filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
52K characters. Original on sec.gov · Markdown
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, 2024 (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 controls, tariffs, conflicts around the world, volatility in foreign currency exchange rates, inflation and changes in interest rates; the impact of government actions; future costs, expenses, tax rates and uses of cash; pending legal, administrative and tax proceedings; restructuring actions and associated charges and benefits; pending acquisitions, the accounting for acquisitions and integration of acquired businesses; and other statements using words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “plans,” “projects,” “should,” “targets,” “will” and “would,” and words of similar import and the negatives thereof, constitute forward-looking statements. These statements are predictions based upon our current expectations about future events. Actual results could vary materially as a result of certain factors, including, but not limited to, those expressed in these statements. We refer you to the “Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk,” and “Liquidity and Capital Resources” sections contained in this Quarterly Report, the "Risk Factors" section contained in our Annual Report, and 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 global market leader that develops computational, AI-driven software, accelerated hardware, and intellectual property (“IP”) solutions for engineers and scientists to bring new and innovative products to life. The world’s most innovative technology companies use our solutions and services to deliver transformational products to multiple industries that drive the global economy. The products these companies develop are some of the most complex systems in the world. Since our inception, we have been at the forefront of technology innovation. We work closely with our customers, helping them solve their most complex challenges in the semiconductor and electronic systems industries to unlock limitless opportunities.
Our customers include semiconductor companies that design and manufacture semiconductor devices and systems companies that design and manufacture products containing many different types of semiconductors, which they either make themselves or buy from a semiconductor company. Semiconductors, also referred to as integrated circuits (“ICs”), or chips, are the heart of almost every industry. Semiconductors are the catalyst for innovation in many industries including automotive, aerospace, biotech, hyperscale and cloud computing, data centers, telecommunications, medical technology, industrial internet of things (“IIoT”), and AI. They are found in a wide variety of consumer products such as cell phones, automobiles, computers, home appliances, home security, drones, and home entertainment systems.
Our Intelligent System Design™ (“ISD”) strategy allows us to deliver solutions to our customers to solve their most complex product development challenges. Our industry-leading computational software, accelerated hardware, and IP enable us to adapt to our customers' dynamic design requirements, allowing them to meet their critical business and environmental concerns including time-to-market and sustainability. The creation of even the most seemingly simple electronic systems and products typically includes a complex design process and requires highly trained engineers with various areas of specialized knowledge and skill sets. Our ability to deliver innovative products that keep up with increasing complexity allows our customers to be successful in meeting their business goals and objectives.
In alignment with our ISD strategy, we group our solutions in three product categories: Core EDA, Semiconductor IP, and System Design and Analysis. Core EDA includes our software, hardware, and services used to design and verify a wide variety of semiconductors. Our Semiconductor IP portfolio includes silicon subsystems, software, and services that are used in semiconductor design. The System Design and Analysis category includes our software and services used to design and verify a wide variety of physical electronic systems. Leveraging our AI and computational software expertise, we have integrated the multiphysics domain (also known as “computational fluid dynamics,” or “CFD”) with our EDA solutions to provide customers with complete system-level design and analysis solutions. These categories are tightly integrated to provide complete design solutions for our customers.
For additional information about our products, see the discussion in Item 1, “Business,” under the heading “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.”
Acquisitions
As part of our ISD strategy, we invest in and acquire complementary businesses, joint ventures, services and technologies and IP rights. The size and timing of these investments and acquisitions may affect comparability of revenue, expenses and cash flows between fiscal periods.
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. For the three months ended March 31, 2025, 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, and 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, inflation, changing interest rates, expanded trade control laws and regulations, imposition of new or higher tariffs 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.
In addition, U.S. President Trump has made a series of announcements regarding the imposition of new and higher U.S. tariffs on imports from many countries, including China and Mexico. In response, China and other countries, as well as the European Union, have announced retaliatory tariffs on imports of U.S. goods and other countermeasures. We are monitoring these actions, including any pauses, escalations, exemptions or removal of exemptions, with respect to the threatened or imposed tariffs, and will continue to assess their potential impact on our business either directly, such as on our hardware business, or due to downstream effects.
We also continuously monitor geopolitical conflicts around the world, including the ongoing conflict between Russia and Ukraine and conflicts in the Middle East, and assess their impact on our business. To date, 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 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 months ended March 31, 2025, as compared to the three months ended March 31, 2024, reflect the following:
-
Growth in revenue from our software, hardware and IP offerings;
-
Continued investment in research and development activities and technical sales support, including headcount from acquisitions; and
-
Increased interest expense from our outstanding indebtedness.
Revenue
We primarily generate revenue from licensing our software and IP, selling or leasing our hardware products, 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 licensing arrangements, services, royalties, maintenance on IP licenses and hardware products, 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.
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 hardware products, 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 months ended March 31, 2025 and March 31, 2024:
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2025 | March 31, 2024 | ||||||||||||||||||||||
| Revenue recognized over time | 77 | % | 87 | % | |||||||||||||||||||
| Revenue from arrangements with non-cancelable commitments | 3 | % | 3 | % | |||||||||||||||||||
| Recurring revenue | 80 | % | 90 | % | |||||||||||||||||||
| Up-front revenue | 20 | % | 10 | % | |||||||||||||||||||
| Total | 100 | % | 100 | % |
The percentage of revenue characterized as recurring compared to revenue characterized as up-front may vary between fiscal quarters. As compared to prior years, we expect our percentage of annual up-front revenue to continue to increase in 2025 as growth in our product offerings for which revenue is recognized up-front is expected to be greater than the growth of our product offerings for which revenue is recognized over 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 | |||||||||||||||||||||||||||||
| March 31, 2025 | December 31, 2024 | September 30, 2024 | June 30, 2024 | March 31, 2024 | |||||||||||||||||||||||||
| Recurring revenue | 80 | % | 83 | % | 86 | % | 87 | % | 87 | % | |||||||||||||||||||
| Up-front revenue | 20 | % | 17 | % | 14 | % | 13 | % | 13 | % | |||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
Revenue by Period
The following table shows our revenue for the three months ended March 31, 2025 and March 31, 2024 and the change in revenue between periods:
| Three Months Ended | Change | ||||||||||||||||||||||
| March 31, 2025 | March 31, 2024 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Product and maintenance | $ | 1,110.9 | $ | 913.4 | $ | 197.5 | 22 | % | |||||||||||||||
| Services | 131.5 | 95.7 | 35.8 | 37 | % | ||||||||||||||||||
| Total revenue | $ | 1,242.4 | $ | 1,009.1 | $ | 233.3 | 23 | % |
Product and maintenance revenue increased during the three months ended March 31, 2025, as compared to the three months ended March 31, 2024, primarily due to growth in revenue from our software, hardware and IP product offerings as a result of existing customers' continued investment in complex designs for their products.
Services revenue increased during the three months ended March 31, 2025, as compared to the three months ended March 31, 2024, primarily due to increased revenue from our IP service offerings. 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 months ended March 31, 2025 or March 31, 2024.
Revenue by Product Category
The following table shows the percentage of revenue contributed by each of our product categories for the past five consecutive quarters:
| Three Months Ended | |||||||||||||||||||||||||||||
| March 31, 2025 | December 31, 2024 | September 30, 2024 | June 30, 2024 | March 31, 2024 | |||||||||||||||||||||||||
| Core EDA | 71 | % | 68 | % | 70 | % | 73 | % | 76 | % | |||||||||||||||||||
| Semiconductor IP | 14 | % | 13 | % | 14 | % | 13 | % | 12 | % | |||||||||||||||||||
| System Design and Analysis | 15 | % | 19 | % | 16 | % | 14 | % | 12 | % | |||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
Revenue from any one product category as a percentage of total revenue may fluctuate from period to period based on the mix of products and services sold in a given period and the timing of revenue recognition, particularly for our hardware, IP and certain software products.
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, in which case the revenue allocation in the table above would differ.
Revenue by Geography
| Three Months Ended | Change | ||||||||||||||||||||||
| March 31, 2025 | March 31, 2024 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| United States | $ | 569.0 | $ | 435.5 | $ | 133.5 | 31 | % | |||||||||||||||
| Other Americas | 29.6 | 27.4 | 2.2 | 8 | % | ||||||||||||||||||
| China | 139.4 | 117.2 | 22.2 | 19 | % | ||||||||||||||||||
| Other Asia | 240.5 | 208.5 | 32.0 | 15 | % | ||||||||||||||||||
| Europe, Middle East and Africa (“EMEA”) | 195.7 | 169.1 | 26.6 | 16 | % | ||||||||||||||||||
| Japan | 68.2 | 51.4 | 16.8 | 33 | % | ||||||||||||||||||
| Total revenue | $ | 1,242.4 | $ | 1,009.1 | $ | 233.3 | 23 | % |
During the three months ended March 31, 2025, as compared to the three months ended March 31, 2024, demand for our software product offerings contributed to growth in each geography. In addition, growth from our hardware and IP product offerings contributed to increased revenue in the United States.
Revenue by Geography as a Percent of Total Revenue
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2025 | March 31, 2024 | ||||||||||||||||||||||
| United States | 46 | % | 43 | % | |||||||||||||||||||
| Other Americas | 2 | % | 3 | % | |||||||||||||||||||
| China | 11 | % | 12 | % | |||||||||||||||||||
| Other Asia | 19 | % | 20 | % | |||||||||||||||||||
| EMEA | 16 | % | 17 | % | |||||||||||||||||||
| Japan | 6 | % | 5 | % | |||||||||||||||||||
| Total | 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 | ||||||||||||||||||||||
| March 31, 2025 | March 31, 2024 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Cost of product and maintenance | $ | 116.7 | $ | 75.4 | $ | 41.3 | 55 | % | |||||||||||||||
| Cost of services | 50.5 | 49.8 | 0.7 | 1 | % |
Cost of Product and Maintenance
Cost of product and maintenance includes costs associated with the sale and lease of our hardware products 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 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 assets, technology or IP.
A summary of cost of product and maintenance is as follows:
| Three Months Ended | Change | ||||||||||||||||||||||
| March 31, 2025 | March 31, 2024 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Product and maintenance-related costs | $ | 100.2 | $ | 64.1 | $ | 36.1 | 56 | % | |||||||||||||||
| Amortization of acquired intangibles | 16.5 | 11.3 | 5.2 | 46 | % | ||||||||||||||||||
| Total cost of product and maintenance | $ | 116.7 | $ | 75.4 | $ | 41.3 | 55 | % |
The changes in product and maintenance-related costs for the three months ended March 31, 2025, as compared to the three months ended March 31, 2024, were due to the following:
| Change | |||||||||||
| Three Months Ended | |||||||||||
| (In millions) | |||||||||||
| Hardware product costs | $ | 30.1 | |||||||||
| Other items | 6.0 | ||||||||||
| Total change in product and maintenance-related costs | $ | 36.1 |
Costs associated with our hardware products include components, assembly, testing, applicable reserves and overhead. These costs make our cost of hardware products higher, as a percentage of revenue, than our cost of software and IP products. Hardware product costs increased during the three months ended March 31, 2025, as compared to the three months ended March 31, 2024, primarily due to increased installations of our hardware products.
Amortization of acquired intangibles included in cost of product and maintenance may fluctuate from period to period depending on the timing of newly acquired assets relative to assets becoming fully amortized in any given period.
Cost of Services
Cost of services primarily includes employee salary, benefits and other employee-related costs to perform work on revenue-generating projects, 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, industry trends for salary and other employee benefits, 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 U.S. dollar strengthens in value against other currencies and we recognize higher expenses when the U.S. 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 months ended March 31, 2025 and March 31, 2024 were as follows:
| Three Months Ended | Change | ||||||||||||||||||||||
| March 31, 2025 | March 31, 2024 | Amount | Percentage | ||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Marketing and sales | $ | 202.7 | $ | 180.6 | $ | 22.1 | 12 | % | |||||||||||||||
| Research and development | 439.1 | 379.0 | 60.1 | 16 | % | ||||||||||||||||||
| General and administrative | 63.1 | 68.7 | (5.6) | (8) | % | ||||||||||||||||||
| Total operating expenses | $ | 704.9 | $ | 628.3 | $ | 76.6 | 12 | % |
Our operating expenses, as a percentage of total revenue, for the three months ended March 31, 2025 and March 31, 2024 were as follows:
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2025 | March 31, 2024 | ||||||||||||||||||||||
| Marketing and sales | 16 | % | 18 | % | |||||||||||||||||||
| Research and development | 35 | % | 37 | % | |||||||||||||||||||
| General and administrative | 5 | % | 7 | % | |||||||||||||||||||
| Total operating expenses | 56 | % | 62 | % |
Marketing and Sales
The increase in marketing and sales expense for the three months ended March 31, 2025, as compared to the three months ended March 31, 2024, was due to the following:
| Change | |||||||||||
| Three Months Ended | |||||||||||
| (In millions) | |||||||||||
| Salary, benefits and other employee-related costs | $ | 15.1 | |||||||||
| Stock-based compensation | 3.8 | ||||||||||
| Marketing programs | 1.4 | ||||||||||
| Other items | 1.8 | ||||||||||
| Total change in marketing and sales expense | $ | 22.1 |
Salary, benefits and other employee-related costs and stock-based compensation included in marketing and sales expense increased during the three months ended March 31, 2025, as compared to the three months ended March 31, 2024, primarily due to our continued investment in attracting and retaining talent dedicated to technical sales support, including additional headcount from acquisitions. 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 months ended March 31, 2025, as compared to the three months ended March 31, 2024, was due to the following:
| Change | |||||||||||
| Three Months Ended | |||||||||||
| (In millions) | |||||||||||
| Salary, benefits and other employee-related costs | $ | 43.1 | |||||||||
| Stock-based compensation | 13.5 | ||||||||||
| Facilities and other infrastructure costs | 4.5 | ||||||||||
| Other items | (1.0) | ||||||||||
| Total change in research and development expense | $ | 60.1 |
Salary, benefits and other employee-related costs and stock-based compensation included in research and development expense increased during the three months ended March 31, 2025, as compared to the three months ended March 31, 2024, 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 months ended March 31, 2025, as compared to the three months ended March 31, 2024, primarily due to our growing workforce. We expect to continue attracting and retaining talent dedicated to research and development activities through hiring and acquisitions.
General and Administrative
The decrease in general and administrative expense for the three months ended March 31, 2025, as compared to the three months ended March 31, 2024, was due to the following:
| Change | |||||||||||
| Three Months Ended | |||||||||||
| (In millions) | |||||||||||
| Professional services | $ | (6.6) | |||||||||
| Other items | 1.0 | ||||||||||
| Total change in general and administrative expense | $ | (5.6) |
Professional services decreased during the three months ended March 31, 2025, as compared to the three months ended March 31, 2024, primarily due to decreased legal and consulting services associated with acquisition-related activities.
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.
Operating Margin
Operating margin represents income from operations as a percentage of total revenue. Our operating margin for the three months ended March 31, 2025 and the three months ended March 31, 2024 was as follows:
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2025 | March 31, 2024 | ||||||||||||||||||||||
| Operating margin | 29 | % | 25 | % |
Operating margin increased during the three months ended March 31, 2025, as compared to the three months ended March 31, 2024, primarily due to the mix of products and services sold during each respective period.
Interest Expense
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2025 | March 31, 2024 | ||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Contractual cash interest expense: | |||||||||||||||||||||||
| Senior Notes | 27.7 | 3.8 | |||||||||||||||||||||
| Term Loan | — | 4.7 | |||||||||||||||||||||
| Amortization of debt discount and debt issuance costs: | |||||||||||||||||||||||
| Senior Notes | 1.0 | 0.2 | |||||||||||||||||||||
| Revolving Credit Facility | 0.1 | — | |||||||||||||||||||||
| Other | 0.3 | — | |||||||||||||||||||||
| Total interest expense | $ | 29.1 | $ | 8.7 |
During the three months ended March 31, 2024, our indebtedness was comprised of $350.0 million aggregate principal amount of senior notes that were due October 15, 2024 (the “2024 Senior Notes”) and a $300.0 million three-year senior non-amortizing term loan facility that was due on September 7, 2025 (the “2025 Term Loan”).
In September 2024, we issued $2.5 billion aggregate principal amount of senior notes, consisting of $500.0 million aggregate principal amount of senior notes due 2027 (the “2027 Notes”), $1.0 billion aggregate principal amount of senior notes due 2029 (the “2029 Notes”) and $1.0 billion aggregate principal amount of senior notes due 2034 (the “2034 Notes” and together with the 2027 Notes and the 2029 Notes, the “New Senior Notes”).
In September 2024, we used a portion of the net proceeds from the New Senior Notes to fully prepay the outstanding principal and accrued interest of the 2025 Term Loan. In October 2024, we settled the outstanding principal of $350.0 million and accrued interest on the 2024 Senior Notes.
Interest expense increased during the three months ended March 31, 2025, as compared to the three months ended March 31, 2024, primarily due to the increased level of debt on our condensed consolidated balance sheet as of March 31, 2025, as compared to March 31, 2024. For additional information relating to our debt arrangements, see Note 4 in the notes to condensed consolidated financial statements.
Other Income, Net
Other income, net consists primarily of interest earned on cash, cash equivalents and investments in debt securities, realized and unrealized gains and losses from our investments in equity securities of other companies, gains and losses from investments held in the Nonqualified Deferred Compensation (“NQDC”) trust and foreign exchange gains and losses. Other income, net decreased during the three months ended March 31, 2025, as compared to the three months ended March 31, 2024, primarily due to net losses from our investments in equity securities of publicly held companies, offset by increased interest from deposits and a gain on the sale of IP and other assets. For additional information about other income, net, see Note 8 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 months ended March 31, 2025 and March 31, 2024:
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2025 | March 31, 2024 | ||||||||||||||||||||||
| (In millions, except percentages) | |||||||||||||||||||||||
| Provision for income taxes | $ | 82.1 | $ | 62.4 | |||||||||||||||||||
| Effective tax rate | 23.1 | % | 20.1 | % |
Our provision for income taxes for the three months ended March 31, 2025 was primarily attributable to federal, state and foreign income taxes on our anticipated fiscal 2025 income. We also recognized tax benefits of $18.6 million related to stock-based compensation that vested or was exercised during the period. The increase in our provision for income taxes during the three months ended March 31, 2025, as compared to the three months ended March 31, 2024, was primarily attributable to an increase in our earnings.
In 2021, the Organisation for Economic Co-operation and Development ("OECD") 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%. The currently enacted Pillar Two Model Rules did not have a material impact to our provision for income taxes for the three months ended March 31, 2025.
Our provision for income taxes for the three months ended March 31, 2024 was primarily attributable to federal, state and foreign income taxes on our then anticipated fiscal 2024 income. We also recognized tax benefits of $22.8 million related to stock-based compensation that vested or was exercised during the respective periods.
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 relative to earnings in countries where we have higher statutory tax rates. We currently expect that our fiscal 2025 effective tax rate will be approximately 26%. We expect that our quarterly effective tax rates will vary from our fiscal 2025 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 | |||||||||||||||||
| March 31, 2025 | December 31, 2024 | Change | |||||||||||||||
| (In millions) | |||||||||||||||||
| Cash and cash equivalents | $ | 2,777.7 | $ | 2,644.0 | $ | 133.7 | |||||||||||
| Net working capital | 2,697.3 | 2,646.0 | 51.3 |
Cash and Cash Equivalents
As of March 31, 2025, our principal sources of liquidity consisted of $2,777.7 million of cash and cash equivalents as compared to $2,644.0 million as of December 31, 2024.
Our primary sources of cash and cash equivalents during the three months ended March 31, 2025 were cash generated from operations and proceeds from the issuance of common stock resulting from stock purchases under our employee stock purchase plan and stock options exercised during the period.
Our primary uses of cash and cash equivalents during the three months ended March 31, 2025 were payments related to employee salaries and benefits, repurchases of our common stock, payment of employee taxes on vesting of restricted stock, and purchases of property, plant and equipment.
Approximately 33% of our cash and cash equivalents was held by our foreign subsidiaries as of March 31, 2025. 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
Cash flows provided by operating activities during the three months ended March 31, 2025 and March 31, 2024 were as follows:
| Three Months Ended | |||||||||||||||||
| March 31, 2025 | March 31, 2024 | Change | |||||||||||||||
| (In millions) | |||||||||||||||||
| Cash provided by operating activities | $ | 487.0 | $ | 253.2 | $ | 233.8 |
Cash flows provided by 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 from operating activities are significantly influenced by business levels and the payment terms set forth in our customer agreements. The increase in cash flows from operating activities for the three months ended March 31, 2025, as compared to the three months ended March 31, 2024, was primarily due to the timing of cash receipts from customers and the timing of cash disbursements for operating assets and liabilities.
Cash Flows Used for Investing Activities
Cash flows used for investing activities during the three months ended March 31, 2025 and March 31, 2024 were as follows:
| Three Months Ended | |||||||||||||||||
| March 31, 2025 | March 31, 2024 | Change | |||||||||||||||
| (In millions) | |||||||||||||||||
| Cash used for investing activities | $ | (21.8) | $ | (79.8) | $ | 58.0 |
Cash used for investing activities decreased during the three months ended March 31, 2025, as compared to the three months ended March 31, 2024, primarily due to a decrease 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 Used for Financing Activities
Cash flows used for financing activities during the three months ended March 31, 2025 and March 31, 2024 were as follows:
| Three Months Ended | |||||||||||||||||
| March 31, 2025 | March 31, 2024 | Change | |||||||||||||||
| (In millions) | |||||||||||||||||
| Cash used for financing activities | $ | (345.8) | $ | (159.4) | $ | (186.4) |
Cash used for financing activities increased during the three months ended March 31, 2025, as compared to the three months ended March 31, 2024, primarily due to an increase in repurchases of common stock and decreased proceeds from the issuance of common stock resulting from stock purchases under our employee stock purchase plan and stock options exercised during the period. These factors were partially offset by a decrease in payments of employee taxes on vesting of restricted stock.
Other Factors Affecting Liquidity and Capital Resources
Senior 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 Senior Notes”). Interest on the New Senior Notes is payable semi-annually in arrears in March and September of each year. As of March 31, 2025, we were in compliance with all covenants associated with the New Senior Notes.
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 March 31, 2025, 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 March 31, 2025, approximately $0.5 billion of the share repurchase authorization remained available to repurchase shares of our common stock. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” for additional information on share repurchases.
Other Liquidity Requirements
During the three months ended March 31, 2025, 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.
Previous: Item 1. Financial Statements · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk