Edgar Filing: CADENCE DESIGN SYSTEMS INC

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¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-Q CDNS 06.29.2013

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________

FORM 10-Q

_____________________________________

(Mark One)



	x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 29, 2013



	¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-15867

_____________________________________

CADENCE DESIGN SYSTEMS, INC.

(Exact Name of Registrant as Specified in Its Charter)

_____________________________________



Delaware		77-0148231
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

2655 Seely Avenue, Building 5, San Jose, California		95134
(Address of Principal Executive Offices)		(Zip Code)

(408) 943-1234

Registrant’s Telephone Number, including Area Code

_____________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

On June 29, 2013, 283,941,464 shares of the registrant’s common stock, $0.01 par value, were outstanding.

CADENCE DESIGN SYSTEMS, INC.

INDEX



		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets: June 29, 2013 and December 29, 2012	1

	Condensed Consolidated Income Statements: Three and Six Months Ended June 29, 2013 and June 30, 2012	2

	Condensed Consolidated Statements of Comprehensive Income (Loss): Three and Six Months Ended June 29, 2013 and June 30, 2012	3

	Condensed Consolidated Statements of Cash Flows: Six Months Ended June 29, 2013 and June 30, 2012	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4.	Controls and Procedures	42

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	43

Item 1A.	Risk Factors	43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 3.	Defaults Upon Senior Securities	57

Item 4.	Mine Safety Disclosures	57

Item 5.	Other Information	58

Item 6.	Exhibits	58

	Signatures	59

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)



	June 29, 2013			December 29, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	577,233		$	726,357
Short-term investments	101,251			100,704
Receivables, net of allowances of $0 and $85, respectively	92,581			97,821
Inventories	38,705			36,163
2015 notes hedges	335,131			303,154
Prepaid expenses and other	120,598			127,036
Total current assets	1,265,499			1,391,235
Property, plant and equipment, net of accumulated depreciation of $623,356 and $635,450, respectively	243,288			244,439
Goodwill	457,556			233,266
Acquired intangibles, net of accumulated amortization of $115,406 and $104,351, respectively	337,705			184,938
Long-term receivables	5,929			7,559
Other assets	253,112			225,566
Total assets	$	2,563,089		$	2,287,003
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Revolving credit facility	$	100,000		$	—
Convertible notes	458,179			447,011
2015 notes embedded conversion derivative	335,131			303,154
Accounts payable and accrued liabilities	185,809			171,318
Current portion of deferred revenue	282,784			295,787
Total current liabilities	1,361,903			1,217,270
Long-term liabilities:
Long-term portion of deferred revenue	43,892			50,529
Other long-term liabilities	117,034			104,033
Total long-term liabilities	160,926			154,562
Commitments and contingencies (Note 11)
Stockholders’ equity:
Common stock and capital in excess of par value	1,744,261			1,721,556
Treasury stock, at cost	(168,573		)	(200,786		)
Accumulated deficit	(561,511		)	(649,549		)
Accumulated other comprehensive income	26,083			43,950
Total stockholders’ equity	1,040,260			915,171
Total liabilities and stockholders’ equity	$	2,563,089		$	2,287,003

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

(In thousands, except per share amounts)

(Unaudited)



	Three Months Ended						Six Months Ended
	June 29, 2013			June 30, 2012			June 29, 2013			June 30, 2012
Revenue:
Product and maintenance	$	337,983		$	297,510		$	666,254		$	583,798
Service	24,498			28,966			50,493			58,508
Total revenue	362,481			326,476			716,747			642,306
Costs and expenses:
Cost of product and maintenance	28,095			32,406			57,942			59,618
Cost of service	15,148			17,071			33,492			36,445
Marketing and sales	95,277			80,418			185,679			164,213
Research and development	136,395			112,031			260,479			220,625
General and administrative	34,441			30,244			64,251			58,014
Amortization of acquired intangibles	5,327			3,643			9,118			7,429
Restructuring and other charges (credits)	2,656			43			2,508			(8		)
Total costs and expenses	317,339			275,856			613,469			546,336
Income from operations	45,142			50,620			103,278			95,970
Interest expense	(9,528		)	(8,566		)	(18,790		)	(17,103		)
Other income, net	2,018			3,669			4,193			6,103
Income before provision for income taxes	37,632			45,723			88,681			84,970
Provision for income taxes	28,203			9,337			643			17,480
Net income	$	9,429		$	36,386		$	88,038		$	67,490
Net income per share – basic	$	0.03		$	0.13		$	0.32		$	0.25
Net income per share – diluted	$	0.03		$	0.13		$	0.30		$	0.24
Weighted average common shares outstanding – basic	277,146			269,739			276,018			268,840
Weighted average common shares outstanding – diluted	294,443			275,318			293,274			276,526

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)



	Three Months Ended						Six Months Ended
	June 29, 2013			June 30, 2012			June 29, 2013			June 30, 2012
Net income	$	9,429		$	36,386		$	88,038		$	67,490
Other comprehensive loss, net of tax effects:
Foreign currency translation loss	(11,705		)	(2,366		)	(17,867		)	(4,832		)
Changes in unrealized holding gains or losses on available-for-sale securities, net of reclassification adjustment for realized gains and losses	(99		)	(1,017		)	(383		)	(1,021		)
Changes in defined benefit plan liabilities	65			84			383			54
Total other comprehensive loss, net of tax effects	(11,739		)	(3,299		)	(17,867		)	(5,799		)
Comprehensive income (loss)	$	(2,310	)	$	33,087		$	70,171		$	61,691

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Six Months Ended
	June 29, 2013			June 30, 2012
Cash and cash equivalents at beginning of period	$	726,357		$	601,602
Cash flows from operating activities:
Net income	88,038			67,490
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	46,977			43,736
Amortization of debt discount and fees	12,625			11,529
Stock-based compensation	28,921			21,886
Gain on investments, net	(2,477		)	(4,169		)
Deferred income taxes	(4,413		)	459
Other non-cash items	433			3,564
Changes in operating assets and liabilities, net of effect of acquired businesses:
Receivables	8,719			16,513
Inventories	(2,672		)	499
Prepaid expenses and other	26,516			414
Other assets	(45,274		)	(169		)
Accounts payable and accrued liabilities	10,023			(4,694		)
Deferred revenue	(24,359		)	(27,446		)
Other long-term liabilities	7,174			(1,424		)
Net cash provided by operating activities	150,231			128,188
Cash flows from investing activities:
Purchases of available-for-sale securities	(63,705		)	(49,083		)
Proceeds from the sale of available-for-sale securities	46,857			136
Proceeds from the maturity of available-for-sale securities	15,716			—
Proceeds from the sale of long-term investments	6,102			44
Purchases of property, plant and equipment	(23,739		)	(18,269		)
Investment in venture capital partnerships and equity investments	—			(250		)
Cash paid in business combinations and asset acquisitions, net of cash acquired	(392,139		)	(1,041		)
Net cash used for investing activities	(410,908		)	(68,463		)
Cash flows from financing activities:
Proceeds from revolving credit facility	100,000			—
Principal payments on receivable financing	(2,526		)	(2,907		)
Payment of acquisition-related contingent consideration	(582		)	(39		)
Tax effect related to employee stock transactions allocated to equity	7,300			4,075
Proceeds from issuance of common stock	30,227			13,063
Stock received for payment of employee taxes on vesting of restricted stock	(11,758		)	(9,897		)
Net cash provided by financing activities	122,661			4,295
Effect of exchange rate changes on cash and cash equivalents	(11,108		)	(3,964		)
Increase (decrease) in cash and cash equivalents	(149,124		)	60,056
Cash and cash equivalents at end of period	$	577,233		$	661,658

Supplemental cash flow information:
Interest paid	$	6,294		$	5,677
Income taxes paid, including foreign withholding tax	$	6,598		$	9,801
Non-cash investing and financing activities:
Stock options assumed for acquisition	$	529		$	—
Available-for-sale securities received from customer	$	232		$	15

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared by Cadence Design Systems, Inc., or Cadence, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission, or the SEC. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, Cadence believes that the disclosures contained in this Quarterly Report on Form 10-Q comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These condensed consolidated financial statements are meant to be, and should be, read in conjunction with the consolidated financial statements and the Notes thereto included in Cadence’s Annual Report on Form 10-K for the fiscal year ended December 29, 2012. In the condensed consolidated income statements for the three and six months ended June 29, 2013, Cadence combined product and maintenance revenue because product and maintenance revenue is generally recognized from agreements that require customers to purchase both the product and associated maintenance in a bundled offering. Cadence reclassified prior period product and maintenance revenue balances to conform to the current period presentation. Certain other prior period balances have also been reclassified to conform to current period presentation.

The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q reflect all adjustments (which include only normal, recurring adjustments and those items discussed in these Notes) that are, in the opinion of management, necessary to state fairly the results of operations, cash flows and financial position for the periods and dates presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year.

Preparation of the condensed consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

NOTE 2. DEBT

Cadence’s outstanding debt as of June 29, 2013 and December 29, 2012 was as follows:



	June 29, 2013							December 29, 2012
	(In thousands)
	Principal		Unamortized Discount			Carrying Value		Principal		Unamortized Discount			Carrying Value
2015 Notes	$	350,000	$	(33,320	)	$	316,680	$	350,000	$	(41,181	)	$	308,819
2013 Notes	144,461		(3,140		)	141,321		144,461		(6,447		)	138,014
2023 Notes	178		—			178		178		—			178
Revolving credit facility	100,000		—			100,000		—		—			—
Total outstanding debt	$	594,639	$	(36,460	)	$	558,179	$	494,639	$	(47,628	)	$	447,011

2015 Notes

In June 2010, Cadence issued $350.0 million principal amount of 2.625% Cash Convertible Senior Notes Due 2015, or the 2015 Notes. At maturity, the holders of the 2015 Notes will be entitled to receive the principal amount of the 2015 Notes plus accrued interest. The 2015 Notes are convertible into cash prior to maturity upon the occurrence of certain conditions described in the table below. To the extent that the 2015 Notes are convertible prior to maturity and a holder of the 2015 Notes elects to convert its notes prior to maturity, that note holder will be entitled to receive cash equal to the principal amount of the notes plus any additional conversion value as described in the table below under the heading "Conversion feature."

Cadence entered into hedge transactions, or the 2015 Notes Hedges, in connection with the issuance of the 2015 Notes. The purpose of the 2015 Notes Hedges was to limit Cadence’s exposure to the additional cash payments above the principal amount of the 2015 Notes that may be due to the holders. As a result of the 2015 Notes Hedges, Cadence’s maximum expected cash exposure upon conversion of the 2015 Notes is the $350.0 million principal balance of the notes. In June 2010, Cadence also sold warrants in separate transactions, or the 2015 Warrants. As a result of the 2015 Warrants, Cadence will experience dilution to its diluted earnings per share if its average closing stock price exceeds $10.78 for any fiscal quarter. To the extent that Cadence’s stock price exceeds $10.78 at expiration of the 2015 Warrants, Cadence will issue shares to net settle the 2015 Warrants.

A summary of key terms of the 2015 Notes is as follows:



		2015 Notes
		(In thousands, except percentages and per share amounts)

Outstanding principal maturity value – at June 29, 2013		$350,000

Contractual interest rate		2.625%

Contractual maturity date		June 1, 2015

Initial conversion rate		132.5205 shares of common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $7.55 per share of Cadence common stock.

Conversion feature (in addition to principal amount payable in cash)		Cash to the extent Cadence’s stock price exceeds approximately $7.55 per share, calculated based on the applicable conversion rate multiplied by the volume weighted average price of Cadence common stock over a specified period.

Early conversion conditions (or the Early Conversion Conditions)		• Closing stock price greater than $9.81 for at least 20 of the last 30 trading days in a fiscal quarter (convertible only for subsequent quarter); • Specified corporate transactions; or • Note trading price falls below a calculated minimum.

Conversion immediately preceding maturity		From March 1, 2015 until the second trading day immediately preceding the maturity date, holders may convert their 2015 Notes at any time into cash as described above under “Conversion feature.”

Redemption at Cadence’s option prior to maturity		None.

Fundamental change put right		Upon certain fundamental corporate changes prior to maturity, the 2015 Note holders could require Cadence to repurchase their notes for cash equal to the principal amount of the notes plus accrued interest.

Make-whole premium		Upon certain fundamental changes prior to maturity, if Cadence’s stock price were between $6.16 and $40.00 per share at that time, the 2015 Note holders would be entitled to an increase to the conversion rate. This is referred to as a “make-whole premium.”

Financial covenants		None.

Impact of Early Conversion Conditions on Financial Statements

The 2015 Notes are convertible into cash from June 30, 2013 through September 28, 2013 because Cadence’s closing stock price exceeded $9.81 for at least 20 days in the 30-day period prior to June 29, 2013. Accordingly, the net balance of the 2015 Notes of $316.7 million is classified as a current liability on Cadence’s condensed consolidated balance sheet as of June 29, 2013. The classification of the 2015 Notes as current or long-term on the condensed consolidated balance sheet is evaluated at each balance sheet date and may change from time to time depending on whether Cadence’s closing stock price has exceeded $9.81 during the periods specified in the table above under “Early conversion conditions.” In the event that none of the 2015 Notes Early Conversion Conditions have been met in a future fiscal quarter prior to the one-year period immediately preceding the maturity date, Cadence will classify its net liability under the 2015 Notes as a long-term liability on the condensed consolidated balance sheet as of the end of that fiscal quarter.

If the note holders elect to convert their 2015 Notes prior to maturity, any unamortized discount and transaction fees will be expensed at the time of conversion. If the entire outstanding principal amount had been converted on June 29, 2013, Cadence would have recorded an expense of $37.9 million associated with the conversion, comprised of $33.3 million of unamortized debt discount and $4.6 million of unamortized transaction fees.

As of June 29, 2013, the if-converted value of the 2015 Notes to the note holders of approximately $671.6 million exceeded the principal amount of $350.0 million. The fair value of the 2015 Notes was $684.2 million as of June 29, 2013 and $640.1 million as of December 29, 2012. The 2015 Notes currently trade at a premium to the if-converted value of the notes. As of June 29, 2013, none of the note holders had elected to convert their 2015 Notes.

2015 Notes Embedded Conversion Derivative

The conversion feature of the 2015 Notes, or the 2015 Notes Embedded Conversion Derivative, requires bifurcation from the 2015 Notes and is accounted for as a derivative liability. The fair value of the 2015 Notes Embedded Conversion Derivative at the time of issuance of the 2015 Notes was $76.6 million and was recorded as original debt discount for purposes of accounting for the debt component of the 2015 Notes. This discount is amortized as interest expense using the effective interest method over the term of the 2015 Notes. The 2015 Notes Embedded Conversion Derivative is carried on the condensed consolidated balance sheet at its estimated fair value. The fair value was $335.1 million as of June 29, 2013 and $303.2 million as of December 29, 2012.

2015 Notes Hedges

The 2015 Notes Hedges expire on June 1, 2015 and must be settled in cash. The aggregate cost of the 2015 Notes Hedges was $76.6 million. The 2015 Notes Hedges are accounted for as derivative assets and are carried on the condensed consolidated balance sheet at their estimated fair value. The 2015 Note Hedges fair value was $335.1 million as of June 29, 2013 and $303.2 million as of December 29, 2012. The 2015 Notes Embedded Conversion Derivative liability and the 2015 Notes Hedges asset are adjusted to fair value each reporting period and unrealized gains and losses are reflected in the condensed consolidated income statements. The 2015 Notes Embedded Conversion Derivative and the 2015 Notes Hedges are designed to have similar fair values. Accordingly, the changes in the fair values of these instruments offset during the three and six months ended June 29, 2013 and June 30, 2012 and did not have a net impact on the condensed consolidated income statements for the respective periods.

The classification of the 2015 Notes Embedded Conversion Derivative liability and the 2015 Notes Hedges asset as current or long-term on the condensed consolidated balance sheet corresponds with the classification of the 2015 Notes, is evaluated at each balance sheet date and may change from time to time depending on whether the closing stock price Early Conversion Condition is met for a particular quarter.

2015 Warrants

In June 2010, Cadence sold the 2015 Warrants in separate transactions for the purchase of up to approximately 46.4 million shares of Cadence’s common stock at a strike price of $10.78 per share, for total proceeds of $37.5 million, which was recorded as an increase in stockholders’ equity. The 2015 Warrants expire on various dates from September 2015 through December 2015 and must be settled in net shares of Cadence’s common stock. Therefore, upon expiration of the 2015 Warrants, Cadence will issue shares of common stock to the purchasers of the 2015 Warrants that represent the value by which the price of the common stock exceeds the strike price stipulated within the particular warrant agreement.

The effective interest rate and components of interest expense of the 2015 Notes for the three and six months ended June 29, 2013 and June 30, 2012 were as follows:



	Three Months Ended						Six Months Ended
	June 29, 2013			June 30, 2012			June 29, 2013			June 30, 2012
	(In thousands, except percentages)
Effective interest rate	8.1		%	8.1		%	8.1		%	8.1		%
Contractual interest expense	$	2,289		$	2,289		$	4,578		$	4,578
Amortization of debt discount	$	3,951		$	3,638		$	7,861		$	7,231

2013 Notes and 2011 Notes

In December 2006, Cadence issued $250.0 million principal amount of 1.500% Convertible Senior Notes Due December 15, 2013, or the 2013 Notes. At the same time, Cadence issued $250.0 million principal amount of 1.375% Convertible Senior Notes Due December 15, 2011, or the 2011 Notes. During 2010, Cadence repurchased a portion of the 2011 Notes and the 2013 Notes. The 2011 Notes matured on December 15, 2011, at which time Cadence paid the remaining balance on the 2011 Notes in full. As of June 29, 2013, the remaining principal maturity value of the 2013 Notes was $144.5 million.

At maturity, the holders of the 2013 Notes will be entitled to receive the principal amount of the 2013 Notes plus accrued interest. The 2013 Notes are convertible into a combination of cash and shares of Cadence common stock upon the occurrence of certain conditions described in the table below. To the extent that the 2013 Notes are convertible prior to maturity and a holder of the 2013 Notes elects to convert its notes prior to maturity, that note holder will be entitled to receive cash for the principal amount of the notes plus shares for any additional conversion value as described in the table below under the heading “Conversion feature.” As of June 29, 2013, the 2013 Notes were not convertible.

Cadence entered into hedge transactions, or the 2013 Notes Hedges and the 2011 Notes Hedges, in connection with the issuance of the 2013 Notes and the 2011 Notes. The 2011 Notes Hedges expired unexercised on December 15, 2011. Pursuant to the 2013 Notes Hedges, Cadence has the option to receive the amount of shares that may be owed to the 2013 Notes holders. The purpose of the 2013 Notes Hedges was to limit Cadence’s exposure to the dilution that may result from the issuance of shares upon conversion of the notes. In December 2006, Cadence also sold warrants in separate transactions, or the 2013 Warrants and the 2011 Warrants. As a result of the 2013 Warrants, Cadence will experience dilution to its diluted earnings per share to the extent its average closing stock price exceeds $31.50 for any fiscal quarter. If Cadence’s stock price is above $31.50 at the expiration of the 2013 Warrants, Cadence will issue shares to settle the 2013 Warrants.

A summary of key terms of the 2013 Notes is as follows:



		2013 Notes
		(In thousands, except percentages and per share amounts)

Principal maturity value – at issuance		$250,000

Outstanding principal maturity value – at June 29, 2013		$144,461

Contractual interest rate		1.500%

Contractual maturity date		December 15, 2013

Equity component - included in common stock - at June 29, 2013 and December 29, 2012		$63,027

Initial conversion rate		47.2813 shares of common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $21.15 per share of Cadence common stock.

Conversion feature (in addition to principal amount payable in cash)		Shares to the extent Cadence’s stock price exceeds $21.15 per share, calculated based on the applicable conversion rate multiplied by the volume weighted average price of Cadence common stock over a specified period.

Early conversion conditions (or the Early Conversion Conditions)		• Closing stock price greater than $27.50 for at least 20 of the last 30 trading days in a calendar quarter (convertible only for subsequent quarter); • Specified corporate transactions; or • Note trading price falls below calculated minimum.

Conversion immediately preceding maturity		From November 1, 2013, and until the trading day immediately preceding the maturity date, holders may convert their 2013 Notes at any time into cash and Cadence shares as described above under “Conversion feature.”

Redemption at Cadence’s option prior to maturity		None.

Fundamental change put right		Upon a fundamental change prior to maturity, the 2013 Note holders could require Cadence to repurchase their notes for cash equal to the principal amount of the notes plus accrued interest.

Make-whole premium		Upon certain fundamental changes, prior to maturity, if Cadence’s stock price were between $18.00 and $60.00 per share at that time, the 2013 Note holders would be entitled to an increase to the conversion rate. This is referred to as a “make-whole premium.”

Financial covenants		None.

Impact of Early Conversion Conditions on Financial Statements

As of June 29, 2013, none of the 2013 Notes Early Conversion Conditions had been met. The 2013 Notes mature on December 15, 2013 and the liability component of the 2013 Notes is classified as a current liability as of June 29, 2013.

As of June 29, 2013, the if-converted value of the 2013 Notes to the note holders did not exceed the principal amount of the 2013 Notes. The total fair value of the 2013 Notes, including the equity component, was $145.0 million as of June 29, 2013 and was $144.1 million as of December 29, 2012.

2013 and 2011 Notes Hedges

The 2011 Notes Hedges expired unexercised on December 15, 2011. The 2013 Notes Hedges expire on December 15, 2013, and must be settled in net shares of Cadence common stock. Therefore, upon expiration of the 2013 Notes Hedges, the counterparties will deliver shares of common stock to Cadence that represent the value, if any, by which the price of the common stock exceeds the price stipulated within the particular hedge agreement. The aggregate cost of the hedges entered into in connection with the 2011 Notes Hedges (which had similar conversion features as the 2013 Notes) and 2013 Notes Hedges was $119.8 million and was recorded as a reduction to stockholders’ equity. In connection with the purchase of a portion of the 2013 Notes and 2011 Notes during fiscal 2010, Cadence also sold a portion of the 2013 Notes Hedges and the 2011 Notes Hedges representing options to purchase approximately 9.7 million shares of Cadence’s common stock for proceeds of $0.4 million. The estimated fair value of the remaining 2013 Notes Hedges was $0.2 million as of June 29, 2013 and $0.7 million as of December 29, 2012. Subsequent changes in the fair value of the 2013 Notes Hedges will not be recognized in the condensed consolidated financial statements as long as the instruments remain classified as equity.

2013 and 2011 Warrants

In December 2006, Cadence sold warrants in separate transactions, which consisted of the 2013 Warrants and the 2011 Warrants, for the purchase of up to 23.6 million shares of Cadence’s common stock at a strike price of $31.50 per share for proceeds of $39.4 million, which was recorded as an increase in stockholders’ equity. In connection with the purchase of some of the 2013 Notes and the 2011 Notes during fiscal 2010, Cadence also purchased some of the 2013 Warrants and the 2011 Warrants, reducing the number of shares of Cadence common stock subject to purchase rights by 9.7 million shares at a cost of $0.1 million. The 2011 Warrants expired on various dates from February 2012 through April 2012, reducing the number of shares of Cadence common stock subject to purchase rights by 7.1 million shares. The 2013 Warrants will expire on various dates from February 2014 through April 2014. The 2013 Warrants must be settled in net shares of Cadence’s common stock. Therefore, upon expiration, Cadence will issue shares of common stock to the purchasers of the warrants that represent the value, if any, by which the price of the common stock exceeds the strike price stipulated within the particular warrant agreement.

The effective interest rate and components of interest expense of the 2013 Notes for the three and six months ended June 29, 2013, and of the 2013 Notes and 2011 Notes for the three and six months ended June 30, 2012 were as follows:



	Three Months Ended						Six Months Ended
	June 29, 2013			June 30, 2012			June 29, 2013			June 30, 2012
	(In thousands, except percentages)
Effective interest rate	6.4		%	6.4		%	6.4		%	6.4		%
Contractual interest expense	$	540		$	540		$	1,080		$	1,080
Amortization of debt discount	$	1,657		$	1,547		$	3,307		$	3,086

Zero Coupon Zero Yield Senior Convertible Notes Due 2023

In August 2003, Cadence issued $420.0 million principal amount of its Zero Coupon Zero Yield Senior Convertible Notes Due 2023, or the 2023 Notes. As of June 29, 2013 and December 29, 2012, the remaining balance and the total fair value of the 2023 Notes was $0.2 million.

Revolving Credit Facility

In December 2012, Cadence entered into a five-year senior secured revolving credit facility. The credit facility provides for borrowings up to $250.0 million, with the right to request increased capacity up to an additional $150.0 million upon the receipt of lender commitments, for total maximum borrowings of $400.0 million.

Any outstanding loans drawn under the credit facility are due at maturity in December 2017. Outstanding amounts may be paid at any time prior to maturity. The facility is secured by certain accounts receivable and certain equity interests in Cadence’s subsidiaries.

Interest accrues based on Cadence’s consolidated leverage ratio. Borrowings may be made at LIBOR plus a margin between 1.25% and 2.00% per annum or at the base rate plus a margin between 0.25% and 1.00% per annum, where in each case the margin is determined by reference to a specified leverage ratio. Interest is payable quarterly. A commitment fee ranging from 0.20% to 0.35% is assessed on the daily average undrawn portion of revolving commitments.

The credit facility contains customary negative covenants that, among other things, restrict Cadence’s ability to incur additional indebtedness, grant liens and make certain investments, make acquisitions, dispose of certain assets and make certain restricted payments, including dividends. In addition, the credit facility contains financial covenants that require Cadence to maintain a leverage ratio not to exceed 3 to 1, and a minimum interest coverage ratio of 3 to 1.

As of June 29, 2013 and December 29, 2012, Cadence had outstanding borrowings under the credit facility of $100.0 million and $0, respectively, and was in compliance with all financial covenants.

NOTE 3. ACQUISITIONS AND ACQUISITION-RELATED CONTINGENT CONSIDERATION

Acquisitions

On April 22, 2013, Cadence acquired Tensilica, Inc., or Tensilica, a privately held provider of configurable dataplane processing units based in Santa Clara, California. The acquired technology enables Cadence to offer customizable design IP solutions to its customers for applications such as mobile wireless, network infrastructure, audio infotainment and home applications. Total cash consideration for Tensilica, after taking into account adjustments for certain costs and cash held by Tensilica at closing of $26.3 million, was $319.3 million. An additional $5.8 million has been placed in escrow and will be expensed as it is conditioned upon certain Tensilica shareholders remaining employees of Cadence over designated retention periods. Cadence also assumed certain unvested Tensilica options with a fair value of $15.3 million, of which $0.5 million was allocated to purchase consideration. The remaining $14.8 million of assumed options will be expensed over the remaining vesting periods of the awards. The Black-Scholes option-pricing model was used to determine the fair value of the assumed options at the acquisition date. The Black-Scholes option-pricing model incorporates various subjective assumptions including expected volatility, expected term and risk-free interest rates. Cadence will also make payments to certain employees that are conditioned upon continued employment and the achievement of certain performance metrics over a three-year period.

On May 23, 2013, Cadence acquired Cosmic Circuits Private Limited, or Cosmic, a privately held provider of intellectual property used in system-on-chip design and verification based in Bangalore, India. The acquired technology enables Cadence to offer broader analog and mixed signal IP solutions to its customers. Total cash consideration for Cosmic, after taking into account cash held by Cosmic at closing of $1.7 million, was $59.5 million. Cadence will also make payments to certain employees that are conditioned upon continued employment and the achievement of certain performance metrics over a four-year period. Lip-Bu Tan, Cadence’s president, chief executive officer and director, was also a member of the board of directors of Cosmic. In addition, a trust for the benefit of the children of Mr. Tan owned approximately 8.5% of Cosmic, and Mr. Tan and his wife serve as co-trustees of the trust. Mr. Tan recused himself from the discussions and negotiations between and at Cadence and Cosmic throughout the duration of the transaction, including any discussions and negotiations related to the consideration provided to Cosmic. A financial advisor provided a fairness opinion to Cadence in connection with the transaction, and the Board of Directors of Cadence reviewed the transaction and concluded that it was in the best interests of Cadence to proceed with such transaction.

During the six months ended June 29, 2013, Cadence completed another business combination and an asset acquisition for cash and allocated the total purchase consideration of $14.4 million to the assets acquired and liabilities assumed based on their respective fair values on the acquisition dates.

The following table summarizes the fair value of assets acquired and liabilities assumed as part of the acquisitions completed during the six months ended June 29, 2013:



	(In thousands)
	Tensilica			Cosmic			Other
Cash and cash equivalents	$	26,331		$	1,724		149
Trade receivables	4,454			668			—
Property, plant and equipment	1,938			185			91
Other assets	46,832			1,681			—
Acquired intangibles:
Existing technology	102,000			16,300			2,014
Agreements and relationships	33,000			5,100			1,667
Tradenames and trademarks	3,000			—			—
In-process technology	5,300			4,200			1,200
Goodwill	176,461			41,911			9,587
Total assets acquired	$	399,316		$	71,769		$	14,708
Deferred revenue	(8,100		)	(129		)	—
Other liabilities	(4,959		)	(1,982		)	(277		)
Long-term deferred tax liabilities	(40,147		)	(8,428		)	—
Net assets acquired	$	346,110		$	61,230		$	14,431

Acquired intangibles with definite lives are amortized on a straight-line basis over the remaining estimated economic life of the underlying products and technologies. The weighted average amortization period for definite-lived intangible assets acquired during the six months ended June 29, 2013 is approximately 8 years.

In-process technology consists of projects that had not reached technological feasibility by the date of acquisition and are considered indefinite-lived intangible assets until the completion or abandonment of the project. Upon completion of the project, the assets are amortized over their estimated useful lives. If the project is abandoned rather than completed, the asset is written off. In-process technology is tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired.

The goodwill generated from Cadence's acquisitions during the six months ended June 29, 2013 is primarily related to expected synergies from combining operations of the acquired companies with Cadence. Cadence expects that approximately $9.6 million of goodwill related to the acquisitions completed during the six months ended June 29, 2013 will be deductible for tax purposes.

Results of operations and the estimated fair value of acquired assets and assumed liabilities are recorded in the condensed consolidated financial statements from the date of acquisition. The fair values of acquired intangible assets, including in-process technology, and assumed liabilities were determined using significant inputs that are not observable in the market. For an additional description of these fair value calculations, see Note 7 in the notes to condensed consolidated financial statements.

The financial information in the table below summarizes the combined results of operations of Cadence and Tensilica, on a pro forma basis, as though the companies had been combined as of the beginning of fiscal 2012. Pro forma results of operations for the other acquisitions completed during the three and six months ended June 29, 2013 have not been presented because the effects of these acquisitions, individually and in the aggregate, would not have been material to Cadence's financial results. The pro forma financial information for Tensilica is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on December 31, 2011 or of results that may occur in the future.



	Three Months Ended				Six Months Ended
	June 29, 2013		June 30, 2012		June 29, 2013		June 30, 2012
	(In thousands)
Total revenue	$	364,870	$	333,840	$	729,353	$	656,171
Net income	$	25,998	$	22,032	$	96,429	$	38,100

Acquisition-related costs were $4.8 million and $8.2 million for the three and six months ended June 29, 2013, respectively, and $1.1 million and $1.1 million for the three and six months ended June 30, 2012, respectively. These costs consist of professional fees and administrative costs and were expensed as incurred in Cadence's condensed consolidated income statements.

Acquisition-related Contingent Consideration

One of the fiscal 2011 acquisitions includes contingent consideration payments based on certain future financial measures associated with the acquired technology. This contingent consideration arrangement requires payments of up to $5.0 million if these measures are met during the three-year period subsequent to October 1, 2011. The fair value of the contingent consideration arrangement recorded on the date of the acquisition was $3.5 million. The fair value of the remaining contingent consideration as of June 29, 2013 was $3.7 million.

Cadence may be obligated to make cash payments in connection with its business combinations and asset acquisitions completed in prior fiscal years, subject to the satisfaction of certain financial measures. If performance is such that these payments are fully achieved, Cadence may be obligated to pay up to an aggregate of $14.4 million over the next 34 months. Of the $14.4 million, up to $9.0 million would be recorded as operating expenses in the condensed consolidated income statements.

NOTE 4. GOODWILL AND ACQUIRED INTANGIBLES

Goodwill

The changes in the carrying amount of goodwill during the six months ended June 29, 2013 were as follows:



	Gross Carrying Amount
	(In thousands)
Balance as of December 29, 2012	$	233,266
Goodwill resulting from acquisitions	227,959
Effect of foreign currency translation	(3,669		)
Balance as of June 29, 2013	$	457,556

Acquired Intangibles, Net

Acquired intangibles as of June 29, 2013 were as follows, excluding intangibles that were fully amortized as of December 29, 2012:



	Gross Carrying Amount		Accumulated Amortization			Acquired Intangibles, Net
	(In thousands)
Existing technology	$	231,562	$	(39,088	)	$	192,474
Agreements and relationships	171,550		(44,018		)	127,532
Distribution rights	30,100		(30,100		)	—
Tradenames, trademarks and patents	9,519		(2,200		)	7,319
In-process technology	10,380		—			10,380
Total acquired intangibles	$	453,111	$	(115,406	)	$	337,705

In-process technology as of June 29, 2013 consists of projects acquired during the six months ended June 29, 2013, and if completed, will contribute to Cadence's ability to offer additional IP solutions to its customers. These projects are expected to be complete in 12 to 24 months.

Acquired intangibles as of December 29, 2012 were as follows, excluding intangibles that were fully amortized as of December 31, 2011:



	Gross Carrying Amount		Accumulated Amortization			Acquired Intangibles, Net
	(In thousands)
Existing technology	$	112,940	$	(30,171	)	$	82,769
Agreements and relationships	133,764		(37,769		)	95,995
Distribution rights	30,100		(28,595		)	1,505
Tradenames, trademarks and patents	12,485		(7,816		)	4,669
Total acquired intangibles	$	289,289	$	(104,351	)	$	184,938

Amortization expense from existing technology intangible assets and maintenance agreement intangible assets is included in cost of product and maintenance. Amortization of acquired intangibles for the three and six months ended June 29, 2013 and June 30, 2012 was as follows:



	Three Months Ended				Six Months Ended
	June 29, 2013		June 30, 2012		June 29, 2013		June 30, 2012
	(In thousands)
Cost of product and maintenance	$	5,760	$	2,891	$	9,567	$	5,790
Amortization of acquired intangibles	5,327		3,643		9,118		7,429
Total amortization of acquired intangibles	$	11,087	$	6,534	$	18,685	$	13,219

Estimated amortization expense for the following five fiscal years and thereafter is as follows:



	(In thousands)
2013 – remaining period	$	24,531
2014	50,152
2015	49,590
2016	43,854
2017	40,236
Thereafter	129,342
Total estimated amortization expense	$	337,705

NOTE 5. INCOME TAXES

During the six months ended June 29, 2013, Cadence recognized a provision for income taxes of approximately $0.6 million primarily because of:


•	Federal, state and foreign tax expense on anticipated fiscal 2013 income; and


•	Tax expense related to integrating the acquisitions;

which were partially offset by:


•	A tax benefit of $33.7 million from the release of an uncertain tax position recorded in a previous business combination and the release of related interest and penalties; and


•	A tax benefit of $5.9 million for the fiscal 2012 federal research tax credit that was retroactively enacted.

Unrecognized Tax Benefits

During the six months ended June 29, 2013, Cadence determined that the State of California Franchise Tax Board examination of the 2004 through 2006 tax years was effectively settled and, separately, released an unrecognized tax benefit recorded in a prior business combination.

The changes in Cadence's gross amount of unrecognized tax benefits during the six months ended June 29, 2013 are as follows:



	Unrecognized tax benefits
	(In thousands)
Unrecognized tax benefits as of December 29, 2012	$	92,378
Gross amount of the increases (decreases) in unrecognized tax benefits of tax positions taken during a prior year	1,025
Gross amount of the increases (decreases) in unrecognized tax benefits as a result of tax positions taken during the current year	13,262
Amount of decreases in unrecognized tax benefits relating to settlements with taxing authorities, including the utilization of tax attributes	(13,635		)
Reductions to unrecognized tax benefits resulting from the lapse of the applicable statute of limitations	(12,044		)
Effect of foreign currency translation	155
Unrecognized tax benefits as of June 29, 2013	$	81,141

Total amounts of unrecognized tax benefits that, if upon resolution of the uncertain tax positions would reduce Cadence's effective tax rate as of June 29, 2013	45,127

The total amounts of interest and penalties recognized in the condensed consolidated income statements as provision (benefit) for income taxes for the three and six months ended June 29, 2013 and June 30, 2012 were as follows:



	Three Months Ended						Six Months Ended
	June 29, 2013			June 30, 2012			June 29, 2013			June 30, 2012
	(In thousands)
Interest	$	(14	)	$	1,194		$	(13,459	)	$	1,763
Penalties	1,347			(6		)	(6,959		)	(975		)

The total amounts of gross accrued interest and penalties recognized in the condensed consolidated balance sheets as of June 29, 2013 and December 29, 2012 were as follows:



	As of
	June 29, 2013		December 29, 2012
	(In thousands)
Interest	$	3,096	$	24,427
Penalties	1,964		8,953

NOTE 6. RECEIVABLES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS

Cadence’s current and long-term receivables balances as of June 29, 2013 and December 29, 2012 were as follows:



	As of
	June 29, 2013		December 29, 2012
	(In thousands)
Accounts receivable	$	66,966	$	67,259
Installment contract receivables, short-term	25,615		30,647
Long-term receivables	5,929		7,559
Total receivables	$	98,510	$	105,465
Less allowance for doubtful accounts	—		(85		)
Total receivables, net	$	98,510	$	105,380

Cadence’s customers are primarily concentrated within the semiconductor, electronics systems and consumer electronics industries. As of June 29, 2013 and December 29, 2012, no single customer accounted for 10% of Cadence’s total receivables. As of June 29, 2013, approximately 46% of Cadence’s total receivables were attributable to the ten customers with the largest balances of total receivables. As of December 29, 2012, approximately 47% of Cadence’s total receivables were attributable to the ten customers with the largest balances of total receivables.

NOTE 7. FAIR VALUE

Inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Cadence’s market assumptions. These two types of inputs have created the following fair value hierarchy:


•	Level 1 – Quoted prices for identical instruments in active markets;


•	Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

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•	Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

This hierarchy requires Cadence to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. Cadence recognizes transfers between levels of the hierarchy based on the fair values of the respective financial instruments at the end of the reporting period in which the transfer occurred. There were no transfers between levels of the fair value hierarchy during the three and six months ended June 29, 2013.

On a quarterly basis, Cadence measures at fair value certain financial assets and liabilities. The fair value of financial assets and liabilities was determined using the following levels of inputs as of June 29, 2013 and December 29, 2012:



	Fair Value Measurements as of June 29, 2013:
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Cash equivalents:
Money market funds	$	403,153	$	403,153	$	—	$	—
Corporate debt securities	501		—		501		—
Short-term investments:
Corporate debt securities	34,205		—		34,205		—
Bank certificates of deposit	26,215		—		26,215		—
United States Treasury securities	25,856		25,856		—		—
United States government agency securities	11,223		11,223		—		—
Commercial paper	1,797		—		1,797		—
Marketable equity securities	1,955		1,955		—		—
Trading securities held in Non-Qualified Deferred Compensation, or NQDC, trust	21,472		21,472		—		—
2015 Notes Hedges	335,131		—		335,131		—
Total Assets	$	861,508	$	463,659	$	397,849	$	—

	Total		Level 1		Level 2		Level 3
	(In thousands)
Liabilities
Acquisition-related contingent consideration	$	3,832	$	—	$	—	$	3,832
2015 Notes Embedded Conversion Derivative	335,131		—		335,131		—
Foreign currency exchange contracts	$	1,498	$	—	$	1,498	$	—
Total Liabilities	$	340,461	$	—	$	336,629	$	3,832

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	Fair Value Measurements as of December 29, 2012:
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Cash equivalents:
Money market funds	$	566,334	$	566,334	$	—	$	—
Short-term investments:
Corporate debt securities	31,359		—		31,359		—
Bank certificates of deposit	27,826		—		27,826		—
United States Treasury securities	23,239		23,239		—		—
United States government agency securities	10,258		10,258		—		—
Commercial paper	5,783		—		5,783		—
Marketable equity securities	2,239		2,239		—		—
Trading securities held in NQDC trust	24,329		24,329		—		—
2015 Notes Hedges	303,154		—		303,154		—
Foreign currency exchange contracts	1,737		—		1,737		—
Total Assets	$	996,258	$	626,399	$	369,859	$	—

	Total		Level 1		Level 2		Level 3
	(In thousands)
Liabilities
Acquisition-related contingent consideration	$	4,218	$	—	$	—	$	4,218
2015 Notes Embedded Conversion Derivative	303,154		—		303,154		—
Total Liabilities	$	307,372	$	—	$	303,154	$	4,218

Level 1 Measurements

Cadence’s cash equivalents held in money market funds, available-for-sale United States Treasury securities, United States government agency securities, marketable equity securities and the trading securities held in Cadence’s NQDC trust are measured at fair value using level 1 inputs.

Level 2 Measurements

The 2015 Notes Hedges and the 2015 Notes Embedded Conversion Derivative are measured at fair value using level 1 and level 2 inputs. These instruments are not actively traded and are valued using an option pricing model that uses observable market data for all inputs, such as implied volatility of Cadence’s common stock, risk-free interest rate and other factors.

Cadence’s available-for-sale corporate debt securities, bank certificates of deposit and commercial paper are measured at fair value using level 2 inputs. Cadence obtains the fair values of its level 2 available-for-sale securities from a professional pricing service and validates the fair values by assessing the pricing methods and inputs and by comparing the fair values to another independent source.

The fair values of Cadence’s 2013 Notes and 2015 Notes, which differ from their carrying values, are influenced by interest rates and Cadence’s stock price and stock price volatility and are determined by prices for the 2013 Notes and 2015 Notes observed in market trading, which are level 2 inputs.

Cadence’s foreign currency exchange contracts are measured at fair value using observable foreign currency exchange rates.

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Level 3 Measurements

The liabilities included in level 3 represent the fair value of contingent consideration associated with certain of Cadence’s 2011 and 2010 acquisitions. Cadence makes estimates regarding the fair value of contingent consideration liabilities on the acquisition date and at the end of each reporting period until the contingency is resolved. The fair value of these arrangements is determined by calculating the net present value of the expected payments using significant inputs that are not observable in the market, including revenue projections and discount rates consistent with the level of risk of achievement. The fair value of these contingent consideration arrangements is affected most significantly by the changes in the revenue projections, but is also impacted by the discount rate used to adjust the outcomes to their present values. If the revenue projections increase or decrease, the fair value of the contingent consideration will increase or decrease accordingly, in amounts that will vary based on the timing of the projected revenues, the timing of the expected payments and the discount rate used to calculate the present value of the expected payments. Cadence used discount rates ranging from 11% to 16% to value its contingent consideration liabilities as of June 29, 2013 and December 29, 2012. Cadence believes that its estimates and assumptions are reasonable, but significant judgment is involved.

Changes in the fair value of contingent consideration liabilities subsequent to the acquisition are recorded in general and administrative expense in the condensed consolidated income statements.

The following table summarizes the level 3 activity for the six months ended June 29, 2013:



	(In thousands)
Balance as of December 29, 2012	$	4,218
Payments	(740		)
Adjustments	354
Balance as of June 29, 2013	$	3,832

Cadence acquired intangible assets, including in-process technology, of $173.8 million in connection with its acquisitions during the six months ended June 29, 2013. The fair value of the intangible assets acquired was determined using the income approach and using level 3 inputs. Key assumptions include the level and timing of expected future cash flows, conditions and demands specific to IP solutions, discount rates consistent with the level of risk and the economy in general. The fair value of these intangible assets is affected most significantly by the projected income associated with the intangible assets and the anticipated timing of the projected income, but is also impacted by the discount rate used to adjust the outcomes to their present values. If the income projections increase or decrease, the fair value of the intangible assets would increase or decrease accordingly in amounts that will vary based on the anticipated timing of the projected income and the discount rate used to calculate the present value of the expected income. Cadence used discount rates ranging from 10% to 15% to value the intangible assets acquired during the six months ended June 29, 2013.

As part of its acquisitions, Cadence also assumed obligations related to deferred revenue of $8.2 million, which was estimated using the cost build-up approach. The cost build-up approach determines fair value using estimates of the costs required to provide the contracted deliverables plus an assumed profit between10% and 25%. The total costs including the assumed profit were adjusted to present value using a discount rate of approximately 3%. The resulting fair value approximates the amount that Cadence would be required to pay a third party to assume the obligation. The fair value of the deferred revenue obligation is affected most significantly by the estimated costs required to support the obligation, but is also affected by the assumed profit and the discount rate.

Cadence believes that its estimates and assumptions related to the fair value of its acquired intangible assets and deferred revenue obligations are reasonable, but significant judgment is involved.

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NOTE 8. CASH, CASH EQUIVALENTS AND INVESTMENTS

Cadence’s cash, cash equivalents and short-term investments at fair value as of June 29, 2013 and December 29, 2012 were as follows:



	As of
	June 29, 2013		December 29, 2012
	(In thousands)
Cash and cash equivalents	$	577,233	$	726,357
Short-term investments	101,251		100,704
Cash, cash equivalents and short-term investments	$	678,484	$	827,061

Cash and Cash Equivalents

Cadence considers all highly liquid investments with original maturities of three months or less on the date of purchase to be cash equivalents. The amortized cost of Cadence’s cash equivalents approximates fair value. The following table summarizes Cadence’s cash and cash equivalents at fair value as of June 29, 2013 and December 29, 2012:



	As of
	June 29, 2013		December 29, 2012
	(In thousands)
Cash and interest bearing deposits	$	173,579	$	160,023
Money market funds	403,153		566,334
Corporate debt securities	501		—
Total cash and cash equivalents	$	577,233	$	726,357

Short-Term Investments

The following tables summarize Cadence’s short-term investments as of June 29, 2013 and December 29, 2012:



	As of June 29, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Corporate debt securities	$	34,228	$	25	$	(48	)	$	34,205
Bank certificates of deposit	26,200		16		(1		)	26,215
United States Treasury securities	25,846		22		(12		)	25,856
United States government agency securities	11,218		9		(4		)	11,223
Commercial paper	1,793		4		—			1,797
Marketable debt securities	99,285		76		(65		)	99,296
Marketable equity securities	1,817		138		—			1,955
Total short-term investments	$	101,102	$	214	$	(65	)	$	101,251

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	As of December 29, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Corporate debt securities	$	31,313	$	57	$	(11	)	$	31,359
Bank certificates of deposit	27,805		21		—			27,826
United States Treasury securities	23,213		26		—			23,239
United States government agency securities	10,245		13		—			10,258
Commercial paper	5,777		6		—			5,783
Marketable debt securities	98,353		123		(11		)	98,465
Marketable equity securities	1,817		422		—			2,239
Total short-term investments	$	100,170	$	545	$	(11	)	$	100,704

As of June 29, 2013, any securities held by Cadence with an unrealized loss had been held for less than three months.

The amortized cost and estimated fair value of marketable debt securities included in short-term investments as of June 29, 2013, by contractual maturity, are shown in the table below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.



	Amortized Cost		Fair Value
	(In thousands)
Due in less than one year	$	54,133	$	54,160
Due in one to three years	45,152		45,136
Total marketable debt securities included in short-term investments	$	99,285	$	99,296

Non-Marketable Investments

Cadence’s non-marketable investments generally consist of voting preferred stock or convertible debt of privately held companies and are included in other assets on Cadence’s condensed consolidated balance sheets. If Cadence determines that it has the ability to exercise significant influence over the issuer, which may include considering whether the investments are in-substance common stock, the investment is accounted for using the equity method.

Cadence’s non-marketable investments as of June 29, 2013 and December 29, 2012 were as follows:



	As of
	June 29, 2013		December 29, 2012
	(In thousands)
Cost method	$	3,038	$	3,038
Equity method	3,708		4,249
Total non-marketable investments	$	6,746	$	7,287

Net realized gains on the sale of non-marketable investments during the three and six months ended June 29, 2013 and June 30, 2012 were as follows:



	Three Months Ended				Six Months Ended
	June 29, 2013		June 30, 2012		June 29, 2013		June 30, 2012
	(In thousands)				(In thousands)
Gains on sale of non-marketable investments	$	—	$	—	$	1,190	$	—

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NOTE 9. NET INCOME PER SHARE

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

The calculations for basic and diluted net income per share for the three and six months ended June 29, 2013 and June 30, 2012 are as follows:



	Three Months Ended				Six Months Ended
	June 29, 2013		June 30, 2012		June 29, 2013		June 30, 2012
	(In thousands, except per share amounts)
Net income	$	9,429	$	36,386	$	88,038	$	67,490
Weighted average common shares used to calculate basic net income per share	277,146		269,739		276,018		268,840
2023 Notes	11		11		11		11
2015 Warrants	10,871		637		10,770		1,580
Share-based awards	6,415		4,931		6,475		6,095
Weighted average common shares used to calculate diluted net income per share	294,443		275,318		293,274		276,526
Net income per share - basic	$	0.03	$	0.13	$	0.32	$	0.25
Net income per share - diluted	$	0.03	$	0.13	$	0.30	$	0.24

The following table presents shares of Cadence’s common stock outstanding for the three and six months ended June 29, 2013, and June 30, 2012, that were excluded from the computation of diluted net income per share because the effect of including these shares in the computation of diluted net income per share would have been anti-dilutive:



	Three Months Ended		Six Months Ended
	June 29, 2013	June 30, 2012	June 29, 2013	June 30, 2012
	(In thousands)
2013 Warrants	6,830	6,830	6,830	6,830
Options to purchase shares of common stock	5,752	14,228	6,253	14,149
Non-vested shares of restricted stock	18	203	9	118
Total potential common shares excluded	12,600	21,261	13,092	21,097

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NOTE 10. OTHER COMPREHENSIVE INCOME

Cadence’s other comprehensive income is comprised of foreign currency translation gains and losses, changes in defined benefit plan liabilities, and changes in unrealized holding gains and losses on available-for-sale securities net of reclassifications for realized gains and losses as presented in Cadence’s condensed consolidated statements of comprehensive income.

Accumulated other comprehensive income was comprised of the following as of June 29, 2013, and December 29, 2012:



	As of
	June 29, 2013			December 29, 2012
	(In thousands)
Foreign currency translation gain	$	30,786		$	48,653
Changes in defined benefit plan liabilities	(4,846		)	(5,229		)
Unrealized holding gains on available-for-sale securities	143			526
Total accumulated other comprehensive income	$	26,083		$	43,950

For the three and six months ended June 29, 2013 and June 30, 2012 there were no significant amounts reclassified from accumulated other comprehensive income to net income.

NOTE 11. CONTINGENCIES

Legal Proceedings

From time to time, Cadence is involved in various disputes and litigation that arise in the ordinary course of business. These include disputes and lawsuits related to intellectual property, indemnification obligations, mergers and acquisitions, licensing, contracts, distribution arrangements and employee relations matters. At least quarterly, Cadence reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount or the range of loss can be estimated, Cadence accrues a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on Cadence’s judgments using the best information available at the time. As additional information becomes available, Cadence reassesses the potential liability related to pending claims and litigation matters and may revise estimates.

Other Contingencies

Cadence provides its customers with a warranty on sales of hardware products, generally for a 90-day period. Cadence did not incur any significant costs related to warranty obligations during the three and six months ended June 29, 2013 or June 30, 2012.

Cadence’s product license and services agreements typically include a limited indemnification provision for claims from third parties relating to Cadence’s intellectual property. If the potential loss from any indemnification claim is considered probable and the amount or the range of loss can be estimated, Cadence accrues a liability for the estimated loss. The indemnification is generally limited to the amount paid by the customer. Cadence did not incur any significant losses from indemnification claims during the three and six months ended June 29, 2013 or June 30, 2012.

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NOTE 12. OTHER INCOME, NET

Cadence’s other income, net for the three and six months ended June 29, 2013 and June 30, 2012 was as follows:



	Three Months Ended					Six Months Ended
	June 29, 2013			June 30, 2012		June 29, 2013			June 30, 2012
	(In thousands)
Interest income	$	484		$	308	$	909		$	645
Gains on sale of non-marketable equity investments	—			—		1,190			—
Gains on securities in NQDC trust	1,699			2,278		1,851			4,076
Gains on foreign exchange	223			1,070		987			1,170
Other income (expense), net	(388		)	13		(744		)	212
Total other income, net	$	2,018		$	3,669	$	4,193		$	6,103

NOTE 13. SEGMENT REPORTING

Segment reporting is based on the “management approach,” following the method that management organizes the company’s reportable segments for which separate financial information is made available to, and evaluated regularly by, the chief operating decision maker in allocating resources and in assessing performance. Cadence’s chief operating decision maker is its President and Chief Executive Officer, or CEO, who reviews Cadence’s consolidated results as one reportable segment. In making operating decisions, the CEO primarily considers consolidated financial information, accompanied by disaggregated information about revenues by geographic region.

Outside the United States, Cadence markets and supports its products and services primarily through its subsidiaries. Revenue is attributed to geography based upon the country in which the product is used or services are delivered. Long-lived assets are attributed to geography based on the country where the assets are located.

The following table presents a summary of revenue by geography for the three and six months ended June 29, 2013 and June 30, 2012:



	Three Months Ended				Six Months Ended
	June 29, 2013		June 30, 2012		June 29, 2013		June 30, 2012
	(In thousands)
Americas:
United States	$	159,229	$	142,925	$	308,400	$	273,380
Other Americas	5,566		5,802		10,181		13,926
Total Americas	164,795		148,727		318,581		287,306
Europe, Middle East and Africa	77,757		64,996		156,677		124,705
Japan	45,467		53,880		98,941		110,099
Asia	74,462		58,873		142,548		120,196
Total	$	362,481	$	326,476	$	716,747	$	642,306

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The following table presents a summary of long-lived assets by geography as of June 29, 2013 and December 29, 2012:



	As of
	June 29, 2013		December 29, 2012
	(In thousands)
Americas:
United States	$	211,521	$	214,711
Other Americas	309		185
Total Americas	211,830		214,896
Europe, Middle East and Africa	5,682		5,410
Japan	1,015		1,649
Asia	24,761		22,484
Total	$	243,288	$	244,439

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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, or this Quarterly Report, and in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 29, 2012. Certain of these statements, including, but not limited to, statements regarding the extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of our products, statements regarding our reliance on third parties and other statements using words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “plans,” “projects,” “should,” “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 “Risk Factors,” “Results of Operations,” “Disclosures About Market Risk,” and “Liquidity and Capital Resources” sections contained in this Quarterly Report, and the risks discussed in our other Securities Exchange Commission, or 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 do not intend, and undertake no obligation, to update these forward-looking statements.

Overview

We develop solutions that our customers use to design increasingly complex integrated circuits, or ICs, and electronic devices. Our solutions are designed to help our customers reduce the time to bring an IC or electronic device to market and to reduce their design and development costs. Our offerings include software, two categories of intellectual property, or IP (commonly referred to as verification IP, or VIP, and Design IP), and hardware technology. We provide maintenance for our product offerings and provide engineering services related to methodology, education and hosted design solutions, which help our customers manage and accelerate their electronics product development processes.

Substantially all of our business is generated from semiconductor and electronics systems manufacturers and designers and the renewal of many of our customer contracts and the decisions for new purchases are dependent upon their commencement of new design projects. As a result, our business is significantly influenced by our customers’ business outlook and investment in the introduction of new products and the improvement of existing products.

The markets our customers serve are sensitive to product price and the time it takes to bring the products to market. In order to be competitive and profitable in these markets, our customers demand high levels of productivity from their design teams, better predictability in shorter development schedules, high quality products and lower development costs. Semiconductor and electronics systems companies are responding to these challenges and users’ demand for increased functionality and smaller devices by combining subsystems - such as radio frequency, or RF, wireless communication, signal processing, microprocessors and memory controllers - onto a single silicon chip, creating a system-on-chip, or SoC, or combining multiple chips into a single chip package in a format referred to as system-in-package, or SiP. The trend toward subsystem integration has required these chip makers to find solutions to challenges previously addressed by system companies, such as verifying system-level functionality and hardware-software interoperability.

Our offerings address many of the challenges associated with developing unique silicon circuitry, integrating that circuitry with design IP developed by us or third parties to create SoCs, and combining ICs and SoCs with software to create electronic systems. Our strategy is to provide our customers with the ability to address the broad range of issues that arise at the silicon, SoC, and system levels.

Significant issues that our customers face in creating their products include optimizing energy consumption, manufacturing microscopic circuitry, verifying device functionality, and achieving technical performance targets, all while meeting aggressive time-to-market and cost requirements. Providers of electronic design automation, or EDA, solutions must deliver products that address these technical challenges while improving the productivity, predictability, reliability and profitability of the design processes and products of their customers.

Our products are engineered to improve our customers’ design productivity and design quality by providing a comprehensive set of EDA solutions and a differentiated portfolio of Design IP and VIP. Product revenue includes fees from licenses to use our software and IP, and from sales and leases of our hardware products.

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We combine our products and technologies into categories related to major design activities:


•	Functional Verification, Hardware and IP;


•	Custom IC Design;


•	Digital IC Design;


•	System Interconnect Design; and


•	Design for Manufacturing, or DFM.

The major Cadence^® design platforms are branded as Incisive^® functional verification, Virtuoso^® custom IC design, Encounter^®digital IC design and Allegro^® system interconnect design. Our functional verification offerings include our VIP products, our Design IP offerings and our hardware offerings. In addition, we augment these platform product offerings with a set of DFM products that service both the digital and custom IC design flows.

The products and technologies included in these categories are combined with ready-to-use packages of technologies assembled from our broad portfolio of IP and other associated components that provide comprehensive solutions for low power, mixed signal and designs at smaller geometries referred to as advanced process nodes, as well as popular designs based on design IP owned and licensed by other companies such as ARM Holdings plc. These solutions are marketed to users who specialize in areas such as system design and verification, functional verification, logic design, digital implementation, custom IC design and printed circuit board, or PCB, and IC package and SiP design.

During the six months ended June 29, 2013, we completed acquisitions that enable us to offer additional IP solutions to our customers. These acquisitions, along with our fiscal 2012 acquisition of Sigrity, influenced revenues and operating expenses for the three and six months ended June 29, 2013. It is expected that the impact of these acquisitions on our condensed consolidated income statements for the remainder of fiscal 2013 will result in a greater increase in our operating expenses than the increase in revenue generated from the acquisitions, in part, because the adjustment of deferred revenue to fair value.

We have identified certain items that management uses as 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 heading "Results of Operations" and "Liquidity and Capital Resources."

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. Historically, our assumptions, judgments and estimates relative to our critical accounting estimates have not differed materially from actual results. For further 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 on Form 10-K for the fiscal year ended December 29, 2012.

Results of Operations

Financial results for the three and six months ended June 29, 2013, as compared to the three and six months ended June 30, 2012, reflect the following:


•	An increase in our product and maintenance revenue, primarily because of increased business levels and increased revenue recognized from bookings in prior periods;


•	An increase in employee-related costs, primarily consisting of incremental costs related to employees added from our fiscal 2013 and fiscal 2012 acquisitions and costs related to hiring additional employees; and


•	An increase in variable compensation due to increased revenue, bookings and operating performance.

Revenue

We primarily generate revenue from licensing our EDA software and IP, selling or leasing our hardware technology, providing maintenance for our software, IP and hardware, providing engineering services and earning royalties generated from the use of our IP.

The timing of our product revenue is significantly affected by the mix of hardware and software products in the bookings executed in any given period and whether the revenue for such bookings is recognized over multiple periods or up-front, upon completion of delivery.

We seek to achieve a consistent mix of bookings with approximately 90% of the aggregate value of our bookings of a type for which the revenue is recurring, or ratable, in nature, and the remainder of the resulting revenue recognized up-front, upon completion of delivery. Our ability to achieve this bookings mix in any single fiscal quarter may be impacted by hardware sales, because product revenue for hardware sales is generally recognized up-front in the quarter in which delivery is completed.

Greater than 90% of the aggregate value of our bookings during the three and six months ended June 29, 2013 and June 30, 2012 was of a type for which the revenue is recurring, or ratable, in nature.

For an additional description of the impact of hardware sales on the anticipated mix of bookings, our other license types and the timing of revenue recognition for license transactions, see the discussion under the heading “Critical Accounting Estimates – Revenue Recognition” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K for the fiscal year ended December 29, 2012.

Revenue by Period

In the condensed consolidated income statements for the three and six months ended June 29, 2013, we combined product and maintenance revenue because product and maintenance revenue is generally recognized from agreements that require customers to purchase both the product and associated maintenance in a bundled offering. We reclassified prior period product and maintenance revenue balances to conform to the current year presentation.

The following table shows our revenue for the three months ended June 29, 2013 and June 30, 2012 and the change in revenue between periods:



	Three Months Ended				Change
	June 29, 2013		June 30, 2012		Amount			Percentage
	(In millions, except percentages)
Product and maintenance	$	338.0	$	297.5	$	40.5		14	%
Services	24.5		29.0		(4.5		)	(15	)%
Total revenue	$	362.5	$	326.5	$	36.0		11	%

The following table shows our revenue for the six months ended June 29, 2013 and June 30, 2012 and the change in revenue between periods:



	Six Months Ended				Change
	June 29, 2013		June 30, 2012		Amount			Percentage
	(In millions, except percentages)
Product and maintenance	$	666.3	$	583.8	$	82.5		14	%
Services	50.5		58.5		(8.0		)	(14	)%
Total revenue	$	716.8	$	642.3	$	74.5		12	%

Product and maintenance revenue increased during the three and six months ended June 29, 2013, as compared to the three and six months ended June 30, 2012, primarily because of increased business levels, increased revenue recognized from bookings in prior periods and revenue recognized from our 2013 acquisitions. Services revenue decreased during the three and six months ended June 29, 2013, as compared to the three and six months ended June 30, 2012, because of the redeployment of certain of our design services engineers to internal research and development projects related to our Design IP activities.

No one customer accounted for 10% or more of total revenue during the three and six months ended June 29, 2013 or June 30, 2012.

Revenue by Product Group

The following table shows the percentage of product and related maintenance revenue contributed by each of our five product groups, and services and other for the past five consecutive quarters:



	Three Months Ended
	June 29, 2013		March 30, 2013		December 29, 2012		September 29, 2012		June 30, 2012
Functional Verification, Hardware and IP	28	%	26	%	30	%	30	%	33	%
Digital IC Design	23	%	25	%	23	%	23	%	22	%
Custom IC Design	25	%	25	%	24	%	24	%	22	%
System Interconnect Design	11	%	10	%	9	%	9	%	8	%
Design for Manufacturing	6	%	7	%	6	%	6	%	6	%
Services and other	7	%	7	%	8	%	8	%	9	%
Total	100	%	100	%	100	%	100	%	100	%

As described in Note 2 in the notes to consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 29, 2012, 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 groups 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.

The changes in the percentage of revenue contributed by the Functional Verification, Hardware and IP product group for the quarters presented are primarily related to changes in revenue related to our hardware and IP products, including revenue recognized from our acquisition of Tensilica during the three months ended June 29, 2013.

Revenue by Geography



	Three Months Ended				Change
	June 29, 2013		June 30, 2012		Amount			Percentage
	(In millions, except percentages)
United States	$	159.2	$	142.9	$	16.3		11	%
Other Americas	5.6		5.8		(0.2		)	(3	)%
Europe, Middle East and Africa	77.8		65.0		12.8