Edgar Filing: CADENCE DESIGN SYSTEMS INC

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-Q CDNS 03.29.2014

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 March 29, 2014



	¨	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		00-0000000
(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 March 29, 2014, approximately 289,512,000 shares of the registrant’s common stock, $0.01 par value, were outstanding.

CADENCE DESIGN SYSTEMS, INC.

INDEX



		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets: March 29, 2014 and December 28, 2013	1

	Condensed Consolidated Income Statements: Three Months Ended March 29, 2014 and March 30, 2013	2

	Condensed Consolidated Statements of Comprehensive Income: Three Months Ended March 29, 2014 and March 30, 2013	3

	Condensed Consolidated Statements of Cash Flows: Three Months Ended March 29, 2014 and March 30, 2013	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	35

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 3.	Defaults Upon Senior Securities	49

Item 4.	Mine Safety Disclosures	49

Item 5.	Other Information	49

Item 6.	Exhibits	50

	Signatures	51

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)



	March 29, 2014			December 28, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	532,761		$	536,260
Short-term investments	97,006			96,788
Receivables, net	106,322			107,624
Inventories	55,605			50,220
2015 notes hedges	369,731			306,817
Prepaid expenses and other	136,300			123,382
Total current assets	1,297,725			1,221,091
Property, plant and equipment, net of accumulated depreciation of $576,562 and $568,494, respectively	239,425			238,715
Goodwill	478,990			456,905
Acquired intangibles, net of accumulated amortization of $107,521 and $139,820, respectively	316,498			311,693
Long-term receivables	6,193			3,672
Other assets	185,389			196,525
Total assets	$	2,524,220		$	2,428,601
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Convertible notes	329,058			324,826
2015 notes embedded conversion derivative	369,731			306,817
Accounts payable and accrued liabilities	189,200			216,594
Current portion of deferred revenue	304,705			299,973
Total current liabilities	1,192,694			1,148,210
Long-term liabilities:
Long-term portion of deferred revenue	48,299			52,850
Other long-term liabilities	69,025			71,436
Total long-term liabilities	117,324			124,286
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock and capital in excess of par value	1,785,069			1,757,242
Treasury stock, at cost	(147,621		)	(140,142		)
Accumulated deficit	(452,236		)	(485,306		)
Accumulated other comprehensive income	28,990			24,311
Total stockholders’ equity	1,214,202			1,156,105
Total liabilities and stockholders’ equity	$	2,524,220		$	2,428,601

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

(In thousands, except per share amounts)

(Unaudited)



	Three Months Ended
	March 29, 2014			March 30, 2013
Revenue:
Product and maintenance	$	357,350		$	328,271
Services	21,200			25,995
Total revenue	378,550			354,266
Costs and expenses:
Cost of product and maintenance	42,197			29,847
Cost of services	14,902			18,344
Marketing and sales	98,323			90,402
Research and development	146,466			124,084
General and administrative	28,744			29,810
Amortization of acquired intangibles	5,210			3,791
Restructuring and other charges (credits)	396			(148		)
Total costs and expenses	336,238			296,130
Income from operations	42,312			58,136
Interest expense	(7,268		)	(9,262		)
Other income, net	3,382			2,175
Income before provision (benefit) for income taxes	38,426			51,049
Provision (benefit) for income taxes	5,356			(27,560		)
Net income	$	33,070		$	78,609
Net income per share – basic	$	0.12		$	0.29
Net income per share – diluted	$	0.11		$	0.27
Weighted average common shares outstanding – basic	281,615			274,936
Weighted average common shares outstanding – diluted	301,034			292,151

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)



	Three Months Ended
	March 29, 2014			March 30, 2013
Net income	$	33,070		$	78,609
Other comprehensive income (loss), net of tax effects:
Foreign currency translation adjustments	4,452			(6,162		)
Changes in unrealized holding gains or losses on available-for-sale securities, net of reclassification adjustment for realized gains and losses	(181		)	(284		)
Changes in defined benefit plan liabilities	408			318
Total other comprehensive income (loss), net of tax effects	4,679			(6,128		)
Comprehensive income	$	37,749		$	72,481

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Three Months Ended
	March 29, 2014			March 30, 2013
Cash and cash equivalents at beginning of period	$	536,260		$	726,357
Cash flows from operating activities:
Net income	33,070			78,609
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	26,017			21,682
Amortization of debt discount and fees	4,882			6,281
Stock-based compensation	18,864			13,810
Gain on investments, net	(3,651		)	(1,006		)
Deferred income taxes	2,245			8,695
Other non-cash items	2,344			(1,007		)
Changes in operating assets and liabilities, net of effect of acquired businesses:
Receivables	(108		)	23,652
Inventories	(9,373		)	(979		)
Prepaid expenses and other	(9,753		)	(1,099		)
Other assets	3,157			4,148
Accounts payable and accrued liabilities	(29,680		)	(11,003		)
Deferred revenue	(5,508		)	(16,648		)
Other long-term liabilities	(4,408		)	(49,799		)
Net cash provided by operating activities	28,098			75,336
Cash flows from investing activities:
Purchases of available-for-sale securities	(47,005		)	(24,282		)
Proceeds from the sale of available-for-sale securities	32,586			14,985
Proceeds from the maturity of available-for-sale securities	13,905			8,700
Proceeds from the sale of long-term investments	—			6,102
Purchases of property, plant and equipment	(6,252		)	(6,569		)
Cash paid in business combinations and asset acquisitions, net of cash acquired	(27,422		)	(757		)
Net cash used for investing activities	(34,188		)	(1,821		)
Cash flows from financing activities:
Principal payments on receivable financing	—			(2,526		)
Payment of acquisition-related contingent consideration	(1,835		)	(582		)
Tax effect related to employee stock transactions allocated to equity	1,827			5,276
Proceeds from issuance of common stock	23,377			21,801
Stock received for payment of employee taxes on vesting of restricted stock	(10,981		)	(8,775		)
Payments for repurchases of common stock	(12,517		)	—
Net cash provided by (used for) financing activities	(129		)	15,194
Effect of exchange rate changes on cash and cash equivalents	2,720			(4,914		)
Increase (decrease) in cash and cash equivalents	(3,499		)	83,795
Cash and cash equivalents at end of period	$	532,761		$	810,152

Supplemental cash flow information:
Cash paid for interest	$	112		$	183
Cash paid for taxes, net	$	5,393		$	(21	)
Non-cash investing and financing activities:
Available-for-sale securities received from customer	$	—		$	209

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 28, 2013. Certain prior period balances have 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. Management has evaluated subsequent events through the issuance date of the unaudited condensed consolidated financial statements.

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 March 29, 2014 and December 28, 2013 was as follows:



	March 29, 2014							December 28, 2013
	(In thousands)
	Principal		Unamortized Discount			Carrying Value		Principal		Unamortized Discount			Carrying Value
2015 Notes	$	350,000	$	(20,942	)	$	329,058	$	350,000	$	(25,174	)	$	324,826
Revolving credit facility	—		—			—		—		—			—
Total outstanding debt	$	350,000	$	(20,942	)	$	329,058	$	350,000	$	(25,174	)	$	324,826

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 and accrued interest. 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 March 29, 2014		$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 holders of the notes 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 March 30, 2014 through June 28, 2014 because Cadence’s closing stock price exceeded $9.81 for at least 20 days in the 30-day period prior to March 29, 2014. The net balance of the 2015 Notes of $329.1 million is classified as a current liability on Cadence’s condensed consolidated balance sheet as of March 29, 2014, as holders of the 2015 Notes have the ability to convert their notes into cash subsequent to March 1, 2015 as specified in the table above under “Conversion immediately preceding maturity.”

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 March 29, 2014, Cadence would have recorded an expense of $23.8 million associated with the conversion, comprised of $20.9 million of unamortized debt discount and $2.9 million of unamortized transaction fees.

As of March 29, 2014, the if-converted value of the 2015 Notes to the note holders of approximately $714.3 million exceeded the principal amount of $350.0 million. The fair value of the 2015 Notes was $719.7 million as of March 29, 2014 and $654.1 million as of December 28, 2013. The 2015 Notes currently trade at a premium to the if-converted value of the notes. As of March 29, 2014, 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 $369.7 million as of March 29, 2014 and $306.8 million as of December 28, 2013.

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 Notes Hedges fair value was $369.7 million as of March 29, 2014 and $306.8 million as of December 28, 2013. 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 months ended March 29, 2014 and March 30, 2013 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 on the condensed consolidated balance sheet corresponds with the classification of the 2015 Notes.

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. 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 months ended March 29, 2014 and March 30, 2013 were as follows:



	Three Months Ended
	March 29, 2014			March 30, 2013
	(In thousands, except percentages)
Effective interest rate	8.1		%	8.1		%
Contractual interest expense	$	2,289		$	2,289
Amortization of debt discount	$	4,232		$	3,910

Revolving Credit Facility

In December 2012, Cadence entered into a five-year senior secured revolving credit facility with a group of lenders led by Bank of America, N.A., as administrative agent. 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 on December 12, 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 2.0% per annum or at the base rate plus a margin between 0.25% and 1.0% 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, make certain investments (including acquisitions), dispose of certain assets and make certain payments, including share repurchases and 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 March 29, 2014 and December 28, 2013, Cadence had no outstanding balance on the credit facility and was in compliance with all financial covenants.

NOTE 3. ACQUISITIONS AND ACQUISITION-RELATED CONTINGENT CONSIDERATION

Acquisitions

During the three months ended March 29, 2014, Cadence completed two business combinations for total cash consideration of $27.5 million, after taking into account cash acquired of $2.1 million. The total purchase consideration was preliminarily allocated to the assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition dates. Cadence will continue to evaluate certain tax estimates and assumptions that are subject to change within the measurement period (up to one year from the acquisition date). Cadence recorded a total of $20.8 million of goodwill, $16.9 million of other intangible assets and $8.1 million of net liabilities consisting primarily of long-term deferred income taxes and deferred revenue.

The goodwill related to Cadence’s acquisitions during the three months ended March 29, 2014 is primarily related to expected synergies from combining operations of the acquired companies with Cadence. Cadence expects that approximately $0.5 million of goodwill related to the acquisitions completed during the three months ended March 29, 2014 will be deductible for tax purposes.

Cadence amortizes intangible assets with definite lives 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 three months ended March 29, 2014 is approximately nine years.

Transaction costs associated with Cadence’s acquisitions were $1.0 million and $3.4 million for the three months ended March 29, 2014 and March 30, 2013, respectively. These costs consisted of professional fees and administrative costs and were expensed as incurred in Cadence’s condensed consolidated income statements.

Acquisition-related Contingent Consideration

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 future financial measures associated with the acquired technology. If performance is such that these payments are fully achieved, Cadence will be obligated to pay up to an aggregate of $11.8 million over the next 25 months. Of the $11.8 million, up to $9.2 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 three months ended March 29, 2014 were as follows:



	Gross Carrying Amount
	(In thousands)
Balance as of December 28, 2013	$	456,905
Goodwill resulting from acquisitions	20,756
Effect of foreign currency translation	1,329
Balance as of March 29, 2014	$	478,990

Acquired Intangibles, Net

Acquired intangibles as of March 29, 2014 were as follows, excluding intangibles that were fully amortized as of December 28, 2013:



	Gross Carrying Amount		Accumulated Amortization			Acquired Intangibles, Net
	(In thousands)
Existing technology	$	248,836	$	(56,632	)	$	192,204
Agreements and relationships	161,892		(47,679		)	114,213
Tradenames, trademarks and patents	9,719		(3,210		)	6,509
Total acquired intangibles with definite lives	420,447		(107,521		)	312,926
In-process technology	3,572		—			3,572
Total acquired intangibles	$	424,019	$	(107,521	)	$	316,498

In-process technology as of March 29, 2014 consists of acquired projects that, if completed, will contribute to Cadence’s ability to offer additional IP solutions to its customers. As of March 29, 2014, these projects were expected to be complete in six to twelve months. During the three months ended March 29, 2014, there were no significant transfers from in-process technology to existing technology.

Acquired intangibles as of December 28, 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	$	237,624	$	(53,243	)	$	184,381
Agreements and relationships	170,760		(53,607		)	117,153
Distribution rights	30,100		(30,100		)	—
Tradenames, trademarks and patents	9,519		(2,870		)	6,649
Total acquired intangibles with definite lives	448,003		(139,820		)	308,183
In-process technology	3,510		—			3,510
Total acquired intangibles	$	451,513	$	(139,820	)	$	311,693

Amortization expense from existing technology and maintenance agreements is included in cost of product and maintenance. Amortization of acquired intangibles for the three months ended March 29, 2014 and March 30, 2013 was as follows:



	Three Months Ended
	March 29, 2014		March 30, 2013
	(In thousands)
Cost of product and maintenance	$	7,576	$	3,807
Amortization of acquired intangibles	5,210		3,791
Total amortization of acquired intangibles	$	12,786	$	7,598

Estimated amortization expense for intangible assets with definite lives for the following five fiscal years and thereafter is as follows:



	(In thousands)
2014 – remaining period	$	38,792
2015	51,220
2016	45,360
2017	41,550
2018	38,609
Thereafter	97,395
Total estimated amortization expense	$	312,926

NOTE 5. INCOME TAXES

Cadence’s provision for income taxes of $5.4 million for the three months ended March 29, 2014 primarily resulted from federal, state and foreign income taxes on its anticipated fiscal 2014 income. Cadence’s foreign earnings are generally subject to lower statutory tax rates than its United States earnings. In addition, Cadence’s provision for income taxes for the three months ended March 29, 2014 does not include the potential tax benefit of the United States federal research tax credit which expired in December 2013. The expiration of the research tax credit is estimated to increase Cadence’s estimated annual effective tax rate for fiscal 2014 by 3%.

Cadence’s benefit for income taxes of $27.6 million for the three months ended March 30, 2013 primarily resulted from a tax benefit of $33.7 million from the release of an uncertain tax position, including related interest and penalties, and a $5.9 million tax benefit from the retroactive enactment of the fiscal 2012 United States federal research tax credit during the period.

NOTE 6. RECEIVABLES, NET

Cadence’s current and long-term receivables balances as of March 29, 2014 and December 28, 2013 were as follows:



	As of
	March 29, 2014		December 28, 2013
	(In thousands)
Accounts receivable	$	81,330	$	76,057
Unbilled accounts receivable	24,992		31,567
Long-term receivables	6,193		3,672
Total receivables	$	112,515	$	111,296
Less allowance for doubtful accounts	—		—
Total receivables, net	$	112,515	$	111,296

Cadence’s customers are primarily concentrated within the semiconductor and electronics systems industries. As of March 29, 2014 and December 28, 2013, no single customer accounted for 10% of Cadence’s total receivables. As of March 29, 2014, approximately 45% of Cadence’s total receivables were attributable to the ten customers with the largest balances of total receivables. As of December 28, 2013, approximately 47% of Cadence’s total receivables were attributable to the ten customers with the largest balances of total receivables.

Table of Contents

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


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

This hierarchy requires Cadence to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. Cadence recognizes transfers between levels of the hierarchy based on the fair values of the respective financial instruments at the end of the reporting period in which the transfer occurred. There were no transfers between levels of the fair value hierarchy during the three months ended March 29, 2014.

On a quarterly basis, Cadence measures at fair value certain financial assets and liabilities. The fair value of financial assets and liabilities was determined using the following levels of inputs as of March 29, 2014 and December 28, 2013:



	Fair Value Measurements as of March 29, 2014:
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Cash equivalents:
Money market funds	$	348,884	$	348,884	$	—	$	—
Short-term investments:
Corporate debt securities	36,906		—		36,906		—
Bank certificates of deposit	26,362		—		26,362		—
United States Treasury securities	18,944		18,944		—		—
United States government agency securities	10,366		10,366		—		—
Commercial paper	2,495		—		2,495		—
Marketable equity securities	1,933		1,933		—		—
Trading securities held in Non-Qualified Deferred Compensation, or NQDC, trust	23,786		23,786		—		—
2015 Notes Hedges	369,731		—		369,731		—
Total Assets	$	839,407	$	403,913	$	435,494	$	—

	Total		Level 1		Level 2		Level 3
	(In thousands)
Liabilities
Acquisition-related contingent consideration	$	1,805	$	—	$	—	$	1,805
2015 Notes Embedded Conversion Derivative	369,731		—		369,731		—
Foreign currency exchange contracts	$	367	$	—	$	367	$	—
Total Liabilities	$	371,903	$	—	$	370,098	$	1,805

Table of Contents



	Fair Value Measurements as of December 28, 2013:
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Cash equivalents:
Money market funds	$	345,872	$	345,872	$	—	$	—
Bank certificates of deposit	2,300		—		2,300		—
Short-term investments:
Corporate debt securities	37,441		—		37,441		—
Bank certificates of deposit	20,308		—		20,308		—
United States Treasury securities	24,246		24,246		—		—
United States government agency securities	10,223		10,223		—		—
Commercial paper	2,493		—		2,493		—
Marketable equity securities	2,077		2,077		—		—
Trading securities held in NQDC trust	23,960		23,960		—		—
2015 Notes Hedges	306,817		—		306,817		—
Foreign currency exchange contracts	262		—		262		—
Total Assets	$	775,999	$	406,378	$	369,621	$	—

	Total		Level 1		Level 2		Level 3
	(In thousands)
Liabilities
Acquisition-related contingent consideration	$	4,091	$	—	$	—	$	4,091
2015 Notes Embedded Conversion Derivative	306,817		—		306,817		—
Total Liabilities	$	310,908	$	—	$	306,817	$	4,091

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 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 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.

Table of Contents

Level 3 Measurements

The liabilities included in level 3 represent the fair value of contingent consideration associated with certain of Cadence’s 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 March 29, 2014 and December 28, 2013. 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 three months ended March 29, 2014:



	(In thousands)
Balance as of December 28, 2013	$	4,091
Payments	(2,329		)
Adjustments	43
Balance as of March 29, 2014	$	1,805

NOTE 8. CASH, CASH EQUIVALENTS AND INVESTMENTS

Cadence’s cash, cash equivalents and short-term investments at fair value as of March 29, 2014 and December 28, 2013 were as follows:



	As of
	March 29, 2014		December 28, 2013
	(In thousands)
Cash and cash equivalents	$	532,761	$	536,260
Short-term investments	97,006		96,788
Cash, cash equivalents and short-term investments	$	629,767	$	633,048

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 March 29, 2014 and December 28, 2013:



	As of
	March 29, 2014		December 28, 2013
	(In thousands)
Cash and interest bearing deposits	$	183,877	$	188,088
Money market funds	348,884		345,872
Bank certificates of deposit	—		2,300
Total cash and cash equivalents	$	532,761	$	536,260

Table of Contents

Short-Term Investments

The following tables summarize Cadence’s short-term investments as of March 29, 2014 and December 28, 2013:



	As of March 29, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Corporate debt securities	$	36,903	$	20	$	(17	)	$	36,906
Bank certificates of deposit	26,350		12		—			26,362
United States Treasury securities	18,921		24		(1		)	18,944
United States government agency securities	10,356		11		(1		)	10,366
Commercial paper	2,493		2		—			2,495
Marketable debt securities	95,023		69		(19		)	95,073
Marketable equity securities	1,817		116		—			1,933
Total short-term investments	$	96,840	$	185	$	(19	)	$	97,006



	As of December 28, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Corporate debt securities	$	37,422	$	30	$	(11	)	$	37,441
Bank certificates of deposit	20,300		9		(1		)	20,308
United States Treasury securities	24,219		28		(1		)	24,246
United States government agency securities	10,212		11		—			10,223
Commercial paper	2,492		1		—			2,493
Marketable debt securities	94,645		79		(13		)	94,711
Marketable equity securities	1,817		260		—			2,077
Total short-term investments	$	96,462	$	339	$	(13	)	$	96,788

As of March 29, 2014, no securities held by Cadence had been in an unrealized loss position for greater than twelve months.

The amortized cost and estimated fair value of marketable debt securities included in short-term investments as of March 29, 2014, 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	$	42,803	$	42,823
Due in one to three years	52,220		52,250
Total marketable debt securities included in short-term investments	$	95,023	$	95,073

Realized gains and losses from the sale of marketable debt and equity securities are recorded in other income, net in the condensed consolidated income statements.

Table of Contents

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 records in the condensed consolidated income statements as other income, net, realized gains and losses on non-marketable investments, write downs related to cost method investments due to other-than-temporary declines in value, and the proportional share of issuers’ gains or losses related to equity method investments.

The equity method income or loss recorded by Cadence is based on its percentage ownership in the issuer.

Cadence’s non-marketable investments as of March 29, 2014 and December 28, 2013 were as follows:



	As of
	March 29, 2014		December 28, 2013
	(In thousands)
Cost method	$	3,038	$	3,038
Equity method	5,163		3,639
Total non-marketable investments	$	8,201	$	6,677

NOTE 9. RESTRUCTURING AND OTHER CHARGES

Cadence has initiated various restructuring plans in the past, most recently in fiscal 2013, in an effort to operate more efficiently. These restructuring plans were primarily comprised of severance and termination benefits related to headcount reductions and estimated lease losses related to facilities vacated under the restructuring plans.

The remaining accrual for Cadence’s restructuring plans is recorded in the condensed consolidated balance sheet as follows:



	As of
	March 29, 2014
	(In thousands)
Accounts payable and accrued liabilities	$	4,433
Other long-term liabilities	2,765
Total accrued as of March 29, 2014	$	7,198

The following table presents activity relating to Cadence’s restructuring plans during the three months ended March 29, 2014:



	Severance and Benefits			Excess Facilities			Total
	(In thousands)
Balance, December 28, 2013	$	10,672		$	3,552		$	14,224
Restructuring and other charges, net	295			101			396
Cash payments	(7,159		)	(286		)	(7,445		)
Effect of foreign currency translation	11			12			23
Balance, March 29, 2014	$	3,819		$	3,379		$	7,198

Table of Contents

NOTE 10. NET INCOME PER SHARE

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

The calculations for basic and diluted net income per share for the three months ended March 29, 2014 and March 30, 2013 are as follows:



	Three Months Ended
	March 29, 2014		March 30, 2013
	(In thousands, except per share amounts)
Net income	$	33,070	$	78,609
Weighted average common shares used to calculate basic net income per share	281,615		274,936
Convertible notes	—		11
2015 Warrants	12,576		10,668
Stock-based awards	6,843		6,536
Weighted average common shares used to calculate diluted net income per share	301,034		292,151
Net income per share - basic	$	0.12	$	0.29
Net income per share - diluted	$	0.11	$	0.27

The following table presents shares of Cadence’s common stock outstanding for the three months ended March 29, 2014 and March 30, 2013 that were excluded from the computation of diluted net income per share because the effect of including these shares in the computation of diluted net income per share would have been anti-dilutive:



	Three Months Ended
	March 29, 2014	March 30, 2013
	(In thousands)
2013 Warrants	1,518	6,830
Options to purchase shares of common stock	4,634	6,754
Non-vested shares of restricted stock	11	—
Total potential common shares excluded	6,163	13,584

Table of Contents

NOTE 11. 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 March 29, 2014, and December 28, 2013:



	As of
	March 29, 2014			December 28, 2013
	(In thousands)
Foreign currency translation gain	$	31,635		$	27,183
Changes in defined benefit plan liabilities	(2,810		)	(3,218		)
Unrealized holding gains on available-for-sale securities	165			346
Total accumulated other comprehensive income	$	28,990		$	24,311

For the three months ended March 29, 2014 and March 30, 2013 there were no significant amounts reclassified from accumulated other comprehensive income to net income.

NOTE 12. 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 emulation hardware products, generally for a 90-day period. Cadence did not incur any significant costs related to warranty obligations during the three months ended March 29, 2014 or March 30, 2013.

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 months ended March 29, 2014 or March 30, 2013.

Table of Contents

NOTE 13. OTHER INCOME, NET

Cadence’s other income, net for the three months ended March 29, 2014 and March 30, 2013 was as follows:



	Three Months Ended
	March 29, 2014			March 30, 2013
	(In thousands)
Interest income	$	486		$	425
Gains on non-marketable investments, net	1,546			878
Gains on securities in NQDC trust	2,063			152
Gains (losses) on foreign exchange	(802		)	764
Other income (expense), net	89			(44		)
Total other income, net	$	3,382		$	2,175

NOTE 14. 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 months ended March 29, 2014 and March 30, 2013:



	Three Months Ended
	March 29, 2014		March 30, 2013
	(In thousands)
Americas:
United States	$	163,121	$	149,171
Other Americas	5,784		4,615
Total Americas	168,905		153,786
Europe, Middle East and Africa	77,532		78,920
Japan	44,890		53,474
Asia	87,223		68,086
Total	$	378,550	$	354,266

Table of Contents

The following table presents a summary of long-lived assets by geography as of March 29, 2014 and December 28, 2013:



	As of
	March 29, 2014		December 28, 2013
	(In thousands)
Americas:
United States	$	209,612	$	207,694
Other Americas	266		294
Total Americas	209,878		207,988
Europe, Middle East and Africa	6,441		6,326
Japan	809		893
Asia	22,297		23,508
Total	$	239,425	$	238,715

NOTE 15. SUBSEQUENT EVENT

On April 18, 2014, Cadence entered into an agreement to acquire Jasper Design Automation, Inc., or Jasper, a provider of formal analysis solutions, for approximately $170.0 million in cash. Jasper had approximately $24.0 million of cash, cash equivalents and short-term investments as of December 31, 2013. The completion of the transaction is subject to certain conditions, including regulatory approval.

Table of Contents

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 28, 2013. 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 forward-looking statements. 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 small and 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, development and manufacturing costs. Our product offerings include electronic design automation, or EDA, software, emulation hardware, and two categories of intellectual property, or IP, commonly referred to as verification IP, or VIP, and design IP. We provide maintenance for our software, emulation hardware, and IP product offerings. We also provide engineering services related to methodology, education, hosted design solutions and design services for advanced ICs and development of custom IP. These services help our customers manage and accelerate their electronics product development processes.

Our customers include semiconductor and electronics systems companies that deliver a wide range of electronics products in a number of market segments such as mobile devices, communications, cloud and data center infrastructure, personal computers and other devices. The renewal of many of our customer contracts and our customers’ decisions to make new purchases from us are dependent upon our customers’ commencement of new design projects. As a result, our business is significantly influenced by our customers’ business outlook and investment in new designs and products.

The markets our customers serve are sensitive to product price, performance and the time it takes to bring their 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 performance products and lower development and manufacturing 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, and has driven the need for incorporation of preverified commercial IP into these 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. 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, designing the packaging and board-level interconnect which links ICs and SoCs, and combining the resulting hardware with software to create electronic systems.

Significant issues that our customers face in creating their products include reducing power consumption, manufacturing microscopic circuitry, verifying device functionality and achieving technical performance targets, all while meeting aggressive time-to-market and cost requirements. Providers of EDA and IP 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.

Table of Contents

Our products are engineered to improve our customers’ design productivity and design quality by providing a comprehensive set of EDA solutions, emulation hardware and a differentiated portfolio of design IP and VIP. Product and maintenance revenue includes fees from licenses to use our software and IP, from sales and leases of our emulation hardware products and from royalties generated by our customers’ shipment of their products containing certain types of our IP.

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


•	Functional Verification, including Emulation Hardware;


•	Digital IC Design and Signoff;


•	Custom IC Design;


•	System Interconnect and Analysis; and


•	IP.

We have realigned these categories in the current period to better reflect our business objectives. As a result of the realignment, our Design for Manufacturing, or DFM, products are now categorized together with Digital IC Design and Signoff. We have also established a stand-alone category for our IP offerings, which includes design IP and VIP. The product category that was formerly called System Interconnect Design has been renamed System Interconnect and Analysis, to better reflect the growing system analysis component in this category. All prior periods presented have been conformed to the current period presentation.

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 verification, and printed circuit board, or PCB, IC package and SiP design and analysis.

The major Cadence^® design and verification platforms are branded as Incisive^® functional verification, Virtuoso^® custom IC design, Encounter^® digital IC design and Allegro^® system interconnect design. For additional information about our products, see the discussion in Item 1, “Business,” under the heading “Products and Product Strategy,” in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

During the second quarter of fiscal 2013, we acquired Tensilica, Inc., or Tensilica, a privately held provider of configurable dataplane processing units, and Cosmic Circuits Private Limited, or Cosmic, a privately held provider of intellectual property used in system-on-chip design. These acquisitions, along with other acquired technology and internal development, expanded our design IP offerings, enabling us to offer customized IP as well as broader analog and mixed signal IP solutions to our customers. These acquisitions influenced revenues and operating expenses for the three months ended March 29, 2014 when compared to the same period of the prior year, which preceded the acquisitions.

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 28, 2013.

Results of Operations

Financial results for the three months ended March 29, 2014, as compared to the three months ended March 30, 2013, reflect the following:


•	An increase in our product and maintenance revenue, primarily because of increased business levels, increased revenue recognized from bookings in prior periods and incremental revenue from the licensing of the IP that we acquired as part of our fiscal 2013 acquisitions;


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


•	An increase in stock-based compensation;


•	An increase in amortization of acquired intangibles resulting from our fiscal 2013 acquisitions; and


•	A provision for income taxes for the three months ended March 29, 2014 as compared to a benefit for income taxes for the three months ended March 30, 2013.

Revenue

We primarily generate revenue from licensing our software and IP, selling or leasing our emulation hardware technology, providing maintenance for our software, emulation 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, emulation hardware and IP 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 revenue mix such that approximately 90% of our revenue is recurring in nature, and the remainder of the resulting revenue is recognized up-front, upon completion of delivery. Our ability to achieve this mix in any single fiscal period may be impacted primarily by hardware sales, because revenue for hardware sales is generally recognized up front in the period in which delivery is completed.

For an additional description of the impact of emulation hardware sales on the timing of revenue recognition, see the discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Estimates – Revenue Recognition” in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

Revenue by Period

The following table shows our revenue for the three months ended March 29, 2014 and March 30, 2013 and the change in revenue between periods:



	Three Months Ended				Change
	March 29, 2014		March 30, 2013		Amount			Percentage
	(In millions, except percentages)
Product and maintenance	$	357.4	$	328.3	$	29.1		9	%
Services	21.2		26.0		(4.8		)	(18	)%
Total revenue	$	378.6	$	354.3	$	24.3		7	%

Product and maintenance revenue increased during the three months ended March 29, 2014, as compared to the three months ended March 30, 2013, primarily because of increased business levels, increased revenue recognized from bookings in prior periods and incremental revenue recognized from our fiscal 2013 acquisitions. Services revenue may fluctuate from period to period based on demand for, and our resources to fulfill, our services and customized IP offerings.

No single customer accounted for 10% or more of total revenue during the three months ended March 29, 2014 or March 30, 2013.

Revenue by Product Group

The following table shows the percentage of revenue contributed by each of our five product groups for the past five consecutive quarters:



	Three Months Ended
	March 29, 2014		December 28, 2013		September 28, 2013		June 29, 2013		March 30, 2013
Functional Verification, including Emulation Hardware	23	%	25	%	24	%	22	%	22	%
Digital IC Design and Signoff	30	%	29	%	29	%	31	%	33	%
Custom IC Design	27	%	26	%	28	%	28	%	28	%
System Interconnect and Analysis	10	%	10	%	10	%	11	%	10	%
IP	10	%	10	%	9	%	8	%	7	%
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 28, 2013, 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.

Revenue by Geography



	Three Months Ended				Change
	March 29, 2014		March 30, 2013		Amount			Percentage
	(In millions, except percentages)
United States	$	163.1	$	149.2	$	13.9		9	%
Other Americas	5.8		4.6		1.2			26	%
Europe, Middle East and Africa	77.5		78.9		(1.4		)	(2	)%
Japan	45.0		53.5		(8.5		)	(16	)%
Asia	87.2		68.1		19.1			28	%
Total revenue	$	378.6	$	354.3	$	24.3		7	%

Most of our revenue is transacted in the United States dollar. However, certain revenue transactions are denominated in foreign currencies, primarily the Japanese yen, and we recognize reduced revenue from those contracts in periods when the Japanese yen weakens in value against the United States dollar and additional revenue from those contracts in periods when the Japanese yen strengthens against the United States dollar. 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.”

Revenue for Japan decreased during the three months ended March 29, 2014, as compared to the three months ended March 30, 2013, primarily due to business conditions facing our Japanese customers. Because of these conditions, we expect lower revenue for Japan during fiscal 2014, as compared to fiscal 2013.

Revenue for Asia increased during the three months ended March 29, 2014, as compared to the three months ended March 30, 2013, primarily due to an increase in revenue from emulation hardware installations and an increase in software business.

For the primary factors contributing to our increase in revenue in other geographies, see the general description under “Revenue by Period,” above.

Revenue by Geography as a Percent of Total Revenue



	Three Months Ended
	March 29, 2014		March 30, 2013
United States	43	%	42	%
Other Americas	2	%	2	%
Europe, Middle East and Africa	20	%	22	%
Japan	12	%	15	%
Asia	23	%	19	%
Total	100	%	100	%

Cost of Revenue



	Three Months Ended				Change
	March 29, 2014		March 30, 2013		Amount			Percentage
	(In millions, except percentages)
Product and maintenance	$	42.2	$	29.8	$	12.4		42	%
Services	14.9		18.3		(3.4		)	(19	)%

The following table shows cost of revenue as a percentage of related revenue for the three months ended March 29, 2014 and March 30, 2013:



	Three Months Ended
	March 29, 2014		March 30, 2013
Product and maintenance	12	%	9	%
Services	70	%	71	%

Cost of Product and Maintenance

Cost of product and maintenance includes costs associated with the sale and lease of our emulation hardware and licensing of our software and IP products, certain employee salary, benefits and other employee-related costs, cost of our customer support services, amortization of technology-related and maintenance-related acquired intangibles, as well as the costs of technical documentation and royalties payable to third-party vendors. Costs associated with our emulation hardware products include materials, assembly and overhead. These additional hardware manufacturing costs make our cost of emulation hardware product higher, as a percentage of revenue, than our cost of software and IP products.

A summary of cost of product and maintenance is as follows:



	Three Months Ended				Change
	March 29, 2014		March 30, 2013		Amount		Percentage
	(In millions, except percentages)
Product and maintenance-related costs	$	34.6	$	26.0	$	8.6	33	%
Amortization of acquired intangibles	7.6		3.8		3.8		100	%
Total cost of product and maintenance	$	42.2	$	29.8	$	12.4	42	%

Cost of product and maintenance depends primarily upon our emulation hardware product sales in any given period, employee salary, benefits and other employee-related costs, and also upon the timing and extent to which we acquire intangible assets, acquire or license third-parties’ intellectual property or technology and sell our products that include such acquired or licensed intellectual property or technology.

The changes in product and maintenance-related costs for the three months ended March 29, 2014, as compared to the three months ended March 30, 2013, were due to the following:



	Change
	(In millions)
Emulation hardware costs	$	9.7
Other items	(1.1		)
	$	8.6

Emulation hardware costs increased during the three months ended March 29, 2014, as compared to the three months ended March 30, 2013, due to a higher volume of emulation hardware products sold. Profit margins on our emulation hardware products may fluctuate based on customer pricing strategies, product competition and product life cycle. Profit margins on our emulation hardware products decreased during the three months ended March 29, 2014, as compared to the three months ended March 30, 2013. We expect lower profit margins on the sale of our emulation hardware products for the remainder of fiscal 2014, as compared to the same period in fiscal 2013, primarily due to an increasingly competitive environment for EDA hardware.

Amortization of acquired intangibles included in cost of product and maintenance increased during the three months ended March 29, 2014, as compared to the three months ended March 30, 2013, primarily due to the increase in amortization of intangible assets associated with our fiscal 2013 acquisitions. We expect amortization of acquired intangibles to increase for the remainder of fiscal 2014, as compared to the same period in fiscal 2013, primarily due to amortization of intangible assets recorded in connection with our fiscal 2014 and 2013 acquisitions. For an additional description of our expected amortization of intangible assets, see Note 4 of the notes to condensed consolidated financial statements.

Cost of Services

Cost of services primarily includes employee salary, benefits and other employee-related costs, costs to maintain the infrastructure necessary to manage a services organization, and provisions for contract losses, if any. During the three months ended March 29, 2014, we utilized certain of our design services engineers on internal research and development activities, resulting in lower cost of services expense when compared to the three months ended March 30, 2013, because these costs are recorded as research and development expense in the condensed consolidated income statement. Cost of services will fluctuate from period to period based on our utilization of design services engineers on revenue generating projects or on internal development projects.

Operating Expenses

Our operating expenses include marketing and sales, research and development and general and administrative expenses. Factors that may cause our operating expenses to fluctuate include changes in the number of employees due to acquisitions and hiring, foreign exchange rates, stock-based compensation and the impact of our variable compensation programs that are driven by overall operating results.

Our employee salary and other compensation-related costs increased during the three months ended March 29, 2014, as compared to the three months ended March 30, 2013, primarily due to incremental costs related to employees added from our fiscal 2013 acquisitions and hiring additional employees for our research and development and sales activities.

Many of our operating expenses are transacted in various foreign currencies. We recognize lower expenses in periods when the United States dollar strengthens in value against other currencies and we recognize higher expenses when the United States dollar weakens against other currencies. For an additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see the discussion in Item 3, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”

We expect our operating expenses to increase during the remainder of fiscal 2014, as compared to the same period in fiscal 2013, due to the addition of employees through our fiscal 2014 and 2013 acquisitions and hiring of research and development and sales personnel.

Our operating expenses for the three months ended March 29, 2014 and March 30, 2013 were as follows:



	Three Months Ended				Change
	March 29, 2014		March 30, 2013		Amount			Percentage
	(In millions, except percentages)
Marketing and sales	$	98.3	$	90.4	$	7.9		9	%
Research and development	146.5		124.1		22.4			18	%
General and administrative	28.7		29.8		(1.1		)	(4	)%
Operating expenses	$	273.5	$	244.3	$	29.2		12	%

Our operating expenses, as a percentage of total revenue, for the three months ended March 29, 2014 and March 30, 2013 were as follows:



	Three Months Ended
	March 29, 2014		March 30, 2013
Marketing and sales	26	%	26	%
Research and development	39	%	35	%
General and administrative	8	%	8	%
Operating expenses	73	%	69	%

Marketing and Sales

The changes in marketing and sales expense for the three months ended March 29, 2014, as compared to the three months ended March 30, 2013, were due to the following:



	Change
	(In millions)
Salary, benefits and other employee-related costs	$	6.3
Stock-based compensation	1.6
	$	7.9

The increase in salary, benefits and other employee-related costs during the three months ended March 29, 2014, as compared to the three months ended March 30, 2013, is primarily due to the addition of employees from our fiscal 2013 acquisitions and hiring of additional sales and marketing personnel.

Research and Development

The changes in research and development expense for the three months ended March 29, 2014, as compared to the three months ended March 30, 2013, were due to the following:



	Change
	(In millions)
Salary, benefits and other employee-related costs	$	17.8
Stock-based compensation	3.1
Other items	1.5
	$	22.4

The increase in salary, benefits and other employee-related costs during the three months ended March 29, 2014, as compared to the three months ended March 30, 2013, was primarily due to incremental costs related to employees added from our fiscal 2013 acquisitions and hiring of additional research and development personnel.

General and Administrative

The changes in general and administrative expense for the three months ended March 29, 2014, as compared to the three months ended March 30, 2013, were due to the following:



	Change
	(In millions)
Professional services	$	(2.0	)
Other items	0.9
	$	(1.1	)

The decrease in professional services costs during the three months ended March 29, 2014, as compared to the three months ended March 30, 2013, was primarily due to a decrease in acquisition-related professional services.

Stock-based Compensation

Stock-based compensation expense is recorded within the various components of our costs and expenses. Stock-based compensation expense increased $5.1 million during the three months ended March 29, 2014, as compared to the three months ended March 30, 2013, primarily because of higher grant-date fair values and the assumption of certain unvested options related to our acquisitions.

We expect stock-based compensation to increase during the remainder of fiscal 2014, as compared to the same period of fiscal 2013, because we expect that new awards granted during fiscal 2014 will have higher grant date fair values compared to grants made in previous years and because awards vesting during fiscal 2014 generally have higher grant date fair values than awards that vested during fiscal 2013.

Amortization of Acquired Intangibles



	Three Months Ended				Change
	March 29, 2014		March 30, 2013		Amount		Percentage
	(In millions, except percentages)
Amortization of acquired intangibles	$	5.2	$	3.8	$	1.4	37	%

The increase in amortization of acquired intangibles during the three months ended March 29, 2014, as compared to the three months ended March 30, 2013, resulted from increased amortization of intangible assets related to our fiscal 2013 acquisitions, which was partially offset by certain acquired intangibles becoming fully amortized.

We expect amortization of acquired intangibles to increase during the remainder of fiscal 2014, as compared to the same period in fiscal 2013, due to the amortization of intangible assets recorded in connection with our fiscal 2014 and 2013 acquisitions. For an additional description of our expected amortization of intangible assets, see Note 4 of the notes to condensed consolidated financial statements.

Interest Expense



	Three Months Ended
	March 29, 2014		March 30, 2013
	(In millions)
Contractual interest expense:
2013 Notes	$	—	$	0.5
2015 Notes	2.3		2.3
Amortization of debt discount:
2013 Notes	—		1.7
2015 Notes	4.2		3.9
Amortization of deferred financing costs:
2013 Notes	—		0.1
2015 Notes	0.6		0.5
Other	0.2		0.3
Total interest expense	$	7.3	$	9.3

Income Taxes

The following table presents the provision for income taxes and the effective tax rate for the three months ended March 29, 2014 and March 30, 2013:



	Three Months Ended
	March 29, 2014			March 30, 2013
	(In millions, except percentages)
Provision (benefit) for income taxes	$	5.4		$	(27.6	)
Effective tax rate	13.9		%	(54.0		)%

Our provision for income taxes for the three months ended March 29, 2014 primarily resulted from federal, state and foreign income taxes on our anticipated fiscal 2014 income. Our foreign earnings are generally subject to lower statutory tax rates than our United States earnings. In addition, our provision for income taxes for the three months ended March 29, 2014 does not include the potential tax benefit of the United States federal research tax credit, which expired in December 2013. The expiration of the research tax credit is estimated to increase our estimated annual effective tax rate for fiscal 2014 by 3%.

Our benefit for income taxes for the three months ended March 30, 2013 primarily resulted from the tax benefit of $33.7 million from the release of an uncertain tax position, including related interest and penalties, and the $5.9 million tax benefit from the retroactive enactment of the fiscal 2012 United States federal research tax credit during the period.

We estimate our annual effective tax rate for fiscal 2014 to be approximately 20%. Our estimate excludes tax effects of certain stock compensation, potential acquisitions, and other items which we cannot anticipate.

For further discussion regarding our income taxes, see Note 6 in the notes to consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

Liquidity and Capital Resources



	As of
	March 29, 2014		December 28, 2013		Change
	(In millions)
Cash, cash equivalents and short-term investments	$	629.8	$	633.0	$	(3.2	)
Net working capital	$	105.0	$	72.9	$	32.1

Cash, Cash Equivalents and Short-term Investments

As of March 29, 2014, our principal sources of liquidity consisted of $629.8 million of cash, cash equivalents and short-term investments, as compared to $633.0 million as of December 28, 2013.

Our primary source of cash, cash equivalents and short-term investments during the three months ended March 29, 2014 was customer payments for products, maintenance and services. We also received cash from the exercise of stock options and from stock purchases under our employee stock purchase plan.

Our primary uses of cash, cash equivalents and short-term investments during the three months ended March 29, 2014 were payments relating to salaries, benefits, other employee-related costs, other operating expenses, our fiscal 2014 acquisitions, payments for inventory purchases and repurchases of our common stock.

Approximately 83% of our cash, cash equivalents and short-term investments were held by our foreign subsidiaries as of March 29, 2014. Our intent is to permanently reinvest our earnings from certain foreign operations. We do not anticipate we will need to repatriate dividends from foreign operations that are permanently reinvested in order to fund our domestic operations. In the event that dividends from foreign operations that are currently permanently reinvested are needed to fund United States liquidity, we could be required to accrue and pay additional taxes in order to repatriate these funds.

We maintain an investment portfolio of approximately $100 million in marketable debt securities, including corporate debt securities, United States Treasury securities, United States government agency securities, bank certificates of deposit and commercial paper. Our investments in marketable debt securities are classified as available-for-sale and are included in short-term investments as of March 29, 2014. Our investments are made in accordance with our cash investment policy, which governs the amounts and types of investments we hold in our portfolio. Our investment portfolio could be affected by various risks and uncertainties including credit risk, interest rate risk and general market risk, as outlined in Item 3, “Quantitative and Qualitative Disclosures About Market Risk” and Part II, Item 1A, “Risk Factors.”

We have a $250 million revolving credit facility that may be used to finance working capital, capital expenditures, acquisitions and other business purposes. Any outstanding loans drawn under the credit facility are payable on or before December 12, 2017. The credit facility contains customary negative covenants that, among other things, restrict our ability to incur additional indebtedness, grant liens and make certain investments, asset dispositions and restricted payments. In addition, the credit facility contains certain financial covenants that require us to maintain a leverage ratio of not greater than 3 to 1, subject to certain exceptions, and requires that we maintain an interest coverage ratio of at least 3 to 1.

As of March 29, 2014, we were in compliance with the financial covenants. For an additional description of this revolving credit facility, see Note 2 in the notes to condensed consolidated financial statements.

We expect that current cash, cash equivalents and short-term investment balances, cash flows that are generated from operations and cash borrowings available under our revolving credit facility will be sufficient to meet our domestic and international working capital needs, and other capital and liquidity requirements, including acquisitions and share repurchases, if any, for at least the next 12 months.

Net Working Capital

Net working capital increased by $32.1 million as of March 29, 2014, as compared to December 28, 2013, due to the following:



	Change
	(In millions)
Decrease in accounts payable and accrued liabilities	$	27.4
Increase in prepaid expenses and other	12.9
Increase in inventories	5.4
Decrease in receivables	(1.3		)
Decrease in cash and cash equivalents	(3.5		)
Increase in convertible notes	(4.2		)
Increase in current portion of deferred revenue	(4.7		)
Other items	0.1
	$	32.1

Cash Flows from Operating Activities



	Three Months Ended
	March 29, 2014		March 30, 2013		Change
	(In millions)
Cash provided by operating activities	$	28.1	$	75.3	$	(47.2	)

Cash flows from operating activities decreased $47.2 million during the three months ended March 29, 2014, as compared to March 30, 2013, due to the following:



	Change
	(In millions)
Net income, net of non-cash related gains and losses	$	(43.3	)
Changes in operating assets and liabilities, net of effect of acquired businesses	(3.9		)
	$	(47.2	)

Cash flows from operating activities include net income, adjusted for certain non-cash items, as well as changes in the balances of certain assets and liabilities. Our cash flows from operating activities are significantly influenced by business levels and the payment terms set forth in our license agreements. The decrease in cash flows from operating activities for the three months ended March 29, 2014, as compared to the three months ended March 30, 2013, was primarily due to the timing of cash receipts from customers, working capital requirements, payments under our recent restructuring plans and an increase in cash paid for taxes, net of tax refunds.

We expect to pay an additional $7.2 million related to our previous restructuring activities after March 29, 2014, of which the majority will be paid within the next twelve months.

We expect that cash flows from operating activities will fluctuate in future periods due to a number of factors, including our operating results, tax payments and the timing of our billings, collections and disbursements.

Cash Flows from Investing Activities



	Three Months Ended
	March 29, 2014			March 30, 2013			Change
	(In millions)
Cash used for investing activities	$	(34.2	)	$	(1.8	)	$	(32.4	)

The changes in net cash used for investing activities for the three months ended March 29, 2014, as compared to the three months ended March 30, 2013, were due to the following:



	Change
	(In millions)
Cash paid in business combinations and asset acquisitions, net of cash acquired	$	(26.7	)
Purchases of available-for-sale securities	(22.7		)
Proceeds from the sale and maturity of available-for-sale securities	22.8
Proceeds from the sale of long-term investments	(6.1		)
Other items	0.3
	$	(32.4	)

Cash paid in business combinations and asset acquisitions relates to our fiscal 2014 acquisitions. For an additional description of the acquisitions completed during the three months ended March 29, 2014, see Note 3 in the notes to condensed consolidated financial statements.

We maintain an investment portfolio of approximately $100 million in marketable debt securities. The proceeds from, purchases of and maturities of available-for-sale securities are primarily related to normal purchases, sales and maturities of the debt securities included in our investment portfolio.

We expect to continue our investing activities, including purchasing property, plant and equipment, purchasing intangible assets, business combinations, purchasing software licenses, and making long-term equity investments.

Cash Flows from Financing Activities



	Three Months Ended
	March 29, 2014			March 30, 2013		Change
	(In millions)
Cash provided by (used for) financing activities	$	(0.1	)	$	15.2	$	(15.3	)

The changes in net cash provided by or used for financing activities for the three months ended March 29, 2014, as compared to the three months ended March 30, 2013, were due to the following:



	Change
	(In millions)
Payments for repurchases of common stock	$	(12.5	)
Tax effect related to employee stock transactions allocated to equity	(3.4		)
Stock received for payment of employee taxes on vesting of restricted stock	(2.2		)
Payment of acquisition-related contingent consideration	(1.3		)
Proceeds from the issuance of common stock	1.6
Principal payments on receivable financing	2.5
	$	(15.3	)

During the three months ended March 29, 2014, we used $12.5 million of cash and cash equivalents to repurchase shares of our common stock. We expect to repurchase up to a total of $50.0 million of our common stock during fiscal 2014, and we may repurchase additional shares of our common stock in fiscal 2015. For an additional description of our share repurchase programs and repurchase authorizations, see Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds.”

Other Factors Affecting Liquidity and Capital Resources

Convertible Notes

As of March 29, 2014, we had convertible notes outstanding with a net liability value of $329.1 million that mature on June 1, 2015. The principal maturity value of our 2015 Notes is $350.0 million. The total cash payable upon the early conversion of these notes, as determined by the indenture of each security, will be their principal amount plus any additional conversion value that would be due upon conversion.

We will owe additional cash to the note holders upon early conversion if our stock price exceeds $7.55 per share. We entered into hedges with counterparties to limit our exposure to the additional cash payments above the principal amount of the 2015 Notes that may be due to the holders upon conversion. In separate transactions, we sold warrants, or the 2015 Warrants, with a strike price of $10.78 per share. Although our incremental cash payout exposure above the conversion price is limited by the hedges to the $350.0 million outstanding principal value of the 2015 Notes and accrued interest, we will experience dilution to our stock and to our diluted earnings per share from the outstanding 2015 Warrants to the extent our average closing stock price exceeds $10.78 in any fiscal quarter until the 2015 Notes are converted and the 2015 Warrants are settled.

Additionally, holders may convert their 2015 Notes into cash during any quarter following a quarter in which our stock price closes above $9.81 for at least 20 of the last 30 trading days. The 2015 Notes are convertible into cash from March 30, 2014 through June 28, 2014 because our closing stock price exceeded $9.81 for at least 20 of the last 30 trading days prior to March 29, 2014. While holders of the 2015 Notes have the right to convert their notes if early conversion conditions are met, we do not expect holders of the 2015 Notes to convert their notes under such circumstances because the economic value to the holders of the notes has exceeded and likely will continue to exceed the cash received upon conversion. If the holders of our 2015 Notes elect to convert their notes into cash, we would be required to make cash payments of up to $350 million and accrued interest prior to the maturity of the 2015 Notes.

In connection with the 2015 Notes, we entered into the 2015 Notes Hedges and sold warrants to limit our exposure to the additional cash payments above the $350 million principal balance in the event of a cash conversion of the 2015 Notes. The 2015 Notes currently trade at a premium to their if-converted value, and we do not anticipate a conversion of the 2015 Notes by the note holders between March 30, 2014 and June 28, 2014.

We believe that cash generated from our operating activities in future periods as well as access to our revolving credit facility will be sufficient to service the maturity or conversion of our 2015 Notes, but future changes in our cash position, cash flows from operating activities, cash flows from investing activities, cash flows from financing activities, as well as general business levels and changes in our access to financing may impact our ability to settle the principal amount payable to the holders of the 2015 Notes when they mature or convert.

For an additional description of the 2015 Notes, the conversion terms thereof and the hedge and warrants transactions, see Note 2 in the notes to condensed consolidated financial statements.

Acquisition-related contingent consideration

In connection with our business combinations and asset acquisitions completed in prior fiscal years, we may be obligated to make payments subject to the satisfaction of future financial measures. If performance is such that these payments are fully achieved, we will be obligated to pay up to an aggregate of $11.8 million in cash over the next 25 months.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Risk

A material portion of our revenue, expenses and business activities are transacted in the United States dollar. However, certain of our operations include transactions in foreign currencies that can affect our results of operations. In certain countries where we invoice customers in the local currency, Japan in particular, our revenues benefit from a weaker dollar and are adversely affected by a stronger dollar. The opposite impact occurs in countries where we record expenses in local currencies. In those cases, our operating expenses benefit from a stronger dollar and are adversely affected by a weaker dollar. The fluctuations in our operating expenses outside the United States resulting from volatility in the United States dollar against certain foreign currencies are not generally moderated by corresponding fluctuations in our revenues, except for our operations in Japan because we receive some cash payments and make most expense payments in Japanese yen.

We enter into foreign currency forward exchange contracts with financial institutions to protect against currency exchange risks associated with existing assets and liabilities. A foreign currency forward exchange contract acts as a hedge by increasing in value when underlying assets decrease in value or underlying liabilities increase in value due to changes in foreign exchange rates. Conversely, a foreign currency forward exchange contract decreases in value when underlying assets increase in value or underlying liabilities decrease in value due to changes in foreign exchange rates. These forward contracts are not designated as accounting hedges, so the unrealized gains and losses are recognized in other income, net, in advance of the actual foreign currency cash flows with the fair value of these forward contracts being recorded as accrued liabilities or other current assets.

We do not use forward contracts for trading purposes. Our forward contracts generally have maturities of 90 days or less. We enter into foreign currency forward exchange contracts based on estimated future asset and liability exposures, and the effectiveness of our hedging program depends on our ability to estimate these future asset and liability exposures. Recognized gains and losses with respect to our current hedging activities will ultimately depend on how accurately we are able to match the amount of foreign currency forward exchange contracts with actual underlying asset and liability exposures.

The following table provides information about our foreign currency forward exchange contracts as of March 29, 2014. The information is provided in United States dollar equivalent amounts. The table presents the notional amounts, at contract exchange rates, and the weighted average contractual foreign currency exchange rates expressed as units of the foreign currency per United States dollar, which in some cases may not be the market convention for quoting a particular currency. All of these forward contracts mature before or during May 2014.



	Notional Principal			Weighted Average Contract Rate
	(In millions)
Forward Contracts:
European Union euro	$	53.5		0.72
Indian rupee	18.1			61.06
Israeli shekel	13.0			3.47
Chinese renminbi	12.9			6.14
Japanese yen	12.9			102.98
Canadian dollar	11.7			1.11
Taiwan dollar	5.6			30.32
Other	14.3			N/A
Total	$	142.0
Estimated fair value	$	(0.4	)

While we actively monitor our foreign currency risks, there can be no assurance that our foreign currency hedging activities will substantially offset the impact of fluctuations in currency exchange rates on our results of operations, cash flows and financial position.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our portfolio of marketable debt securities, our portfolio of cash and cash equivalents and outstanding balances drawn on our revolving credit facility, if any.

We are exposed to interest rate fluctuations in many of the world’s leading industrialized countries, but the fair value of our marketable debt securities and our interest income and expense is most sensitive to fluctuations in the general level of United States interest rates. In this regard, changes in United States interest rates affect the interest earned on our marketable debt securities and cash and cash equivalents, any unrealized and realized gains or losses on our marketable debt securities and the costs associated with foreign currency hedges. Pursuant to our investment policy, we limit the amount of our credit exposure to any one issuer, other than in securities issued by the United States Treasury and United States government agencies.

Our short-term investments as of March 29, 2014, include $95.1 million of marketable debt securities that may decline in value if market interest rates rise. Such variability in market interest rates may result in a negative impact on the results of our investment activities. As of March 29, 2014, an increase in the market rates of interest of 1% would result in a decrease in the fair values of our marketable debt securities by approximately $0.8 million.