filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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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 interest rate fluctuations; 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 integrated circuit (“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:
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Custom IC Design and Simulation;
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Digital IC Design and Signoff;
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Functional Verification;
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IP; and
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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, changing 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 nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, reflect the following:
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Growth in revenue from our software, services and IP offerings;
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Continued investment in research and development activities and technical sales support, including headcount from acquisitions;
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Incremental costs for professional services associated with acquisitions;
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Restructuring activities designed to better align our resources with our business strategy;
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Increased interest expense from our outstanding indebtedness; and
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Gains and losses 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 nine months ended September 30, 2024 and September 30, 2023:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | ||||||||||||||||||||
| Revenue recognized over time | 80 | % | 83 | % | 83 | % | 80 | % | |||||||||||||||
| Revenue from arrangements with non-cancelable commitments | 2 | % | 2 | % | 3 | % | 3 | % | |||||||||||||||
| Recurring revenue | 82 | % | 85 | % | 86 | % | 83 | % | |||||||||||||||
| Up-front revenue | 18 | % | 15 | % | 14 | % | 17 | % | |||||||||||||||
| Total | 100 | % | 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 continue 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 | |||||||||||||||||||||||||||||
| September 30, 2024 | June 30, 2024 | March 31, 2024 | December 31, 2023 | September 30, 2023 | |||||||||||||||||||||||||
| Recurring revenue | 86 | % | 87 | % | 87 | % | 84 | % | 84 | % | |||||||||||||||||||
| Up-front revenue | 14 | % | 13 | % | 13 | % | 16 | % | 16 | % | |||||||||||||||||||
| Total | 100 | % | 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 September 30, 2024 and September 30, 2023 and the change in revenue between periods:
| Three Months Ended | Change | ||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Product and maintenance | $ | 1,100.4 | $ | 965.8 | $ | 134.6 | 14 | % | |||||||||||||||
| Services | 115.1 | 57.3 | 57.8 | 101 | % | ||||||||||||||||||
| Total revenue | $ | 1,215.5 | $ | 1,023.1 | $ | 192.4 | 19 | % |
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. Product and maintenance revenue increased during the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, primarily as a result of growth in revenue from IP, software and hardware product offerings.
Services revenue increased during the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, primarily due to increased revenue from our design service offerings, which were supplemented by our acquisition of Invecas.
The following table shows our revenue for the nine months ended September 30, 2024 and September 30, 2023 and the change in revenue between periods:
| Nine Months Ended | Change | ||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Product and maintenance | $ | 2,974.2 | $ | 2,852.4 | $ | 121.8 | 4 | % | |||||||||||||||
| Services | 311.1 | 169.0 | 142.1 | 84 | % | ||||||||||||||||||
| Total revenue | $ | 3,285.3 | $ | 3,021.4 | $ | 263.9 | 9 | % |
Product and maintenance revenue increased during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, primarily due to growth in revenue from our software and IP offerings as a result of existing customers' continued investment in complex designs for their products.
This growth was partially offset by a decrease in revenue from our emulation and prototyping hardware offerings during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023. During the first half of fiscal 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 nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023.
Services revenue increased during the nine months ended September 30, 2024, as compared to the nine months ended September 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 nine months ended September 30, 2024 or September 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 | |||||||||||||||||||||||||||||
| September 30, 2024 | June 30, 2024 | March 31, 2024 | December 31, 2023 | September 30, 2023 | |||||||||||||||||||||||||
| Custom IC Design and Simulation | 19 | % | 21 | % | 22 | % | 22 | % | 22 | % | |||||||||||||||||||
| Digital IC Design and Signoff | 24 | % | 27 | % | 29 | % | 29 | % | 28 | % | |||||||||||||||||||
| Functional Verification, including Emulation and Prototyping Hardware | 27 | % | 25 | % | 25 | % | 24 | % | 26 | % | |||||||||||||||||||
| Core EDA Total | 70 | % | 73 | % | 76 | % | 75 | % | 76 | % | |||||||||||||||||||
| IP | 14 | % | 13 | % | 12 | % | 13 | % | 11 | % | |||||||||||||||||||
| System Design and Analysis | 16 | % | 14 | % | 12 | % | 12 | % | 13 | % | |||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
Revenue by product category fluctuates from period to period based on demand for our products and services, our available resources and our ability to deliver and support them. Certain of our licensing arrangements allow customers the ability to remix among software products. Additionally, we have arrangements with customers that include a combination of our products, with the actual product selection and number of licensed users to be determined at a later date. For these arrangements, we estimate the allocation of the revenue to product categories based upon the expected usage of our products. The actual usage of our products by these customers may differ and, if that proves to be the case, the revenue allocation in the table above would differ.
Revenue by Geography
| Three Months Ended | Change | ||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| United States | $ | 580.5 | $ | 421.6 | $ | 158.9 | 38 | % | |||||||||||||||
| Other Americas | 24.9 | 15.8 | 9.1 | 58 | % | ||||||||||||||||||
| China | 156.7 | 172.0 | (15.3) | (9) | % | ||||||||||||||||||
| Other Asia | 211.1 | 197.8 | 13.3 | 7 | % | ||||||||||||||||||
| Europe, Middle East and Africa (“EMEA”) | 174.6 | 158.2 | 16.4 | 10 | % | ||||||||||||||||||
| Japan | 67.7 | 57.7 | 10.0 | 17 | % | ||||||||||||||||||
| Total revenue | $ | 1,215.5 | $ | 1,023.1 | $ | 192.4 | 19 | % |
| Nine Months Ended | Change | ||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| United States | $ | 1,523.2 | $ | 1,241.5 | $ | 281.7 | 23 | % | |||||||||||||||
| Other Americas | 63.9 | 47.9 | 16.0 | 33 | % | ||||||||||||||||||
| China | 401.7 | 523.7 | (122.0) | (23) | % | ||||||||||||||||||
| Other Asia | 617.6 | 558.7 | 58.9 | 11 | % | ||||||||||||||||||
| EMEA | 496.2 | 479.3 | 16.9 | 4 | % | ||||||||||||||||||
| Japan | 182.7 | 170.3 | 12.4 | 7 | % | ||||||||||||||||||
| Total revenue | $ | 3,285.3 | $ | 3,021.4 | $ | 263.9 | 9 | % |
During the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 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 and software offerings.
Revenue by Geography as a Percent of Total Revenue
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | ||||||||||||||||||||
| United States | 48 | % | 41 | % | 46 | % | 41 | % | |||||||||||||||
| Other Americas | 2 | % | 2 | % | 2 | % | 2 | % | |||||||||||||||
| China | 13 | % | 17 | % | 12 | % | 17 | % | |||||||||||||||
| Other Asia | 17 | % | 19 | % | 19 | % | 18 | % | |||||||||||||||
| EMEA | 14 | % | 15 | % | 15 | % | 16 | % | |||||||||||||||
| Japan | 6 | % | 6 | % | 6 | % | 6 | % | |||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % |
Most of our revenue is transacted in the U.S. dollar. However, certain revenue transactions are denominated in foreign currencies. For an additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see the discussion under Item 3, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”
Cost of Revenue
| Three Months Ended | Change | ||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Cost of product and maintenance | $ | 109.6 | $ | 85.8 | $ | 23.8 | 28 | % | |||||||||||||||
| Cost of services | 53.5 | 23.8 | 29.7 | 125 | % |
| Nine Months Ended | Change | ||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Cost of product and maintenance | $ | 279.4 | $ | 260.3 | $ | 19.1 | 7 | % | |||||||||||||||
| Cost of services | 148.2 | 70.6 | 77.6 | 110 | % |
Cost of Product and Maintenance
Cost of product and maintenance includes costs associated with the sale and lease of our emulation and prototyping hardware and licensing of our software and IP products, certain employee salary and benefits and other employee-related costs, cost of our customer support services, amortization of technology-related and maintenance-related acquired intangibles, costs of technical documentation and royalties payable to third-party vendors. Cost of product and maintenance depends primarily on our hardware product sales in any given period, but is also affected by employee salary and benefits and other employee-related costs, reserves for inventory, and the timing and extent to which we acquire intangible assets, license third-party technology or IP, and sell our products that include such acquired or licensed technology or IP.
A summary of cost of product and maintenance is as follows:
| Three Months Ended | Change | ||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Product and maintenance-related costs | $ | 92.0 | $ | 74.8 | $ | 17.2 | 23 | % | |||||||||||||||
| Amortization of acquired intangibles | 17.6 | 11.0 | 6.6 | 60 | % | ||||||||||||||||||
| Total cost of product and maintenance | $ | 109.6 | $ | 85.8 | $ | 23.8 | 28 | % |
| Nine Months Ended | Change | ||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Product and maintenance-related costs | $ | 236.9 | $ | 228.4 | $ | 8.5 | 4 | % | |||||||||||||||
| Amortization of acquired intangibles | 42.5 | 31.9 | 10.6 | 33 | % | ||||||||||||||||||
| Total cost of product and maintenance | $ | 279.4 | $ | 260.3 | $ | 19.1 | 7 | % |
The changes in product and maintenance-related costs for the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, were due to the following:
| Change | |||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||
| (In millions) | |||||||||||
| Emulation and prototyping hardware costs | $ | 12.8 | $ | 3.6 | |||||||
| Other items | 4.4 | 4.9 | |||||||||
| Total change in product and maintenance-related costs | $ | 17.2 | $ | 8.5 |
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 September 30, 2024, as compared to the three months ended September 30, 2023, primarily due to increased installations of emulation and prototyping hardware products. Emulation and prototyping hardware costs increased during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, primarily due to increased charges for excess and obsolete inventory, partially offset by decreased installations of emulation and prototyping hardware products during the first half of fiscal 2024, as compared to the same period during fiscal 2023.
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. Cost of services increased during three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, primarily due to increased costs associated with our design service offerings and costs associated with the service offerings from our acquisition of Invecas.
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 merit compensation cycle, stock-based compensation, foreign exchange rate movements, acquisition-related costs, and volatility in variable compensation programs that are driven by operating results.
Many of our operating expenses are transacted in various foreign currencies. We recognize lower expenses in periods when the United States dollar strengthens in value against other currencies and we recognize higher expenses when the United States dollar weakens against other currencies. For an additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see the discussion in Item 3, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”
Our operating expenses for the three and nine months ended September 30, 2024 and September 30, 2023 were as follows:
| Three Months Ended | Change | ||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Marketing and sales | $ | 189.8 | $ | 176.2 | $ | 13.6 | 8 | % | |||||||||||||||
| Research and development | 407.4 | 369.6 | 37.8 | 10 | % | ||||||||||||||||||
| General and administrative | 71.6 | 58.6 | 13.0 | 22 | % | ||||||||||||||||||
| Total operating expenses | $ | 668.8 | $ | 604.4 | $ | 64.4 | 11 | % |
| Nine Months Ended | Change | ||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Marketing and sales | $ | 557.1 | $ | 510.0 | $ | 47.1 | 9 | % | |||||||||||||||
| Research and development | 1,157.1 | 1,074.4 | 82.7 | 8 | % | ||||||||||||||||||
| General and administrative | 203.7 | 166.7 | 37.0 | 22 | % | ||||||||||||||||||
| Total operating expenses | $ | 1,917.9 | $ | 1,751.1 | $ | 166.8 | 10 | % |
Our operating expenses, as a percentage of total revenue, for the three and nine months ended September 30, 2024 and September 30, 2023 were as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | ||||||||||||||||||||
| Marketing and sales | 16 | % | 17 | % | 17 | % | 17 | % | |||||||||||||||
| Research and development | 33 | % | 36 | % | 35 | % | 35 | % | |||||||||||||||
| General and administrative | 6 | % | 6 | % | 6 | % | 6 | % | |||||||||||||||
| Total operating expenses | 55 | % | 59 | % | 58 | % | 58 | % |
Marketing and Sales
The increase in marketing and sales expense for the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, was due to the following:
| Change | |||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||
| (In millions) | |||||||||||
| Salary, benefits and other employee-related costs | $ | 9.6 | $ | 32.2 | |||||||
| Stock-based compensation | 3.6 | 6.7 | |||||||||
| Facilities and other infrastructure costs | 1.1 | 5.4 | |||||||||
| Professional services | 1.6 | 5.3 | |||||||||
| Marketing programs | (1.0) | (3.3) | |||||||||
| Other items | (1.3) | 0.8 | |||||||||
| Total change in marketing and sales expense | $ | 13.6 | $ | 47.1 |
Salary, benefits and other employee-related costs and stock-based compensation included in marketing and sales expense increased during the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, primarily due to our continued investment in attracting and retaining talent dedicated to technical sales support, including additional headcount from acquisitions. Facilities and other infrastructure costs included in marketing and sales expense increased during the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 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 nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, was due to the following:
| Change | |||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||
| (In millions) | |||||||||||
| Salary, benefits and other employee-related costs | $ | 20.6 | $ | 36.1 | |||||||
| Stock-based compensation | 14.8 | 33.8 | |||||||||
| Facilities and other infrastructure costs | 4.2 | 12.4 | |||||||||
| Professional services | 1.9 | 5.4 | |||||||||
| Other items | (3.7) | (5.0) | |||||||||
| Total change in research and development expense | $ | 37.8 | $ | 82.7 |
Salary, benefits and other employee-related costs and stock-based compensation included in research and development expense increased during the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, primarily due to our continued investment in attracting and retaining talent for research and development activities, including additional headcount from acquisitions. Facilities and other infrastructure costs included in research and development expense increased during the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 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 nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, was due to the following:
| Change | |||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||
| (In millions) | |||||||||||
| Professional services | $ | 3.2 | $ | 18.6 | |||||||
| Salary, benefits and other employee-related costs | 7.8 | 10.0 | |||||||||
| Foreign service tax | — | 5.0 | |||||||||
| Other items | 2.0 | 3.4 | |||||||||
| Total change in general and administrative expense | $ | 13.0 | $ | 37.0 |
Professional services increased during the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, primarily due to increased legal and consulting services associated with acquisition-related activities. Salary, benefits and other employee-related costs and stock-based compensation included in general and administrative expense increased during the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, primarily due to additional headcount from acquisitions. Also, during the nine months ended September 30, 2024, as compared to the nine months ended September 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 August 2024, to better align our resources with our business strategy. Restructuring charges and related benefits are derived from management's estimates during the formulation of the restructuring plans, based on then-currently available information. As a result, 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. For additional information about our restructuring plans, see Note 9 in the notes to condensed consolidated financial statements.
Operating Margin
Operating margin represents income from operations as a percentage of total revenue. Our operating margin for the three and nine months ended September 30, 2024, and the three and nine months ended September 30, 2023 was as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | ||||||||||||||||||||
| Operating margin | 29 | % | 29 | % | 27 | % | 30 | % |
Operating margin decreased during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, primarily due to the mix of products and services sold during each respective period. In addition, our acquisitions in fiscal 2023 and fiscal 2024 resulted in incremental expenses, including amortization of acquired intangibles, that exceeded incremental revenue during the three and nine months ended September 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 Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Contractual cash interest expense: | |||||||||||||||||||||||
| Senior Notes | 10.0 | 3.8 | 17.6 | 11.4 | |||||||||||||||||||
| Term Loans | 12.5 | 4.6 | 25.9 | 13.0 | |||||||||||||||||||
| Revolving Credit Facility | 0.1 | 0.2 | 0.5 | 1.9 | |||||||||||||||||||
| Amortization of debt discount and debt issuance costs: | |||||||||||||||||||||||
| Senior Notes | 0.5 | 0.3 | 0.9 | 0.7 | |||||||||||||||||||
| Term Loans | 1.1 | 0.1 | 1.2 | 0.2 | |||||||||||||||||||
| Revolving Credit Facility | 0.3 | — | 0.3 | — | |||||||||||||||||||
| Other | — | 0.1 | (0.3) | — | |||||||||||||||||||
| Total interest expense | $ | 24.5 | $ | 9.1 | $ | 46.1 | $ | 27.2 |
Interest expense increased during the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, primarily due to the interest expense related to increased debt during fiscal 2024. For additional information relating to our debt arrangements, see Note 4 in the notes to condensed consolidated financial statements.
Income Taxes
The following table presents the provision for income taxes and the effective tax rate for the three and nine months ended September 30, 2024 and September 30, 2023:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Provision for income taxes | $ | 95.3 | $ | 45.6 | $ | 243.9 | $ | 202.6 | |||||||||||||||
| Effective tax rate | 28.6 | % | 15.2 | % | 25.4 | % | 22.0 | % |
Our provision for income taxes for the three and nine months ended September 30, 2024 was primarily attributable to federal, state and foreign income taxes on our anticipated fiscal 2024 income. We also recognized tax benefits of $12.6 million and $40.8 million related to stock-based compensation that vested or was exercised during the respective periods. The higher effective tax rates during the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023 were primarily attributable to a different geographic mix of earnings and lower tax benefits related to stock-based compensation.
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 nine months ended September 30, 2024.
Our provision for income taxes for the three and nine months ended September 30, 2023 was primarily attributable to federal, state and foreign income taxes on our then anticipated fiscal 2023 income. We also recognized tax benefits of $21.0 million and $46.8 million related to stock-based compensation that vested or was exercised during 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 26.7%. 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 | |||||||||||||||||
| September 30, 2024 | December 31, 2023 | Change | |||||||||||||||
| (In millions) | |||||||||||||||||
| Cash and cash equivalents | $ | 2,786.0 | $ | 1,008.2 | $ | 1,777.8 | |||||||||||
| Net working capital | 2,424.9 | 385.4 | 2,039.5 |
Cash and Cash Equivalents
As of September 30, 2024, our principal sources of liquidity consisted of approximately $2,786.0 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 nine months ended September 30, 2024 were proceeds from debt, 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 nine months ended September 30, 2024 were payments related to employee salaries and benefits, operating expenses, payments on debt, cash paid for acquired businesses, payment of employee taxes on vesting of restricted stock, repurchases of our common stock, purchases of inventory, payments for income tax and purchases of property, plant and equipment.
Approximately 26% of our cash and cash equivalents were held by our foreign subsidiaries as of September 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
| Nine Months Ended | |||||||||||||||||
| September 30, 2024 | September 30, 2023 | Change | |||||||||||||||
| (In millions) | |||||||||||||||||
| Cash provided by operating activities | $ | 819.2 | $ | 1,077.1 | $ | (257.9) |
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 nine months ended September 30, 2024, as compared to the nine months ended September 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
| Nine Months Ended | |||||||||||||||||
| September 30, 2024 | September 30, 2023 | Change | |||||||||||||||
| (In millions) | |||||||||||||||||
| Cash used for investing activities | $ | (797.1) | $ | (313.6) | $ | (483.5) |
Cash used for investing activities increased during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, primarily due to increases in payments for business combinations and purchases of property, plant and equipment. 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 From Financing Activities
| Nine Months Ended | |||||||||||||||||
| September 30, 2024 | September 30, 2023 | Change | |||||||||||||||
| (In millions) | |||||||||||||||||
| Cash provided by (used for) financing activities | $ | 1,750.4 | $ | (666.0) | $ | 2,416.4 |
Cash from financing activities increased during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, primarily due to an increase in net proceeds from debt, increased 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 a decrease in repurchases of common stock. These factors were partially offset by an increase in payments on debt and payments of employee taxes on vesting of restricted stock.
Other Factors Affecting Liquidity and Capital Resources
Senior 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”). As of September 30, 2024, the carrying value of the 2024 Notes was classified as a current liability on our condensed consolidated balance sheet, and we were in compliance with all covenants associated with the 2024 Notes.
Subsequent to the balance sheet date, on October 15, 2024, we settled the outstanding principal of $350.0 million and accrued interest on the 2024 Notes.
In September 2024, we issued $2.5 billion aggregate principal amount of senior notes, consisting of $500.0 million aggregate principal amount of 4.200% Senior Notes due 2027 (the “2027 Notes”), $1.0 billion aggregate principal amount of 4.300% Senior Notes due 2029 (the “2029 Notes”) and $1.0 billion aggregate principal amount of 4.700% Senior Notes due 2034 (the “2034 Notes” and together with the 2027 Notes and the 2029 Notes, the “New Notes”). Interest on the New Notes is payable semi-annually in arrears in March and September of each year, beginning in March 2025. As of September 30, 2024, we were in compliance with all covenants associated with the New Notes.
We used a portion of the net proceeds of the New Notes issued in September 2024 to fully prepay the outstanding principal and accrued interest of our term loan facility due on September 7, 2025 (the “2025 Term Loan”) and our term loan facility due on May 20, 2026 (the “2026 Term Loan”), both with groups of lenders led by Bank of America, N.A., as administrative agent.
Revolving Credit Facility
In August 2024, we terminated our existing revolving credit facility, dated June 30, 2021, and amended in September 2022, and 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 “2024 Credit Facility”). The 2024 Credit Facility provides for borrowings up to $1.25 billion, with the right to request increased capacity up to an additional $500.0 million upon receipt of lender commitments, for total maximum borrowings of $1.75 billion. The 2024 Credit Facility expires on August 14, 2029. Any outstanding loans drawn under the 2024 Credit Facility are due at maturity on August 14, 2029, 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 2024 Credit Facility are variable, so interest expense is impacted by changes in the interest rates, particularly for periods when there are outstanding borrowings under the revolving credit facility. Interest is payable quarterly. As of September 30, 2024, there were no borrowings outstanding under the 2024 Credit Facility, and we were in compliance with all covenants associated with such credit facility.
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 September 30, 2024, approximately $1.0 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 $36.4 million.
Other Liquidity Requirements
During the nine months ended September 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.
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