Edgar Filing: CADENCE DESIGN SYSTEMS INC

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Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-Q CDNS 06.28.2014

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________

FORM 10-Q

_____________________________________

(Mark One)



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

For the quarterly period ended June 28, 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 June 28, 2014, approximately 290,040,000 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: June 28, 2014 and December 28, 2013	1

	Condensed Consolidated Income Statements: Three and Six Months Ended June 28, 2014 and June 29, 2013	2

	Condensed Consolidated Statements of Comprehensive Income (Loss) : Three and Six Months Ended June 28, 2014 and June 29, 2013	3

	Condensed Consolidated Statements of Cash Flows: Six Months Ended June 28, 2014 and June 29, 2013	4

	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	38

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 3.	Defaults Upon Senior Securities	52

Item 4.	Mine Safety Disclosures	52

Item 5.	Other Information	52

Item 6.	Exhibits	53

	Signatures	55

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)



	June 28, 2014			December 28, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	557,416		$	536,260
Short-term investments	97,910			96,788
Receivables, net	101,924			107,624
Inventories	58,311			50,220
2015 notes hedges	455,844			306,817
Prepaid expenses and other	143,314			123,382
Total current assets	1,414,719			1,221,091
Property, plant and equipment, net of accumulated depreciation of $584,613 and $568,494, respectively	239,314			238,715
Goodwill	559,957			456,905
Acquired intangibles, net of accumulated amortization of $121,797 and $139,820, respectively	395,430			311,693
Long-term receivables	5,611			3,672
Other assets	170,802			196,525
Total assets	$	2,785,833		$	2,428,601
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Revolving credit facility	$	100,000		$	—
Convertible notes	333,333			324,826
2015 notes embedded conversion derivative	455,844			306,817
Accounts payable and accrued liabilities	216,959			216,594
Current portion of deferred revenue	301,911			299,973
Total current liabilities	1,408,047			1,148,210
Long-term liabilities:
Long-term portion of deferred revenue	46,800			52,850
Other long-term liabilities	70,502			71,436
Total long-term liabilities	117,302			124,286
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock and capital in excess of par value	1,812,175			1,757,242
Treasury stock, at cost	(154,839		)	(140,142		)
Accumulated deficit	(428,973		)	(485,306		)
Accumulated other comprehensive income	32,121			24,311
Total stockholders’ equity	1,260,484			1,156,105
Total liabilities and stockholders’ equity	$	2,785,833		$	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						Six Months Ended
	June 28, 2014			June 29, 2013			June 28, 2014			June 29, 2013
Revenue:
Product and maintenance	$	354,468		$	337,983		$	711,818		$	666,254
Services	24,320			24,498			45,520			50,493
Total revenue	378,788			362,481			757,338			716,747
Costs and expenses:
Cost of product and maintenance	37,707			28,095			79,904			57,942
Cost of services	16,706			15,148			31,608			33,492
Marketing and sales	98,611			95,277			196,934			185,679
Research and development	152,672			136,395			299,138			260,479
General and administrative	32,042			34,441			60,786			64,251
Amortization of acquired intangibles	5,579			5,327			10,789			9,118
Restructuring and other charges (credits)	(26		)	2,656			370			2,508
Total costs and expenses	343,291			317,339			679,529			613,469
Income from operations	35,497			45,142			77,809			103,278
Interest expense	(7,369		)	(9,528		)	(14,637		)	(18,790		)
Other income, net	1,635			2,018			5,017			4,193
Income before provision for income taxes	29,763			37,632			68,189			88,681
Provision for income taxes	6,500			28,203			11,856			643
Net income	$	23,263		$	9,429		$	56,333		$	88,038
Net income per share – basic	$	0.08		$	0.03		$	0.20		$	0.32
Net income per share – diluted	$	0.08		$	0.03		$	0.19		$	0.30
Weighted average common shares outstanding – basic	283,344			277,146			282,480			276,018
Weighted average common shares outstanding – diluted	305,755			294,443			303,395			293,274

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)



	Three Months Ended						Six Months Ended
	June 28, 2014			June 29, 2013			June 28, 2014		June 29, 2013
Net income	$	23,263		$	9,429		$	56,333	$	88,038
Other comprehensive income (loss), net of tax effects:
Foreign currency translation adjustments	2,377			(11,705		)	6,828		(17,867		)
Changes in unrealized holding gains or losses on available-for-sale securities, net of reclassification adjustment for realized gains and losses	775			(99		)	595		(383		)
Changes in defined benefit plan liabilities	(21		)	65			387		383
Total other comprehensive income (loss), net of tax effects	3,131			(11,739		)	7,810		(17,867		)
Comprehensive income (loss)	$	26,394		$	(2,310	)	$	64,143	$	70,171

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Six Months Ended
	June 28, 2014			June 29, 2013
Cash and cash equivalents at beginning of period	$	536,260		$	726,357
Cash flows from operating activities:
Net income	56,333			88,038
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	53,609			46,977
Amortization of debt discount and fees	9,814			12,625
Stock-based compensation	37,941			28,921
Gain on investments, net	(5,128		)	(2,477		)
Deferred income taxes	4,778			(4,413		)
Other non-cash items	3,694			433
Changes in operating assets and liabilities, net of effect of acquired businesses:
Receivables	5,336			8,719
Inventories	(12,266		)	(2,672		)
Prepaid expenses and other	(13,602		)	26,516
Other assets	(1,273		)	(45,274		)
Accounts payable and accrued liabilities	(13,550		)	10,023
Deferred revenue	(23,740		)	(24,359		)
Other long-term liabilities	(4,983		)	7,174
Net cash provided by operating activities	96,963			150,231
Cash flows from investing activities:
Purchases of available-for-sale securities	(77,490		)	(63,705		)
Proceeds from the sale of available-for-sale securities	54,601			46,857
Proceeds from the maturity of available-for-sale securities	23,799			15,716
Proceeds from the sale of long-term investments	—			6,102
Purchases of property, plant and equipment	(17,715		)	(23,739		)
Cash paid in business combinations and asset acquisitions, net of cash acquired	(163,685		)	(392,139		)
Net cash used for investing activities	(180,490		)	(410,908		)
Cash flows from financing activities:
Proceeds from revolving credit facility	100,000			100,000
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	2,642			7,300
Proceeds from issuance of common stock	36,482			30,227
Stock received for payment of employee taxes on vesting of restricted stock	(12,292		)	(11,758		)
Payments for repurchases of common stock	(25,032		)	—
Net cash provided by financing activities	99,965			122,661
Effect of exchange rate changes on cash and cash equivalents	4,718			(11,108		)
Increase (decrease) in cash and cash equivalents	21,156			(149,124		)
Cash and cash equivalents at end of period	$	557,416		$	577,233

Supplemental cash flow information:
Cash paid for interest	$	4,831		$	6,294
Cash paid for taxes, net	$	10,231		$	6,598
Non-cash investing and financing activities:
Stock options assumed in acquisitions	$	—		$	529
Available-for-sale securities received from customer	$	1,695		$	232

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 June 28, 2014 and December 28, 2013 was as follows:



	June 28, 2014							December 28, 2013
	(In thousands)
	Principal		Unamortized Discount			Carrying Value		Principal		Unamortized Discount			Carrying Value
2015 Notes	$	350,000	$	(16,667	)	$	333,333	$	350,000	$	(25,174	)	$	324,826
Revolving credit facility	100,000		—			100,000		—		—			—
Total outstanding debt	$	450,000	$	(16,667	)	$	433,333	$	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 June 28, 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 mature on June 1, 2015 and therefore are classified as a current liability as of June 28, 2014. The 2015 Notes are convertible into cash from June 29, 2014 through September 27, 2014 because Cadence’s closing stock price exceeded $9.81 for at least 20 days in the 30-day period prior to June 28, 2014.

If the note holders elect to convert their 2015 Notes prior to maturity, any unamortized discount and transaction fees will be expensed at the time of conversion. If the entire outstanding principal amount had been converted on June 28, 2014, Cadence would have recorded an expense of $19.0 million associated with the conversion, comprised of $16.7 million of unamortized debt discount and $2.3 million of unamortized transaction fees.

As of June 28, 2014, the if-converted value of the 2015 Notes to the note holders of approximately $804.3 million exceeded the principal amount of $350.0 million. The fair value of the 2015 Notes was $807.7 million as of June 28, 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.

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 $455.8 million as of June 28, 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 $455.8 million as of June 28, 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 and six months ended June 28, 2014 and June 29, 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 and six months ended June 28, 2014 and June 29, 2013 were as follows:



	Three Months Ended						Six Months Ended
	June 28, 2014			June 29, 2013			June 28, 2014			June 29, 2013
	(In thousands, except percentages)
Effective interest rate	8.1		%	8.1		%	8.1		%	8.1		%
Contractual interest expense	$	2,289		$	2,289		$	4,578		$	4,578
Amortization of debt discount	$	4,275		$	3,951		$	8,507		$	7,861

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 on borrowings under the credit facility at either LIBOR plus a margin between 1.25% and 2.0% per annum or at a base rate plus a margin between 0.25% and 1.0% per annum. The interest rate applied to borrowings is determined by Cadence’s consolidated leverage ratio as specified by the credit facility agreement. 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. As of June 28, 2014, the interest rate applied to outstanding borrowings under the credit facility was 1.40%.

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 June 28, 2014 and December 28, 2013, Cadence had outstanding borrowings under the credit facility of $100.0 million and $0, respectively, and was in compliance with all financial covenants.

NOTE 3. ACQUISITIONS AND ACQUISITION-RELATED CONTINGENT CONSIDERATION

Acquisitions

On June 13, 2014, Cadence acquired Jasper Design Automation, Inc., or Jasper, a privately held provider of formal analysis solutions based in Mountain View, California. The acquired technology complements Cadence's existing system design and verification platforms. Total cash consideration for Jasper, after taking into account adjustments for certain costs, and cash held by Jasper at closing of $28.7 million, was $139.5 million. Cadence will also make payments to certain employees that are conditioned upon continued employment and the achievement of certain performance metrics over a three-year period.

The following table summarizes the fair value of assets acquired and liabilities assumed in the acquisition of Jasper:



	(In thousands)
Cash and cash equivalents	$	28,678
Property, plant and equipment	520
Other assets	4,362
Acquired intangibles:
Existing technology	68,200
Agreements and relationships	13,600
Tradenames and trademarks	900
In-process technology	10,300
Goodwill	81,269
Total assets acquired	$	207,829
Deferred revenue	(11,900		)
Other liabilities	(7,719		)
Long-term deferred tax liabilities	(20,002		)
Net assets acquired	$	168,208

The allocation of purchase consideration to certain assets and liabilities has not been finalized. Cadence will continue to evaluate certain estimates and assumptions, primarily related to taxes and assumed liabilities, during the measurement period (up to one year from the acquisition date).

During the six months ended June 28, 2014, Cadence also completed two other 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 recorded a total of $20.3 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.

Cadence amortizes acquired 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 six months ended June 28, 2014 is approximately eight years.

The goodwill related to Cadence’s acquisitions during the six months ended June 28, 2014 is primarily related to expected synergies from combining operations of the acquired companies with Cadence. Cadence expects that approximately $2.8 million of goodwill related to the acquisitions completed during the six months ended June 28, 2014 will be deductible for tax purposes.

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

Transaction costs associated with Cadence’s acquisitions were $2.7 million and $3.7 million for the three and six months ended June 28, 2014, respectively, and $4.8 million and $8.2 million for the three and six months ended June 29, 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 22 months. Of the $11.8 million, up to $9.1 million would be recorded as operating expenses in the condensed consolidated income statements.

NOTE 4. GOODWILL AND ACQUIRED INTANGIBLES

Goodwill

The changes in the carrying amount of goodwill during the six months ended June 28, 2014 were as follows:



	Gross Carrying Amount
	(In thousands)
Balance as of December 28, 2013	$	456,905
Goodwill resulting from acquisitions	102,025
Measurement period adjustments	(436		)
Effect of foreign currency translation	1,463
Balance as of June 28, 2014	$	559,957

Measurement period adjustments to goodwill are applied based on new information obtained about preliminary amounts recognized for a business combination. During the six months ended June 28, 2014, Cadence recorded a measurement period adjustment related to certain tax estimates and assumptions made for one of its fiscal 2014 acquisitions, resulting in a decrease to goodwill.

Acquired Intangibles, Net

Acquired intangibles as of June 28, 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	$	319,593	$	(65,059	)	$	254,534
Agreements and relationships	175,499		(53,159		)	122,340
Tradenames, trademarks and patents	10,619		(3,579		)	7,040
Total acquired intangibles with definite lives	505,711		(121,797		)	383,914
In-process technology	11,516		—			11,516
Total acquired intangibles	$	517,227	$	(121,797	)	$	395,430

In-process technology as of June 28, 2014 consists of acquired projects that, if completed, will contribute to Cadence’s ability to offer additional IP and software solutions to its customers. As of June 28, 2014, these projects were expected to be complete in three to fifteen months. During the six months ended June 28, 2014, Cadence completed certain projects previously included in in-process technology and transferred approximately $2.3 million 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 and six months ended June 28, 2014 and June 29, 2013 was as follows:



	Three Months Ended				Six Months Ended
	June 28, 2014		June 29, 2013		June 28, 2014		June 29, 2013
	(In thousands)
Cost of product and maintenance	$	8,613	$	5,760	$	16,189	$	9,567
Amortization of acquired intangibles	5,579		5,327		10,789		9,118
Total amortization of acquired intangibles	$	14,192	$	11,087	$	26,978	$	18,685

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	$	32,522
2015	63,522
2016	56,646
2017	51,695
2018	48,059
Thereafter	131,470
Total estimated amortization expense	$	383,914

NOTE 5. INCOME TAXES

Cadence’s provision for income taxes of $6.5 million and $11.9 million for the three and six months ended June 28, 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 June 28, 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 provision for income taxes of $28.2 million for the three months ended June 29, 2013 was primarily related to federal, state and foreign income taxes on its anticipated fiscal 2013 income and tax expense related to an increase in the United States valuation allowance. Cadence's provision for income taxes for the six months ended June 29, 2013 was primarily related to federal, state and foreign income taxes on its fiscal 2013 income partially offset by 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 June 28, 2014 and December 28, 2013 were as follows:



	As of
	June 28, 2014		December 28, 2013
	(In thousands)
Accounts receivable	$	77,088	$	76,057
Unbilled accounts receivable	24,836		31,567
Long-term receivables	5,611		3,672
Total receivables	$	107,535	$	111,296
Less allowance for doubtful accounts	—		—
Total receivables, net	$	107,535	$	111,296

Cadence’s customers are primarily concentrated within the semiconductor and electronics systems industries. As of June 28, 2014 and December 28, 2013, no single customer accounted for 10% of Cadence’s total receivables. As of June 28, 2014, approximately 50% 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.

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 and six months ended June 28, 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 June 28, 2014 and December 28, 2013:



	Fair Value Measurements as of June 28, 2014:
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Cash equivalents:
Money market funds	$	357,616	$	357,616	$	—	$	—
Short-term investments:
Corporate debt securities	36,625		—		36,625		—
Bank certificates of deposit	24,259		—		24,259		—
United States Treasury securities	19,310		19,310		—		—
United States government agency securities	11,361		11,361		—		—
Commercial paper	1,995		—		1,995		—
Marketable equity securities	4,360		4,360		—		—
Trading securities held in Non-Qualified Deferred Compensation, or NQDC, trust	25,070		25,070		—		—
2015 Notes Hedges	455,844		—		455,844		—
Foreign currency exchange contracts	471		—		471		—
Total Assets	$	936,911	$	417,717	$	519,194	$	—

	Total		Level 1		Level 2		Level 3
	(In thousands)
Liabilities
Acquisition-related contingent consideration	$	1,850	$	—	$	—	$	1,850
2015 Notes Embedded Conversion Derivative	455,844		—		455,844		—
Total Liabilities	$	457,694	$	—	$	455,844	$	1,850



	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.

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 a discount rate of 11% to value its contingent consideration liabilities as of June 28, 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 six months ended June 28, 2014:



	(In thousands)
Balance as of December 28, 2013	$	4,091
Payments	(2,329		)
Adjustments	88
Balance as of June 28, 2014	$	1,850

Cadence acquired intangible assets, including in-process technology, of $93.0 million in connection with its acquisition of Jasper. The fair value of the intangible assets acquired was determined using the income approach and using level 3 inputs. Key assumptions include the level and timing of expected future cash flows, conditions and demands specific to IP solutions, discount rates consistent with the level of risk and the economy in general. The fair value of these intangible assets was affected most significantly by the projected income associated with the intangible assets and the anticipated timing of the projected income, but was also impacted by the discount rate used to adjust the outcomes to their present values. Cadence used discount rates ranging from 13% to 17% to value the intangible assets acquired.

As part of the Jasper acquisition, Cadence also assumed obligations related to deferred revenue of $11.9 million, which was estimated using the cost build-up approach. The cost build-up approach determines fair value using estimates of the costs required to fulfill the contracted obligations plus an assumed profit of 25%. The total costs including the assumed profit were adjusted to present value using a discount rate of approximately 3.25%. The resulting fair value approximates the amount that Cadence would be required to pay a third party to assume the obligation. The fair value of the deferred revenue obligation was affected most significantly by the estimated costs required to support the obligation, but was also affected by the assumed profit and the discount rate.

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

NOTE 8. CASH, CASH EQUIVALENTS AND INVESTMENTS

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



	As of
	June 28, 2014		December 28, 2013
	(In thousands)
Cash and cash equivalents	$	557,416	$	536,260
Short-term investments	97,910		96,788
Cash, cash equivalents and short-term investments	$	655,326	$	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 June 28, 2014 and December 28, 2013:



	As of
	June 28, 2014		December 28, 2013
	(In thousands)
Cash and interest bearing deposits	$	199,800	$	188,088
Money market funds	357,616		345,872
Bank certificates of deposit	—		2,300
Total cash and cash equivalents	$	557,416	$	536,260

Short-Term Investments

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



	As of June 28, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Corporate debt securities	$	36,615	$	23	$	(13	)	$	36,625
Bank certificates of deposit	24,249		10		—			24,259
United States Treasury securities	19,273		37		—			19,310
United States government agency securities	11,352		10		(1		)	11,361
Commercial paper	1,994		1		—			1,995
Marketable debt securities	93,483		81		(14		)	93,550
Marketable equity securities	3,485		875		—			4,360
Total short-term investments	$	96,968	$	956	$	(14	)	$	97,910



	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 June 28, 2014, no securities held by Cadence had been in an unrealized loss position for greater than two months.

The amortized cost and estimated fair value of marketable debt securities included in short-term investments as of June 28, 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	$	45,019	$	45,057
Due in one to three years	48,464		48,493
Total marketable debt securities included in short-term investments	$	93,483	$	93,550

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.

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 June 28, 2014 and December 28, 2013 were as follows:



	As of
	June 28, 2014		December 28, 2013
	(In thousands)
Cost method	$	3,038	$	3,038
Equity method	5,570		3,639
Total non-marketable investments	$	8,608	$	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
	June 28, 2014
	(In thousands)
Accounts payable and accrued liabilities	$	2,151
Other long-term liabilities	2,635
Total accrued as of June 28, 2014	$	4,786

The following table presents activity relating to Cadence’s restructuring plans during the six months ended June 28, 2014:



	Severance and Benefits			Excess Facilities			Total
	(In thousands)
Balance, December 28, 2013	$	10,672		$	3,552		$	14,224
Restructuring and other charges, net	168			202			370
Cash payments	(9,338		)	(497		)	(9,835		)
Effect of foreign currency translation	5			22			27
Balance, June 28, 2014	$	1,507		$	3,279		$	4,786

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 and six months ended June 28, 2014 and June 29, 2013 are as follows:



	Three Months Ended				Six Months Ended
	June 28, 2014		June 29, 2013		June 28, 2014		June 29, 2013
	(In thousands, except per share amounts)
Net income	$	23,263	$	9,429	$	56,333	$	88,038
Weighted average common shares used to calculate basic net income per share	283,344		277,146		282,480		276,018
Convertible notes	—		11		—		11
2015 Warrants	15,054		10,871		13,815		10,770
Stock-based awards	7,357		6,415		7,100		6,475
Weighted average common shares used to calculate diluted net income per share	305,755		294,443		303,395		293,274
Net income per share - basic	$	0.08	$	0.03	$	0.20	$	0.32
Net income per share - diluted	$	0.08	$	0.03	$	0.19	$	0.30

The following table presents shares of Cadence’s common stock outstanding for the three and six months ended June 28, 2014 and June 29, 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		Six Months Ended
	June 28, 2014	June 29, 2013	June 28, 2014	June 29, 2013
	(In thousands)
2013 Warrants	—	6,830	—	6,830
Options to purchase shares of common stock	4,399	5,752	4,517	6,253
Non-vested shares of restricted stock	8	18	9	9
Total potential common shares excluded	4,407	12,600	4,526	13,092

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 June 28, 2014, and December 28, 2013:



	As of
	June 28, 2014			December 28, 2013
	(In thousands)
Foreign currency translation gain	$	34,011		$	27,183
Changes in defined benefit plan liabilities	(2,831		)	(3,218		)
Unrealized holding gains on available-for-sale securities	941			346
Total accumulated other comprehensive income	$	32,121		$	24,311

For the three and six months ended June 28, 2014 and June 29, 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 and six months ended June 28, 2014 or June 29, 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 and six months ended June 28, 2014 or June 29, 2013.

NOTE 13. OTHER INCOME, NET

Cadence’s other income, net for the three and six months ended June 28, 2014 and June 29, 2013 was as follows:



	Three Months Ended						Six Months Ended
	June 28, 2014			June 29, 2013			June 28, 2014			June 29, 2013
	(In thousands)
Interest income	$	498		$	484		$	983		$	909
Gains (losses) on non-marketable investments, net	406			(229		)	1,952			649
Gains on securities in NQDC trust	1,047			1,699			3,109			1,851
Gains (losses) on foreign exchange	(368		)	223			(1,169		)	987
Other income (expense), net	52			(159		)	142			(203		)
Total other income, net	$	1,635		$	2,018		$	5,017		$	4,193

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 and six months ended June 28, 2014 and June 29, 2013:



	Three Months Ended				Six Months Ended
	June 28, 2014		June 29, 2013		June 28, 2014		June 29, 2013
	(In thousands)
Americas:
United States	$	161,874	$	159,229	$	325,202	$	308,400
Other Americas	6,050		5,566		11,834		10,181
Total Americas	167,924		164,795		337,036		318,581
Asia	88,286		74,462		175,302		142,548
Europe, Middle East and Africa	82,074		77,757		159,606		156,677
Japan	40,504		45,467		85,394		98,941
Total	$	378,788	$	362,481	$	757,338	$	716,747

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



	As of
	June 28, 2014		December 28, 2013
	(In thousands)
Americas:
United States	$	209,533	$	207,694
Other Americas	250		294
Total Americas	209,783		207,988
Asia	22,591		23,508
Europe, Middle East and Africa	6,085		6,326
Japan	855		893
Total	$	239,314	$	238,715

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.

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 year 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.

During the first quarter of fiscal 2014, we acquired Forte Design Systems, a provider of SystemC-based high-level synthesis, or HLS, and arithmetic IP. During the second quarter of fiscal 2014, we acquired Jasper Design Automation, Inc., a leading provider of high-level formal analysis solutions. These acquisitions expanded the capabilities and differentiation of the Cadence System Development Suite, strengthening our offerings for the fast development and verification of advanced design IP.

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.

New Accounting Standard

On May 28, 2014, the Financial Accounting Standards Board issued a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under United States generally accepted accounting principles. The updated standard will become effective for us in the first quarter of fiscal 2017 and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

Results of Operations

Financial results for the three and six months ended June 28, 2014, as compared to the three and six months ended June 29, 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 our acquisitions, including the licensing of IP;


•	An increase in employee-related costs, primarily consisting of costs related to hiring additional employees, increased compensation for existing employees and incremental costs related to employees added from our fiscal 2014 and 2013 acquisitions;


•	An increase in stock-based compensation;


•	An increase in severance and other termination costs primarily associated with a voluntary early retirement program we offered to certain of our employees during the three months ended June 28, 2014;


•	An increase in amortization of acquired intangibles resulting from our fiscal 2014 and 2013 acquisitions; and


•	Variations in our quarterly and year to date provisions for income taxes.

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 June 28, 2014 and June 29, 2013 and the change in revenue between periods:



	Three Months Ended				Change
	June 28, 2014		June 29, 2013		Amount			Percentage
	(In millions, except percentages)
Product and maintenance	$	354.5	$	338.0	$	16.5		5	%
Services	24.3		24.5		(0.2		)	(1	)%
Total revenue	$	378.8	$	362.5	$	16.3		4	%

The following table shows our revenue for the six months ended June 28, 2014 and June 29, 2013 and the change in revenue between periods:



	Six Months Ended				Change
	June 28, 2014		June 29, 2013		Amount			Percentage
	(In millions, except percentages)
Product and maintenance	$	711.8	$	666.3	$	45.5		7	%
Services	45.5		50.5		(5.0		)	(10	)%
Total revenue	$	757.3	$	716.8	$	40.5		6	%

Product and maintenance revenue increased during the three and six months ended June 28, 2014, as compared to the three and six months ended June 29, 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 and six months ended June 28, 2014 or June 29, 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
	June 29, 2013		September 28, 2013		December 28, 2013		March 29, 2014		June 28, 2014
Functional Verification, including Emulation Hardware	22	%	24	%	25	%	23	%	21	%
Digital IC Design and Signoff	31	%	29	%	29	%	30	%	30	%
Custom IC Design	28	%	28	%	26	%	27	%	28	%
System Interconnect and Analysis	11	%	10	%	10	%	10	%	11	%
IP	8	%	9	%	10	%	10	%	10	%
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
	June 28, 2014		June 29, 2013		Amount			Percentage
	(In millions, except percentages)
United States	$	161.9	$	159.2	$	2.7		2	%
Other Americas	6.1		5.6		0.5			9	%
Asia	88.3		74.5		13.8			19	%
Europe, Middle East and Africa	82.1		77.8		4.3			6	%
Japan	40.4		45.4		(5.0		)	(11	)%
Total revenue	$	378.8	$	362.5	$	16.3		4	%



	Six Months Ended				Change
	June 28, 2014		June 29, 2013		Amount			Percentage
	(In millions, except percentages)
United States	$	325.2	$	308.4	$	16.8		5	%
Other Americas	11.8		10.2		1.6			16	%
Asia	175.3		142.6		32.7			23	%
Europe, Middle East and Africa	159.6		156.7		2.9			2	%
Japan	85.4		98.9		(13.5		)	(14	)%
Total revenue	$	757.3	$	716.8	$	40.5		6	%

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 Asia increased during the three and six months ended June 28, 2014, as compared to the three and six months ended June 29, 2013, primarily due to increases in revenue from our software business and emulation hardware installations.

Revenue for Japan decreased during the three and six months ended June 28, 2014, as compared to the three and six months ended June 29, 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.

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				Six Months Ended
	June 28, 2014		June 29, 2013		June 28, 2014		June 29, 2013
United States	43	%	44	%	43	%	43	%
Other Americas	1	%	1	%	2	%	1	%
Asia	23	%	21	%	23	%	20	%
Europe, Middle East and Africa	22	%	21	%	21	%	22	%
Japan	11	%	13	%	11	%	14	%
Total	100	%	100	%	100	%	100	%

Cost of Revenue



	Three Months Ended				Change
	June 28, 2014		June 29, 2013		Amount		Percentage
	(In millions, except percentages)
Cost of product and maintenance	$	37.7	$	28.1	$	9.6	34	%
Cost of services	16.7		15.1		1.6		11	%



	Six Months Ended				Change
	June 28, 2014		June 29, 2013		Amount			Percentage
	(In millions, except percentages)
Cost of product and maintenance	$	79.9	$	57.9	$	22.0		38	%
Cost of services	31.6		33.5		(1.9		)	(6	)%

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
	June 28, 2014		June 29, 2013		Amount		Percentage
	(In millions, except percentages)
Product and maintenance-related costs	$	29.1	$	22.3	$	6.8	30	%
Amortization of acquired intangibles	8.6		5.8		2.8		48	%
Total cost of product and maintenance	$	37.7	$	28.1	$	9.6	34	%



	Six Months Ended				Change
	June 28, 2014		June 29, 2013		Amount		Percentage
	(In millions, except percentages)
Product and maintenance-related costs	$	63.7	$	48.3	$	15.4	32	%
Amortization of acquired intangibles	16.2		9.6		6.6		69	%
Total cost of product and maintenance	$	79.9	$	57.9	$	22.0	38	%

Cost of product and maintenance depends primarily upon our emulation hardware product sales and gross margins 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 and six months ended June 28, 2014, as compared to the three and six months ended June 29, 2013, were due to the following:



	Change
	Three Months Ended		Six Months Ended
	(In millions)
Emulation hardware costs	$	6.1	$	15.7
Other items	0.7		(0.3		)
	$	6.8	$	15.4

Emulation hardware costs increased during the three and six months ended June 28, 2014, as compared to the three and six months ended June 29, 2013, due to a higher volume of emulation hardware products sold. Gross margins on our emulation hardware products may fluctuate based on customer pricing strategies, product competition and product life cycle. Gross margins on our emulation hardware products decreased during the three and six months ended June 28, 2014, as compared to the three and six months ended June 29, 2013. We expect lower gross margins on the sale of our emulation hardware products for fiscal 2014, as compared to fiscal 2013, primarily due to an increasingly competitive environment for emulation hardware.

Amortization of acquired intangibles included in cost of product and maintenance increased during the three and six months ended June 28, 2014, as compared to the three and six months ended June 29, 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