023 and the first half of fiscal 2024 resulted in incremental expenses, including amortization of acquired intangibles, that exceeded incremental revenue during the three and six months ended June 30, 2024. We expect our operating margin to be impacted by our recent acquisitions because the incremental operating expenses, including amortization of the acquired intangibles, are expected to exceed the incremental revenue for the remainder of fiscal 2024.

Interest Expense

Three Months EndedSix Months Ended
June 30, 2024June 30, 2023June 30, 2024June 30, 2023
(In millions)
Contractual cash interest expense:
2024 Notes3.83.8$7.6$7.6
2025 Term Loan4.74.59.48.3
2026 Term Loan4.0—4.0—
2021 Credit Facility0.40.40.41.7
Amortization of debt discount:
2024 Notes0.20.20.40.4
2025 Term Loan0.10.20.10.2
Other(0.3)(0.2)(0.3)(0.1)
Total interest expense$12.9$8.9$21.6$18.1

Interest expense increased during the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, primarily due to the interest expense related to the 2026 Term Loan, and an increase in interest expense for the 2025 Term Loan, which is subject to variable interest rates. We expect higher interest expense in fiscal 2024, as compared to fiscal 2023, primarily due to additional interest expense related to our 2026 Term Loan. 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 six months ended June 30, 2024 and June 30, 2023:

Three Months EndedSix Months Ended
June 30, 2024June 30, 2023June 30, 2024June 30, 2023
(In millions, except percentages)
Provision for income taxes$86.2$77.3$148.6$157.0
Effective tax rate27.3%25.9%23.7%25.3%

Our provision for income taxes for the three and six months ended June 30, 2024 was primarily attributable to federal, state and foreign income taxes on our anticipated fiscal 2024 income. We also recognized tax benefits of $5.4 million and $28.2 million related to stock-based compensation that vested or was exercised during the respective periods.

In 2021, the Organisation for Economic Co-operation and Development announced Pillar Two Model Rules which call for the taxation of large multinational corporations, such as Cadence, at a global minimum tax rate of 15%. Many non-U.S. tax jurisdictions, including Ireland and Hungary, have either recently enacted legislation to adopt certain components of the Pillar Two Model Rules beginning in fiscal 2024 or announced their plans to enact legislation in future years. The currently enacted Pillar Two Model Rules did not have a material impact to our provision for income taxes for the three and six months ended June 30, 2024.

Our provision for income taxes for the three and six months ended June 30, 2023 was primarily attributable to federal, state and foreign income taxes on our then anticipated fiscal 2023 income. We also recognized tax benefits of $8.9 million and $25.8 million related to stock-based compensation that vested or was exercised during the respective periods.

In March 2024, we received a best judgment tax audit assessment of approximately $24.5 million from the Israel Tax Authority (“ITA”) for the tax years 2017 and 2018. The best judgment tax audit assessment is primarily related to transfer pricing and withholding taxes. We disagree with the ITA’s position and have appealed the tax assessment.

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 2024 effective tax rate will be approximately 25.1%. We expect that our quarterly effective tax rates will vary from our fiscal 2024 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
June 30, 2024December 31, 2023Change
(In millions)
Cash and cash equivalents$1,059.0$1,008.2$50.8
Net working capital662.7385.4277.3

Cash and Cash Equivalents

As of June 30, 2024, our principal sources of liquidity consisted of approximately $1,059.0 million of cash and cash equivalents as compared to $1,008.2 million as of December 31, 2023.

Our primary sources of cash and cash equivalents during the six months ended June 30, 2024 were proceeds from borrowings, 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, and proceeds from the sale of investments.

Our primary uses of cash and cash equivalents during the six months ended June 30, 2024 were payments related to employee salaries and benefits, operating expenses, cash paid for acquired businesses, payment of employee taxes on vesting of restricted stock, repurchases of our common stock, purchases of inventory, and purchases of property, plant and equipment.

Approximately 74% of our cash and cash equivalents were held by our foreign subsidiaries as of June 30, 2024. 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. Our net working capital varies from period to period due to changes in operating assets and liabilities and the timing of investing and financing activities.

Cash Flows from Operating Activities

Six Months Ended
June 30, 2024June 30, 2023Change
(In millions)
Cash provided by operating activities$409.2$681.2$(272.0)

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 decrease in cash flows from operating activities for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023, was primarily due to the timing of cash receipts from our customers and an increase in disbursements for operating assets and liabilities.

Cash Flows Used for Investing Activities

Six Months Ended
June 30, 2024June 30, 2023Change
(In millions)
Cash used for investing activities$(757.9)$(129.7)$(628.2)

Cash used for investing activities increased during the six months ended June 30, 2024, as compared to the six months ended June 30, 2023, primarily due to increases in payments for business combinations and purchases of property, plant and equipment, partially offset by an increase in proceeds from the sale and maturity of investments. 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

Six Months Ended
June 30, 2024June 30, 2023Change
(In millions)
Cash provided by (used for) financing activities$415.4$(551.6)$967.0

Cash from financing activities increased the six months ended June 30, 2024, as compared to the six months ended June 30, 2023, primarily due to an increase in net proceeds from borrowings, a decrease in repurchases of common stock and increased proceeds from the issuance of our common stock. These factors were partially offset by an increase in payments of employee taxes on vesting of restricted stock.

Other Factors Affecting Liquidity and Capital Resources

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 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 June 30, 2024, 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”). 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 June 30, 2024, 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 June 30, 2024, we were in compliance with all financial covenants associated with the 2025 Term Loan.

2026 Term Loan

In May 2024, we entered into a $700.0 million two-year senior non-amortizing term loan facility due on May 30, 2026 with a group of lenders led by Bank of America, N.A., as administrative agent (the “2026 Term Loan”). The 2026 Term Loan is unsecured and ranks equal in right of payment to all of our unsecured indebtedness. Interest rates associated with the 2026 Term Loan are variable, so interest expense is impacted by changes in interest rates. Interest is payable quarterly. As of June 30, 2024, we were in compliance with all financial covenants associated with the 2026 Term Loan.

For additional information relating to our debt arrangements, see Note 4 in the notes to condensed consolidated financial statements.

Stock Repurchase Program

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 in August 2023. 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. Our repurchase authorization does not obligate us to acquire a minimum amount of shares, does not have an expiration date and may be modified, suspended or terminated without prior notice. As of June 30, 2024, approximately $1.1 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.

California Legislation

In June 2024, the State of California enacted legislation that, for a three-year period beginning in fiscal 2024, will limit our utilization of California research and development tax credits to $5 million annually. We expect the California tax law change to increase our cash paid for income taxes for fiscal 2024 by approximately $36.1 million.

Other Liquidity Requirements

During the six months ended June 30, 2024, 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 June 30, 2024. 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 August 2024.

Notional PrincipalWeighted Average Contract Rate
(In millions)
Forward Contracts:
European Union euro$173.10.93
British pound150.20.80
Japanese yen124.5156.36
Israeli shekel58.63.72
Swedish krona41.710.65
South Korean won40.41,362.06
Chinese renminbi27.17.23
Indian rupee25.683.70
Canadian dollar25.41.37
Taiwan dollar16.432.34
Singapore dollar2.11.35
Total$685.1
Estimated fair value$—

As of December 31, 2023, our foreign currency exchange contracts had an aggregate principal amount of $697.9 million, and an estimated fair value of $9.3 million.

We have performed sensitivity analyses as of June 30, 2024 and December 31, 2023, 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 $14.5 million and $18.4 million as of June 30, 2024 and December 31, 2023, 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 $16.9 million and $20.4 million as of June 30, 2024 and December 31, 2023, 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, 2025 Term Loan and 2026 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 June 30, 2024.

Our investments in debt securities had a fair value of approximately $50.2 million and $49.8 million as of June 30, 2024 and December 31, 2023, respectively, 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 June 30, 2024 and December 31, 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 $2.4 million and $2.6 million, respectively.

Interest rates under our 2021 Credit Facility, 2025 Term Loan and 2026 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 June 30, 2024, there were no borrowings outstanding under our 2021 Credit Facility, $300.0 million of borrowings outstanding under our 2025 Term Loan and $700.0 million of borrowings outstanding under our 2026 Term Loan.

Interest rates for our 2021 Credit Facility, 2025 Term Loan and 2026 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 or 2026 Term Loan, each quarter point change in interest rates would result in a $5.1 million change in annual interest expense on our indebtedness under our 2021 Credit Facility, 2025 Term Loan and 2026 Term Loan. For an additional description of the 2021 Credit Facility, 2025 Term Loan and 2026 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. For an additional description of our portfolio of equity investments, see Note 11 in the notes to condensed consolidated financial statements.

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 June 30, 2024.

Based on their evaluation as of June 30, 2024, 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 June 30, 2024 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

For information regarding pending legal proceedings, related matters and associated risks, see Note 14 in the notes to condensed consolidated financial statements under Part I, Item 1 in this Quarterly Report and the “Risk Factors” section in our Annual Report.

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, 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. We have updated below five of the risk factors in our Annual Report. The “Risk Factors” section in our Annual Report otherwise remains current in all material respects. The risk factors described in our Annual Report and this Quarterly Report 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.

We have experienced varied operating results, and our operating results for any particular fiscal period are affected by the timing of revenue recognition, particularly for our emulation and prototyping hardware, IP and certain software products.

Historical results of operations should not be viewed as reliable indicators of our future performance. Various factors affect our operating results, and some of them are not within our control. Our operating results for any period are affected by the mix of products and services sold in a given period and the timing of revenue recognition, particularly for our emulation and prototyping hardware, IP products and certain software licenses where revenue is recognized at a point in time rather than over time. In addition, we have recorded net losses in the past and may record net losses in the future. Also, our cash flows from operating activities have and will continue to fluctuate due to a number of factors, including the timing of our billings, collections, disbursements and tax payments.

A substantial portion of the product revenue related to our hardware business and our IP offerings is recognized upon delivery, and our forecasted revenue results are based, in part, on our expectations of hardware and IP to be delivered in a particular quarter. Therefore, changes in hardware and IP bookings or deliveries relative to expectations will have a more immediate impact on our revenue than changes in software or services bookings, for which revenue is generally recognized over time.

As we continue to expand our IP offerings, a portion of the revenue related to our IP bookings will be deferred until we complete and deliver the licensed IP to our customers. As a result, costs related to the research and development of IP may be incurred prior to the recognition of the related revenue.

Revenue related to our hardware and IP products is inherently difficult to predict because sales of our hardware and IP products depend on the commencement of new projects for the design and development of complex ICs and systems by our customers, our customers’ willingness to expend capital to deploy our new and existing hardware or IP products in those projects and the availability of our new and existing hardware or IP products for delivery. Therefore, our hardware or IP sales may be delayed or may decrease if our customers delay or cancel projects because their spending is constrained or if there are problems or delays with the supply, delivery or installation of our hardware or IP products or our hardware suppliers. Moreover, the market environment for hardware and IP is highly competitive, and our customers may choose to purchase a competitor’s hardware or IP product based on cost, performance or other factors. These factors may result in lower revenue, which would have an adverse effect on our business, results of operations and cash flows.

A substantial portion of our software licenses yield revenue recognized over time, which may make it difficult for us to rapidly increase our revenue in future fiscal periods and means that a decrease in orders in a given period would negatively affect our revenue in future periods.

We plan our operating expenses based on forecasted revenue, expected business needs and other factors such as inflation. These expenses and the effect of long-term commitments are relatively fixed in the short term. Bookings and the related revenue are harder to forecast in a difficult economic environment. If we experience a shortfall in bookings, our operating results could differ from our expectations because we may not be able to quickly reduce our expenses in response to short-term business changes. Our operating expenses are also impacted by economic conditions, such as inflation. Unexpected increases in inflation could cause our expenses to increase at a rate faster than our product pricing to recover such increases.

The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting Estimates” under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report). Such methods, estimates and judgments are subject to substantial risks, uncertainties and assumptions, and factors may arise over time that may lead us to change our methods, estimates and judgments. Changes in those methods, estimates and judgments could significantly affect our results of operations.

As we continue to acquire and invest in companies or technologies, we may not realize the expected business or financial benefits and these acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and adversely affect our operating results and the market value of our common stock.

As part of our business strategy, we invest in, and acquire complementary businesses, joint ventures, services and technologies and IP rights, some of which may be material to our financial condition and operating results. We continue to engage in investments and acquisitions and evaluate such opportunities and expect to continue to make such investments and acquisitions in the future. There can be no guarantee that we will be able to find and identify desirable investment or acquisition targets, and we may not be successful in entering into an agreement with any particular target.

Acquisitions and other transactions, arrangements and investments involve numerous risks and potential operating difficulties and expenditures, including:

  • the failure to realize, or a delay in realizing, anticipated benefits or synergies, including as a result of any conditions placed upon approvals from governmental authorities;

  • the failure to complete transactions on a timely basis or at all, including due to a failure to obtain required approvals on a timely basis, or at all, from governmental authorities;

  • potential identified or unknown security vulnerabilities in acquired companies, technologies or products that expose us to additional security risks or delay our ability to integrate them into our organization and offerings;

  • brand or reputational harm;

  • in the case of acquisitions with large greenhouse gas emissions, the failure or perceived failure to achieve our publicly disclosed greenhouse gas emissions reduction target;

  • the failure to understand, compete and operate effectively in markets where we have limited experience or where competitors may have stronger market positions;

  • the failure to integrate, combine or manage acquired products, infrastructure, technologies and businesses effectively or to obtain customer acceptance of multiple platforms on a temporary or permanent basis;

  • difficulties in integrating and assimilating acquired employees, which may lead to retention risk with respect to both acquired and existing employees;

  • the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;

  • diversion of financial resources and management’s attention from day-to-day business;

  • overlapping customers and product sets that impact our ability to maintain revenue at historical rates;

  • unanticipated costs or assumed liabilities, including those related to an acquired company's disclosure controls and procedures, internal control over financial reporting, cybersecurity, taxes and other compliance programs, whether discovered during due diligence or thereafter;

  • contingent payments in connection with acquisitions in the future where we may be required to make certain contingent payments without deriving the value we expect to derive from an acquisition in excess of such payments or at all;

  • unwillingness of customers, suppliers or other business partners of an acquired business to continue licensing or do business with us, or delays in such activities;

  • difficulties managing any strategic investment or collaboration that we do not control or for which we do not have sole decision-making authority;

  • impairment charges or other adverse accounting outcomes related to acquisitions or strategic investments;

  • the failure or cessation of operations by entities in which we made strategic investments or collaboration agreements;

  • the loss of some or all of the value of our investment;

  • additional stock-based compensation issued or assumed in connection with the acquisition, including the impact on stockholder dilution and our results of operations; and

  • the tax effects of any such acquisitions including related integration and business operation changes, and assessment of the impact on the realizability of our future tax assets or liabilities

Any of these risks could harm our business or negatively impact our results of operations. In addition, to facilitate acquisitions or investments, we may seek additional equity or debt financing, which may not be available on terms favorable to us or at all, which may affect our ability to complete subsequent acquisitions or investments, and which may affect the risks of owning our common stock. For example, we have and may in the future finance acquisitions or investments by issuing equity or convertible securities, or use such securities as consideration, which have and may in the future cause our existing stockholders may be diluted. We also have and may in the future finance acquisitions or investments through debt financing, and we may face constraints related to the terms (including restrictive covenants) of, and repayment obligation related to, the incurrence of indebtedness. Acquisitions or investments may also require the expenditure of substantial cash resources. These arrangements may impact our liquidity, financial position and results of operations or increase dilution of our stockholders’ equity interests in the company, all of which could adversely affect the market price of our common stock. Acquisitions are also often dilutive to margins and earnings, at least initially. In addition, in certain cases we may be required to consolidate one or more of our strategic investee's financial results into ours. Fluctuations in any such investee's financial results, due to general market conditions, bank failures or otherwise, could negatively affect our consolidated financial condition, results of operations, cash flows or the price of our common stock.

Our ability to acquire other businesses or technologies, make strategic investments or integrate acquired businesses effectively may be impaired by trade tensions and increased global scrutiny of foreign investments and acquisitions and investments in the technology sector. The United States and several other countries have adopted, or are considering adopting, restrictions on transactions involving foreign investments. Antitrust authorities in the United States and a number of countries have also reviewed acquisitions and investments in the technology industry with increased scrutiny. Governments may continue to adopt or tighten restrictions of this nature, some of which may apply to acquisitions, investments or integrations of businesses by us, and such restrictions or government actions could negatively impact our business and financial results.

Our debt obligations expose us to risks that could adversely affect our business, operating results or financial condition, and could prevent us from fulfilling our obligations under such indebtedness.

We have significant outstanding indebtedness, as well as the ability to access additional borrowings under our revolving credit facility. Subject to the limits contained in the credit agreement governing our revolving credit facility, the indenture that governs the 4.375% Senior Notes due October 15, 2024 (the “2024 Notes”), the loan agreement governing our senior non-amortizing term loan facility due September 7, 2025 (the “2025 Term Loan”), the loan agreement governing our senior non-amortizing term loan facility due May 30, 2026 (the “2026 Term Loan”) and our other debt instruments, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, share repurchases or for other purposes. If we do so, the risks related to our level of debt could intensify. As of June 30, 2024, both our 2024 Notes and 2025 Term Loan will mature in the next 15 months, which could require us to consume a significant portion of our liquidity or raise additional financing in adverse capital markets conditions.

Specifically, our level of debt could have important consequences, including the following:

  • making it more difficult for us to satisfy our obligations to service our debt as described above;

  • limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;

  • requiring a substantial portion of our cash flows (including U.S. cash) to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes and potentially requiring repatriation of cash from outside the U.S.;

  • increasing our vulnerability to adverse economic and industry conditions;

  • exposing us to the risk of increased interest rates as certain of our borrowings are at variable rates of interest;

  • limiting our flexibility in planning for and reacting to changes in the industry in which we compete;

  • placing us at a disadvantage compared to other, less leveraged competitors and competitors that have greater access to capital resources;

  • limiting our interest deductions for U.S. income tax purposes; and

  • increasing our cost of borrowing.

In addition, if we incur any additional indebtedness that ranks equally with the 2024 Notes, then subject to any collateral arrangements we may enter into, the holders of that debt will be entitled to share ratably in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding up of our company.

The terms of our debt agreements restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.

The agreements governing our revolving credit facility, 2025 Term Loan, 2026 Term Loan and 2024 Notes contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to incur liens or additional indebtedness and guarantee indebtedness, enter into transactions with affiliates, alter the businesses we conduct, consolidate, merge or sell all or substantially all of our assets and to enter into sale and leaseback transactions. In addition, the restrictive covenants in the agreements governing our revolving credit facility, 2025 Term Loan and 2026 Term Loan require us to maintain specified financial ratios. Our ability to meet those financial ratios can be affected by events beyond our control, and we may be unable to meet them.

A breach of the covenants or restrictions under the agreements governing our revolving credit facility, 2025 Term Loan, 2026 Term Loan and 2024 Notes could result in an event of default under the applicable indebtedness. Such a default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the credit agreement governing our revolving credit facility would permit the lenders under our revolving credit facility to terminate all commitments to extend further credit. In the event our lenders or note holders accelerate the repayment of our borrowings, we may not have sufficient assets to repay that indebtedness.

As a result of these restrictions, we may be limited in how we conduct our business, unable to raise additional debt or equity financing to operate during general economic or business downturns or unable to compete effectively, take advantage of new business opportunities or otherwise grow in accordance with our strategy. In addition, our financial results, our substantial indebtedness and our credit ratings could adversely affect the availability and terms of our financing.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

Borrowings under our revolving credit facility, 2025 Term Loan and 2026 Term Loan are at variable rates of interest and expose us to interest rate risk. When interest rates increase, our debt service obligations increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, could correspondingly decrease. We may enter into interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk.

Our revolving credit facility utilizes, at our option, either (1) Term Secured Overnight Financing Rate (“SOFR”), plus a margin between 0.750% and 1.250% per annum, plus a SOFR adjustment of 0.10% or (2) the base rate plus a margin between 0.000% and 0.250% per annum, to calculate the amount of accrued interest on any borrowings. The 2025 Term Loan utilizes, at our option, either (1) Term SOFR, plus a margin between 0.625% and 1.125% per annum, plus a SOFR adjustment of 0.10% or (2) base rate plus a margin between 0.000% and 0.125% per annum, to calculate the amount of accrued interest on borrowings. The 2026 Term Loan utilizes, at our option, either (1) Term SOFR, plus a margin of between 0.875% and 1.375% per annum, plus a SOFR adjustment of 0.10%, or (2) base rate plus a margin between 0.000% and 0.375% per annum, to calculate the amount of accrued interest on borrowings. In each case, the applicable margin within the specified ranges is determined by reference to the credit rating of our unsecured debt. Accordingly, a credit rating downgrade would increase the applicable interest rates. Assuming all loans were fully drawn and we were to fully exercise our right to increase borrowing capacity under our revolving credit facility and we made no prepayments on our 2025 Term Loan or our 2026 Term Loan, each quarter point change in interest rates would result in a $5.1 million change in annual interest expense.

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. Our repurchase authorization does not obligate us to acquire a minimum amount of shares, does not have an expiration date and may be modified, suspended or terminated without prior notice.

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 June 30, 2024:

PeriodTotal 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)
April 1, 2024 - April 30, 2024149,072$297.82137,641$1,211
May 1, 2024 - May 31, 2024184,679$287.16164,314$1,163
June 1, 2024 - June 30, 2024131,195$304.93121,498$1,127
Total464,946$295.59423,453

(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 June 30, 2024, 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 PositionActionAdoption/ Termination DateRule 10b5-1*Total Shares of Common Stock to be SoldExpiration Date
Thomas P. Beckley, Senior Vice President and General Manager of the Custom IC and PBC GroupAdoption5/1/2024XUp to 72,4273/31/2025
* Contract, instruction or written plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act.

Item 6. Exhibits

Incorporated by Reference
Exhibit NumberExhibit TitleFormFile No.Exhibit No.Filing DateProvided Herewith
3.1The Registrant’s Restated Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on May 3, 2024.8-K000-158673.15/6/2024
3.2The Registrant’s Amended and Restated Bylaws, effective as of November 2, 2023.8-K000-158673.111/3/2023
10.1#The Registrant's Amended and Restated Employee Stock Purchase Plan.DEF 14A000-15867Appendix A3/21/2024
10.2*#Form of Incentive Stock Award Agreement for Non-Executive Employees and Consultants, as currently in effect under the Registrant's Omnibus Equity Incentive Plan.X
10.3*#Form of Restricted Stock Unit Agreement for Non-Executive Employees and Consultants, as currently in effect under the Registrant's Omnibus Equity Incentive Plan.X
10.4*#Transition and Release Agreement, dated May 2, 2024, between the Registrant and Neil Zaman.X
10.5Loan Agreement, dated May 30, 2024, by and among the Registrant, Bank of America, N.A. and the other lenders party thereto.8-K000-1586710.16/3/2024
31.1*Certification of the Registrant’s Chief Executive Officer, Anirudh Devgan, pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.X
31.2*Certification of the Registrant’s Chief Financial Officer, John M. Wall, pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.X
32.1†Certification of the Registrant’s Chief Executive Officer, Anirudh Devgan, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.X
32.2†Certification of the Registrant’s Chief Financial Officer, John M. Wall, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.X
101.INS*Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*Inline XBRL Taxonomy Extension Schema Document.X
101.CAL*Inline XBRL Taxonomy Extension Calculation Linkbase Document.X
101.DEF*Inline XBRL Definition Linkbase Document.X
101.LAB*Inline XBRL Taxonomy Extension Label Linkbase Document.X
101.PRE*Inline XBRL Taxonomy Extension Presentation Linkbase Document.X
104Cover Page Interactive Data File - The cover page from this Quarterly Report on Form 10-Q is formatted in Inline XBRL (included as Exhibit 101).X
*Filed herewith.
†Furnished herewith.
#Indicates management contract or compensatory plan or arrangement covering executive officers or directors of the Registrant.

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:July 23, 2024By:/s/ Anirudh Devgan
Anirudh Devgan
President and Chief Executive Officer
DATE:July 23, 2024By:/s/ John M. Wall
John M. Wall
Senior Vice President and Chief Financial Officer