e10vq
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-Q
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(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended October 3,
2009
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission file number 0-15867
CADENCE DESIGN SYSTEMS,
INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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77-0148231
(I.R.S. Employer
Identification No.)
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2655 Seely Avenue, Building 5, San Jose, California
(Address of Principal Executive Offices)
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95134
(Zip Code)
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(408) 943-1234
Registrants
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 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):
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Large
accelerated filer [ X ]
|
Accelerated
filer [ ]
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Non-accelerated
filer [ ]
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Smaller
reporting company [ ]
|
(Do not check if a smaller reporting company)
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 October 3, 2009, 268,769,321 shares of the
registrants common stock, $0.01 par value, were
outstanding.
CADENCE
DESIGN SYSTEMS, INC.
INDEX
PART I.
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements
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|
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|
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October 3,
|
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January 3,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
As Adjusted
|
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|
|
|
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|
(Note 2)
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|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
570,617
|
|
|
$
|
568,255
|
|
Short-term investments
|
|
|
4,756
|
|
|
|
3,840
|
|
Receivables, net of allowances of $15,208 and $7,524,
respectively
|
|
|
195,468
|
|
|
|
298,665
|
|
Inventories
|
|
|
25,626
|
|
|
|
28,465
|
|
Prepaid expenses and other
|
|
|
64,694
|
|
|
|
54,765
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
861,161
|
|
|
|
953,990
|
|
Property, plant and equipment, net of accumulated depreciation
of $630,155 and $625,010, respectively
|
|
|
313,398
|
|
|
|
354,852
|
|
Acquired intangibles, net of accumulated amortization of
$122,677 and $134,688, respectively
|
|
|
33,438
|
|
|
|
49,082
|
|
Installment contract receivables, net of allowances of $9,724
and $0, respectively
|
|
|
64,859
|
|
|
|
160,742
|
|
Other assets
|
|
|
141,361
|
|
|
|
161,187
|
|
|
|
|
|
|
|
|
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Total Assets
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|
$
|
1,414,217
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|
|
$
|
1,679,853
|
|
|
|
|
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|
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LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
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Accounts payable and accrued liabilities
|
|
$
|
159,728
|
|
|
$
|
261,099
|
|
Current portion of deferred revenue
|
|
|
245,528
|
|
|
|
303,111
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
405,256
|
|
|
|
564,210
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|
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|
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|
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Long-Term Liabilities:
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|
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|
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Long-term portion of deferred revenue
|
|
|
108,941
|
|
|
|
130,354
|
|
Convertible notes
|
|
|
431,072
|
|
|
|
416,572
|
|
Other long-term liabilities
|
|
|
372,756
|
|
|
|
382,004
|
|
|
|
|
|
|
|
|
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Total long-term liabilities
|
|
|
912,769
|
|
|
|
928,930
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|
|
|
|
|
|
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|
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Contingencies (Notes 7 and 11)
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Stockholders Equity:
|
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|
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Common stock and capital in excess of par value
|
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1,664,029
|
|
|
|
1,659,302
|
|
Treasury stock, at cost
|
|
|
(433,505
|
)
|
|
|
(695,152
|
)
|
Accumulated deficit
|
|
|
(1,175,535
|
)
|
|
|
(814,679
|
)
|
Accumulated other comprehensive income
|
|
|
41,203
|
|
|
|
37,242
|
|
|
|
|
|
|
|
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Total stockholders equity
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|
|
96,192
|
|
|
|
186,713
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|
|
|
|
|
|
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Total Liabilities and Stockholders Equity
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|
$
|
1,414,217
|
|
|
$
|
1,679,853
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|
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The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
1
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Three Months Ended
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Nine Months Ended
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October 3,
|
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|
September 27,
|
|
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October 3,
|
|
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September 27,
|
|
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|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
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|
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As Adjusted
|
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|
|
|
|
As Adjusted
|
|
|
|
|
|
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(Note 2)
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(Note 2)
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Revenue:
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Product
|
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$
|
96,932
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|
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$
|
107,572
|
|
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$
|
286,295
|
|
|
$
|
422,365
|
|
Services
|
|
|
26,669
|
|
|
|
32,873
|
|
|
|
83,684
|
|
|
|
98,763
|
|
Maintenance
|
|
|
92,521
|
|
|
|
92,043
|
|
|
|
262,374
|
|
|
|
290,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total revenue
|
|
|
216,122
|
|
|
|
232,488
|
|
|
|
632,353
|
|
|
|
811,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
|
|
6,405
|
|
|
|
11,829
|
|
|
|
23,828
|
|
|
|
39,241
|
|
Cost of services
|
|
|
21,139
|
|
|
|
25,677
|
|
|
|
69,602
|
|
|
|
78,083
|
|
Cost of maintenance
|
|
|
11,105
|
|
|
|
13,910
|
|
|
|
35,423
|
|
|
|
42,889
|
|
Marketing and sales
|
|
|
68,282
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|
|
|
91,075
|
|
|
|
214,603
|
|
|
|
274,016
|
|
Research and development
|
|
|
88,049
|
|
|
|
112,486
|
|
|
|
273,394
|
|
|
|
357,929
|
|
General and administrative
|
|
|
28,732
|
|
|
|
32,937
|
|
|
|
101,311
|
|
|
|
105,608
|
|
Amortization of acquired intangibles
|
|
|
2,726
|
|
|
|
5,626
|
|
|
|
8,694
|
|
|
|
17,206
|
|
Restructuring and other charges (credits)
|
|
|
(175
|
)
|
|
|
48,120
|
|
|
|
17,833
|
|
|
|
47,765
|
|
Write-off of acquired in-process technology
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
226,263
|
|
|
|
341,660
|
|
|
|
744,688
|
|
|
|
963,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(10,141
|
)
|
|
|
(109,172
|
)
|
|
|
(112,335
|
)
|
|
|
(152,058
|
)
|
Interest expense
|
|
|
(7,278
|
)
|
|
|
(7,042
|
)
|
|
|
(21,592
|
)
|
|
|
(20,696
|
)
|
Other income (expense), net
|
|
|
2,917
|
|
|
|
(7,714
|
)
|
|
|
(5,765
|
)
|
|
|
(3,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision (benefit) for income taxes
|
|
|
(14,502
|
)
|
|
|
(123,928
|
)
|
|
|
(139,692
|
)
|
|
|
(176,455
|
)
|
Provision (benefit) for income taxes
|
|
|
(455
|
)
|
|
|
46,728
|
|
|
|
11,969
|
|
|
|
46,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (loss)
|
|
$
|
(14,047
|
)
|
|
$
|
(170,656
|
)
|
|
$
|
(151,661
|
)
|
|
$
|
(222,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.67
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(0.87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic and
diluted
|
|
|
259,193
|
|
|
|
252,915
|
|
|
|
256,792
|
|
|
|
256,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
2
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
As Adjusted
|
|
|
|
|
|
|
(Note 2)
|
|
|
Cash and Cash Equivalents at Beginning of Period
|
|
$
|
568,255
|
|
|
$
|
1,062,920
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(151,661
|
)
|
|
|
(222,610
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
71,334
|
|
|
|
96,037
|
|
Amortization of debt discount and fees
|
|
|
15,557
|
|
|
|
13,323
|
|
Stock-based compensation
|
|
|
43,690
|
|
|
|
57,678
|
|
Equity in loss from investments, net
|
|
|
369
|
|
|
|
823
|
|
Loss on investments, net
|
|
|
4,307
|
|
|
|
11,440
|
|
(Gain) loss on sale and leaseback of land and buildings
|
|
|
(122
|
)
|
|
|
350
|
|
Write-down of investment securities
|
|
|
5,207
|
|
|
|
10,666
|
|
Write-off of acquired in-process technology
|
|
|
----
|
|
|
|
600
|
|
Tax benefit of call options
|
|
|
----
|
|
|
|
2,994
|
|
Impairment of property, plant and equipment
|
|
|
6,603
|
|
|
|
2,004
|
|
Deferred income taxes
|
|
|
(6,520
|
)
|
|
|
(11,094
|
)
|
Proceeds from the sale of receivables, net
|
|
|
5,827
|
|
|
|
48,124
|
|
Provisions for losses on trade and installment contract
receivables and sales returns
|
|
|
18,668
|
|
|
|
462
|
|
Other non-cash items
|
|
|
(3,962
|
)
|
|
|
(3,119
|
)
|
Changes in operating assets and liabilities, net of effect of
acquired businesses:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
56,444
|
|
|
|
21,489
|
|
Installment contract receivables
|
|
|
122,302
|
|
|
|
46,198
|
|
Inventories
|
|
|
2,846
|
|
|
|
5,486
|
|
Prepaid expenses and other
|
|
|
(4,041
|
)
|
|
|
(3,421
|
)
|
Other assets
|
|
|
11,809
|
|
|
|
(1,849
|
)
|
Accounts payable and accrued liabilities
|
|
|
(79,395
|
)
|
|
|
(41,582
|
)
|
Deferred revenue
|
|
|
(83,760
|
)
|
|
|
(32,243
|
)
|
Other long-term liabilities
|
|
|
(10,773
|
)
|
|
|
35,972
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
24,729
|
|
|
|
37,728
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from the sale of
available-for-sale
investments
|
|
|
139
|
|
|
|
53,783
|
|
Purchases of
available-for-sale
investments
|
|
|
----
|
|
|
|
(62,447
|
)
|
Proceeds from the sale of long-term investments
|
|
|
----
|
|
|
|
3,250
|
|
Purchases of property, plant and equipment
|
|
|
(30,504
|
)
|
|
|
(81,112
|
)
|
Purchases of software licenses
|
|
|
(774
|
)
|
|
|
(1,199
|
)
|
Investment in venture capital partnerships and equity investments
|
|
|
(2,300
|
)
|
|
|
(4,053
|
)
|
Cash paid in business combinations and asset acquisitions, net
of cash acquired, and acquisition of intangibles
|
|
|
(14,126
|
)
|
|
|
(20,621
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(47,565
|
)
|
|
|
(112,399
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from receivable sale financing
|
|
|
----
|
|
|
|
17,970
|
|
Principal payments on receivable sale financing
|
|
|
(2,467
|
)
|
|
|
----
|
|
Payment of convertible notes due 2023
|
|
|
----
|
|
|
|
(230,207
|
)
|
Tax benefit from employee stock transactions
|
|
|
----
|
|
|
|
427
|
|
Proceeds from issuance of common stock
|
|
|
27,862
|
|
|
|
48,116
|
|
Stock received for payment of employee taxes on vesting of
restricted stock
|
|
|
(4,055
|
)
|
|
|
(3,693
|
)
|
Purchases of treasury stock
|
|
|
----
|
|
|
|
(273,950
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
21,340
|
|
|
|
(441,337
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
3,858
|
|
|
|
4,841
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
2,362
|
|
|
|
(511,167
|
)
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period
|
|
$
|
570,617
|
|
|
$
|
551,753
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
3
|
|
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
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 Cadences Annual Report on
Form 10-K
for the fiscal year ended January 3, 2009.
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 for the periods presented. The results for such periods
are not necessarily indicative of the results to be expected for
the full fiscal year.
Preparation of the Condensed Consolidated Financial Statements
in conformity with Generally Accepted Accounting Principles, or
GAAP, 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements
Cadence adopted Statement of Financial Accounting Standard, or
SFAS, No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles a replacement of FASB Statement
No. 162 during the three months ended October 3,
2009. SFAS No. 168 replaces the GAAP hierarchy with
two levels: authoritative and nonauthoritative. The FASB
Accounting Standards Codification, or Codification, became the
single source of authoritative nongovernmental GAAP, except for
rules and interpretive releases of the SEC. All
nongrandfathered, non-SEC accounting literature not included in
the Codification is superseded and deemed nonauthoritative.
Cadence has updated the Notes below to reflect the Codification
and eliminated all prior references to nongrandfathered, and now
nonauthoritative, accounting literature.
Cadence adopted new accounting principles for its
1.375% Convertible Senior Notes Due 2011, or the 2011
Notes, and 1.500% Convertible Senior Notes Due 2013, or the
2013 Notes, and collectively with the 2011 Notes, the
Convertible Senior Notes, on the first day of fiscal 2009. See
Note 2 for additional information and disclosures regarding
this adoption.
Cadence adopted new accounting principles for all non-financial
assets and non-financial liabilities measured at fair value on a
non-recurring basis on the first day of fiscal 2009. This
adoption did not have a material impact on Cadences
consolidated financial position, results of operations or cash
flows. See Note 4 for additional disclosures as a result of
this adoption.
During the three months ended July 4, 2009, Cadence
initially adopted new accounting principles that modified the
definition of what qualifies as a subsequent event
those events or transactions that occur following the balance
sheet date, but before the financial statements are issued, or
are available to be issued and requires companies to
disclose the date through which it has evaluated subsequent
events and the basis for determining that date. Cadence
evaluated subsequent events through October 30, 2009, the
date on which this Quarterly Report on
Form 10-Q
was filed with the SEC.
4
Cadence initially adopted the following three related new
accounting principles during the three months ended July 4,
2009:
|
|
|
|
|
The modifications to the measurement of
other-than-temporary
impairments for debt securities and to the presentation and
frequency of related disclosures;
|
|
|
The requirement for disclosures about fair value of financial
instruments for interim reporting periods as well as in annual
financial statements; and
|
|
|
Additional guidance for estimating fair value when the volume
and level of activity for an asset or a liability have
significantly decreased and identifying transactions that are
not orderly.
|
The adoption of these three updates to GAAP did not have a
material impact on Cadences consolidated financial
position, results of operations or cash flows.
|
|
NOTE 2.
|
CONVERTIBLE
NOTES
|
1.375% Convertible Senior Notes Due 2011 and
1.500% Convertible Senior Notes Due 2013
In December 2006, Cadence issued $250.0 million principal
amount of the 2011 Notes, and $250.0 million of the 2013
Notes. The indentures for the Convertible Senior Notes do not
contain any financial covenants. Cadence received net proceeds
of approximately $487.2 million after issuance costs of
approximately $12.8 million, including $12.0 million
of underwriting discounts. Contractual interest payable on the
Convertible Senior Notes began accruing in December 2006 and is
payable semi-annually each December 15th and
June 15th.
Holders may convert their Convertible Senior Notes prior to
maturity upon the occurrence of one of the following events:
|
|
|
|
|
The price of Cadences common stock reaches $27.50 during
certain periods of time specified in the Convertible Senior
Notes;
|
|
|
Specified corporate transactions occur; or
|
|
|
The trading price of the Convertible Senior Notes falls below
98% of the product of (i) the last reported sale price of
Cadences common stock and (ii) the conversion rate on
that date.
|
From November 2, 2011, in the case of the 2011 Notes, and
November 1, 2013, in the case of the 2013 Notes, and until
the close of business on the scheduled trading day immediately
preceding the maturity date, holders may convert their
Convertible Senior Notes at any time, regardless of the
foregoing circumstances. Cadence may not redeem the Convertible
Senior Notes prior to maturity.
The initial conversion rate for the Convertible Senior Notes is
47.2813 shares of Cadence common stock per $1,000 principal
amount of Convertible Senior Notes, equivalent to a conversion
price of approximately $21.15 per share of Cadence common stock.
Upon conversion, a holder will receive the sum of the daily
settlement amounts, calculated on a proportionate basis for each
day, during a specified observation period following the
conversion date. The daily settlement amount during each date of
the observation period consists of:
|
|
|
|
|
Cash up to the principal amount of the note; and
|
|
|
Cadences common stock to the extent that the conversion
value exceeds the amount of cash paid upon conversion of the
Convertible Senior Notes.
|
In addition, if a fundamental change occurs prior to maturity
and provided that Cadences stock price is greater than
$18.00 per share, the conversion rate will increase by an
additional amount of up to $8.27 per share, for a holder that
elects to convert its Convertible Senior Notes in connection
with such fundamental change, which amount will be paid entirely
in cash. A fundamental change is any transaction or event
(whether by means of an exchange offer, liquidation, tender
offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise) in which more than 50% of
Cadences common stock is exchanged for, converted into,
acquired for or constitutes
5
solely the right to receive, consideration. No fundamental
change will have occurred if at least 90% of the consideration
received consists of shares of common stock, or depositary
receipts representing such shares, that are:
|
|
|
|
|
Listed on, or immediately after the transaction or event will be
listed on, a United States national securities exchange; or
|
|
|
Approved, or immediately after the transaction or event will be
approved, for quotation on a United States system of
automated dissemination of quotations of securities prices
similar to the NASDAQ National Market prior to its designation
as a national securities exchange.
|
As of October 3, 2009, none of the conditions allowing the
holders of the Convertible Senior Notes to convert had been met.
Concurrently with the issuance of the Convertible Senior Notes,
Cadence entered into hedge transactions with various parties
whereby Cadence has the option to purchase up to
23.6 million shares of Cadences common stock at a
price of $21.15 per share, subject to adjustment. These options
expire on December 15, 2011, in the case of the 2011 Notes,
and December 15, 2013, in the case of the 2013 Notes, and
must be settled in net shares. The aggregate cost of these hedge
transactions was $119.8 million and has been recorded as a
reduction to Stockholders equity. The estimated fair value
of the hedges acquired in connection with the issuance of the
Convertible Senior Notes was $9.3 million as of
October 3, 2009. Subsequent changes in the fair value of
these hedges will not be recognized in Cadences Condensed
Consolidated Financial Statements as long as the instruments
remain classified as equity.
In separate transactions, Cadence also sold warrants to various
parties for the purchase of up to 23.6 million shares of
Cadences common stock at a price of $31.50 per share in a
private placement pursuant to Section 4(2) of the
Securities Act of 1933, as amended, or the Securities Act. The
warrants expire on various dates from February 2012 through
April 2012 in the case of the 2011 Notes, and February 2014
through April 2014 in the case of the 2013 Notes, and must be
settled in net shares. Cadence received $39.4 million in
cash proceeds from the sale of these warrants, which has been
recorded as an increase in Stockholders equity. The
estimated fair value of the warrants sold in connection with the
issuance of the Convertible Senior Notes was $4.9 million
as of October 3, 2009. Subsequent changes in the fair value
of these warrants will not be recognized in Cadences
Condensed Consolidated Financial Statements as long as the
instruments remain classified as equity. The warrants will be
included in diluted earnings per share to the extent the impact
is considered dilutive.
Zero Coupon Zero Yield Senior Convertible Notes Due 2023
In August 2003, Cadence issued $420.0 million principal
amount of Zero Coupon Zero Yield Senior Convertible Notes Due
2023, or the 2023 Notes. Cadence received net proceeds of
$406.4 million after issuance costs of $13.6 million
that were recorded in Other long-term assets and were amortized
as interest expense using the straight-line method over five
years. In connection with the issuance of the Convertible Senior
Notes in December 2006, Cadence repurchased $189.6 million
principal amount of the 2023 Notes, and in August 2008, Cadence
repurchased $230.2 million principal amount of the 2023
Notes upon the election of the holders of the 2023 Notes and
pursuant to the terms of the 2023 Notes, for a total
consideration of $230.8 million, reducing the balance of
the outstanding 2023 Notes to $0.2 million. As of
October 3, 2009, the total fair value of the outstanding
2023 Notes was $0.1 million.
Adoption of New Accounting Principles
Cadence adopted new accounting principles for its Convertible
Senior Notes on the first day of fiscal 2009. These new
accounting principles require issuers of certain types of
convertible notes to separately account for the liability and
equity components of such convertible notes in a manner that
reflects the entitys nonconvertible debt borrowing rate
when interest cost is recognized in subsequent periods. These
new accounting principles apply to the Convertible Senior Notes,
but they do not apply to the 2023 Notes. Prior to this adoption,
the liability of the Convertible Senior Notes was carried at its
principal value and only the contractual interest expense was
recognized in Cadences Condensed Consolidated Statements
of Operations. Because these new accounting principles require
retrospective adoption, Cadence was required to adjust all
periods for which the Convertible Senior Notes were outstanding
before the date of adoption.
6
Upon adoption of these new accounting principles and effective
as of the issuance date of the Convertible Senior Notes, Cadence
recorded $120.1 million of the principal amount to equity,
representing a debt discount for the difference between
Cadences estimated nonconvertible debt borrowing rate of
6.3% at the time of issuance and the coupon rate of the
Convertible Senior Notes. This debt discount is amortized as
interest expense over the contractual terms of the 2011 Notes
and the 2013 Notes, respectively, using the effective interest
method. In addition, Cadence allocated $3.1 million of the
issuance costs to the equity component of the Convertible Senior
Notes and the remaining $9.7 million of the issuance costs
to the debt component of the Convertible Senior Notes. The
issuance costs were allocated pro rata based on their initial
carrying amounts. The $9.7 million of debt issuance costs
allocated to the debt component is amortized as interest expense
over the respective contractual terms of the Convertible Senior
Notes using the effective interest method.
The carrying amount of the equity component of the Convertible
Senior Notes and the principal amount, unamortized discount and
net carrying amount of the liability component of the
Convertible Senior Notes as of October 3, 2009 and
January 3, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
October 3,
|
|
|
January 3,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
As Adjusted
|
|
|
|
(In thousands)
|
|
|
Equity component of Convertible Senior Notes
|
|
$
|
116,993
|
|
|
$
|
116,993
|
|
|
|
|
|
|
|
|
|
|
Principal amount of Convertible Senior Notes
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
Unamortized discount of Convertible Senior Notes
|
|
|
(69,106
|
)
|
|
|
(83,606
|
)
|
|
|
|
|
|
|
|
|
|
Liability component of Convertible Senior Notes
|
|
$
|
430,894
|
|
|
$
|
416,394
|
|
|
|
|
|
|
|
|
|
|
The effective interest rate, contractual interest expense,
amortization of debt discount and capitalized interest
associated with the amortization of debt discount for the
Convertible Senior Notes for the three and nine months ended
October 3, 2009 and June 28, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
As Adjusted
|
|
|
|
|
|
As Adjusted
|
|
|
|
(In thousands, except percentages)
|
|
|
Effective interest rate
|
|
|
6.3%
|
|
|
|
6.3%
|
|
|
|
6.3%
|
|
|
|
6.3%
|
|
Contractual interest expense
|
|
$
|
1,791
|
|
|
$
|
1,791
|
|
|
$
|
5,373
|
|
|
$
|
5,373
|
|
Amortization of debt discount
|
|
$
|
4,902
|
|
|
$
|
4,605
|
|
|
$
|
14,503
|
|
|
$
|
13,553
|
|
Capitalized interest associated with the amortization of debt
discount
|
|
$
|
(65
|
)
|
|
$
|
(581
|
)
|
|
$
|
(269
|
)
|
|
$
|
(1,369
|
)
|
As of October 3, 2009, the if-converted value of the
Convertible Senior Notes does not exceed the principal amount of
the Convertible Senior Notes and the total fair value of the
Convertible Senior Notes was $425.7 million.
7
Cadences retrospective adoption of the new accounting
principles for its Convertible Senior Notes resulted in the
following adjustments to Cadences Condensed Consolidated
Balance Sheet as of January 3, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 3, 2009
|
|
|
|
As Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Adjusted
|
|
|
|
(In thousands)
|
|
|
Current assets
|
|
$
|
954,548
|
|
|
$
|
(558
|
)(A)
|
|
$
|
953,990
|
|
Property, plant and equipment, net
|
|
|
351,961
|
|
|
|
2,891
|
(B)
|
|
|
354,852
|
|
Acquired intangibles, net
|
|
|
49,082
|
|
|
|
----
|
|
|
|
49,082
|
|
Installment contract receivables
|
|
|
160,742
|
|
|
|
----
|
|
|
|
160,742
|
|
Other assets
|
|
|
162,381
|
|
|
|
(1,194
|
)(C)
|
|
|
161,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,678,714
|
|
|
$
|
1,139
|
|
|
$
|
1,679,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
564,210
|
|
|
$
|
----
|
|
|
$
|
564,210
|
|
Long-Term Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of deferred revenue
|
|
|
130,354
|
|
|
|
----
|
|
|
|
130,354
|
|
Convertible notes
|
|
|
500,178
|
|
|
|
(83,606
|
)(D)
|
|
|
416,572
|
|
Other long-term liabilities
|
|
|
382,004
|
|
|
|
----
|
|
|
|
382,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
1,012,536
|
|
|
|
(83,606
|
)
|
|
|
928,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and capital in excess of par value
|
|
|
1,562,079
|
|
|
|
97,223
|
(E)
|
|
|
1,659,302
|
|
Treasury stock, at cost
|
|
|
(695,152
|
)
|
|
|
----
|
|
|
|
(695,152
|
)
|
Accumulated deficit
|
|
|
(802,201
|
)
|
|
|
(12,478
|
)(F)
|
|
|
(814,679
|
)
|
Accumulated other comprehensive income
|
|
|
37,242
|
|
|
|
----
|
|
|
|
37,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
101,968
|
|
|
|
84,745
|
|
|
|
186,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
1,678,714
|
|
|
$
|
1,139
|
|
|
$
|
1,679,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cadences retrospective adoption of the new accounting
principles for its Convertible Senior Notes resulted in the
following adjustments to Cadences Condensed Consolidated
Statement of Operations for the three and nine months ended
September 27, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 27, 2008
|
|
|
|
As Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Adjusted
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenue
|
|
$
|
232,488
|
|
|
$
|
----
|
|
|
$
|
232,488
|
|
Costs and expenses
|
|
|
341,660
|
|
|
|
----
|
|
|
|
341,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(109,172
|
)
|
|
|
----
|
|
|
|
(109,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(3,180
|
)
|
|
|
(3,862
|
)(G)
|
|
|
(7,042
|
)
|
Other income (expense), net
|
|
|
(7,714
|
)
|
|
|
----
|
|
|
|
(7,714
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(120,066
|
)
|
|
|
(3,862
|
)
|
|
|
(123,928
|
)
|
Provision for income taxes
|
|
|
49,000
|
|
|
|
(2,272
|
)(H)
|
|
|
46,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(169,066
|
)
|
|
$
|
(1,590
|
)
|
|
$
|
(170,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share
|
|
$
|
(0.67
|
)
|
|
|
|
|
|
$
|
(0.67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share
|
|
$
|
(0.67
|
)
|
|
|
|
|
|
$
|
(0.67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 27, 2008
|
|
|
|
As Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Adjusted
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenue
|
|
$
|
811,279
|
|
|
$
|
----
|
|
|
$
|
811,279
|
|
Costs and expenses
|
|
|
963,337
|
|
|
|
----
|
|
|
|
963,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(152,058
|
)
|
|
|
----
|
|
|
|
(152,058
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(9,055
|
)
|
|
|
(11,641
|
)(G)
|
|
|
(20,696
|
)
|
Other income (expense), net
|
|
|
(3,701
|
)
|
|
|
----
|
|
|
|
(3,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision (benefit) for income taxes
|
|
|
(164,814
|
)
|
|
|
(11,641
|
)
|
|
|
(176,455
|
)
|
Provision for income taxes
|
|
|
50,269
|
|
|
|
(4,114
|
)(H)
|
|
|
46,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(215,083
|
)
|
|
$
|
(7,527
|
)
|
|
$
|
(222,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share
|
|
$
|
(0.84
|
)
|
|
|
|
|
|
$
|
(0.87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share
|
|
$
|
(0.84
|
)
|
|
|
|
|
|
$
|
(0.87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
This amount represents the cumulative adjustments to the current
portion of debt issuance costs associated with the Convertible
Senior Notes. |
|
(B) |
|
This amount represents the cumulative capitalized interest
related to the amortization of debt discount. |
|
(C) |
|
This amount represents the cumulative adjustments to the
long-term portion of debt issuance costs associated with the
Convertible Senior Notes and the cumulative impact on the net
deferred tax assets related to the amortization of debt discount. |
|
(D) |
|
This amount represents the remaining unamortized debt discount
on the Convertible Senior Notes as of January 3, 2009. |
|
(E) |
|
This amount represents the equity component of the Convertible
Senior Notes, net of tax adjustments to the tax benefit of call
options, due to the amortization of debt discount. |
|
(F) |
|
This amount represents the cumulative Net loss impact of the
amortization of debt discount and the associated tax adjustments
since inception of the Convertible Senior Notes. |
|
(G) |
|
This amount represents the amortization of debt discount, net of
the decrease in interest expense associated with the debt
issuance costs. |
|
(H) |
|
This amount represents the tax adjustments associated with the
increased expense during the period. |
Cadences retrospective adoption does not affect the
balance of Cash and cash equivalents and as a result did not
change its Net cash flows from operating, investing or financing
activities in its Condensed Consolidated Statement of Cash Flows
for the nine months ended September 27, 2008.
9
Cadences retrospective adoption of the new accounting
principles for its Convertible Senior Notes resulted in the
following adjustments to Cadences Statements of
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
Stock and
|
|
|
Retained
|
|
|
|
Capital in
|
|
|
Earnings
|
|
|
|
Excess of
|
|
|
(Accumulated
|
|
|
|
Par Value
|
|
|
Deficit)
|
|
|
|
(In thousands)
|
|
|
Balance, December 30, 2006, as reported
|
|
$
|
1,398,899
|
|
|
$
|
832,763
|
|
Equity component of Convertible Senior Notes
|
|
|
120,073
|
|
|
|
----
|
|
Equity component of debt issuance costs
|
|
|
(3,080
|
)
|
|
|
----
|
|
Amortization of debt discount, net of capitalized interest
|
|
|
----
|
|
|
|
(527
|
)
|
Amortization of debt issuance costs, net of reversal of
previously recorded amortization of debt issuance costs
|
|
|
----
|
|
|
|
(44
|
)
|
Tax adjustments
|
|
|
(7,634
|
)
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
Balance, December 30, 2006, as adjusted
|
|
$
|
1,508,258
|
|
|
$
|
832,426
|
|
Fiscal 2007 equity activity as previously reported
|
|
|
117,594
|
|
|
|
329,678
|
|
Amortization of debt discount, net of capitalized interest
|
|
|
----
|
|
|
|
(16,589
|
)
|
Amortization of debt issuance costs, net of reversal of
previously recorded amortization of debt issuance costs
|
|
|
----
|
|
|
|
703
|
|
Tax adjustments
|
|
|
(5,976
|
)
|
|
|
6,422
|
|
|
|
|
|
|
|
|
|
|
Balance, December 29, 2007, as adjusted
|
|
$
|
1,619,876
|
|
|
$
|
1,152,640
|
|
Fiscal 2008 equity activity as previously reported
|
|
|
45,586
|
|
|
|
(1,964,642
|
)
|
Amortization of debt discount, net of capitalized interest
|
|
|
----
|
|
|
|
(16,460
|
)
|
Amortization of debt issuance costs, net of reversal of
previously recorded amortization of debt issuance costs
|
|
|
----
|
|
|
|
672
|
|
Tax adjustments
|
|
|
(6,160
|
)
|
|
|
13,111
|
|
|
|
|
|
|
|
|
|
|
Balance, January 3, 2009, as adjusted
|
|
$
|
1,659,302
|
|
|
$
|
(814,679
|
)
|
|
|
|
|
|
|
|
|
|
Upon adoption of these new accounting principles and effective
as of the issuance date of the Convertible Senior Notes, Cadence
recorded, as adjustments to Common stock and capital in excess
of par value, deferred taxes for the differences in the
financial statement and tax basis that resulted from allocating
$120.1 million of the principal amount of the Convertible
Senior Notes to equity and from allocating $3.1 million of
the associated issuance costs to equity. In subsequent periods,
Cadence reduced the deferred taxes to reflect the tax effect of
the amortization of debt discount, net of capitalized interest,
and of the debt issuance costs. Cadence also recorded tax
adjustments to reverse previously recorded tax benefits from the
Convertible Senior Notes to Common stock and capital in excess
of par value and to Retained earnings (Accumulated deficit).
|
|
NOTE 3.
|
STOCK-BASED
COMPENSATION
|
Cadence has equity incentive plans that provide for the grant to
employees of stock options and restricted stock. Restricted
stock includes restricted stock awards and restricted stock
units. In addition, the 1995 Directors Stock Option Plan,
or the 1995 Directors Plan, provides for the automatic
grant of stock options to non-employee members of Cadences
Board of Directors. Cadence also has an employee stock purchase
plan, or ESPP, which enables employees to purchase shares of
Cadence common stock.
10
Stock-based compensation expense and the related income tax
benefit recognized in connection with stock options, restricted
stock and the ESPP for the three and nine months ended
October 3, 2009 and September 27, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Stock options
|
|
$
|
2,508
|
|
|
$
|
5,809
|
|
|
$
|
8,359
|
|
|
$
|
20,036
|
|
Restricted stock and stock bonuses
|
|
|
8,654
|
|
|
|
4,955
|
|
|
|
27,296
|
|
|
|
27,007
|
|
ESPP
|
|
|
3,293
|
|
|
|
3,870
|
|
|
|
8,035
|
|
|
|
10,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
14,455
|
|
|
$
|
14,634
|
|
|
$
|
43,690
|
|
|
$
|
57,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
400
|
|
|
$
|
3,533
|
|
|
$
|
1,271
|
|
|
$
|
15,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
The exercise price of each stock option granted under
Cadences employee equity incentive plans is equal to or
greater than the closing price of Cadences common stock on
the date of grant. Generally, option grants vest over four
years, expire no later than ten years from the grant date and
are subject to the employees continuing service to
Cadence. The options granted under the 1995 Directors Plan
vest one year from the date of grant. Options assumed in
connection with acquisitions generally have exercise prices that
differ from the fair value of Cadences common stock on the
date of acquisition and such options generally continue to vest
under their original vesting schedules and expire on the
original dates stated in the acquired companys option
agreements. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model.
The weighted average grant date fair value of options granted
and the weighted average assumptions used in the Black-Scholes
option pricing model for the three and nine months ended
October 3, 2009 and September 27, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Dividend yield
|
|
|
None
|
|
|
|
N/A
|
|
|
|
None
|
|
|
|
None
|
|
Expected volatility
|
|
|
54.1
|
%
|
|
|
N/A
|
|
|
|
65.9
|
%
|
|
|
42.9
|
%
|
Risk-free interest rate
|
|
|
2.22
|
%
|
|
|
N/A
|
|
|
|
1.90
|
%
|
|
|
2.76
|
%
|
Expected life (in years)
|
|
|
4.5
|
|
|
|
N/A
|
|
|
|
4.5
|
|
|
|
4.5
|
|
Weighted average fair value of options granted
|
|
$
|
3.10
|
|
|
|
N/A
|
|
|
$
|
2.32
|
|
|
$
|
4.22
|
|
The computation of the expected volatility assumption used in
the Black-Scholes option pricing model for new grants is based
on implied volatility when the remaining maturities of the
underlying traded options are at least one year and, when the
remaining maturities of the underlying traded options are less
than one year, it is based on an equal weighting of historical
and implied volatilities. When establishing the expected life
assumption, Cadence reviews annual historical employee exercise
behavior with respect to option grants having similar vesting
periods. The risk-free interest rate for the period within the
expected term of the option is based on the yield of United
States Treasury notes in effect at the time of grant. Cadence
has not historically paid dividends, so the expected dividend
yield used in the calculation is zero.
Restricted Stock and Stock Bonuses
The cost of restricted stock is determined using the fair value
of Cadences common stock on the date of the grant, and
compensation expense is recognized over the vesting period. The
weighted average grant date fair values
11
of restricted stock granted during the three and nine months
ended October 3, 2009 and September 27, 2008 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Weighted average fair value of restricted stock granted
|
|
$
|
6.22
|
|
|
$
|
8.02
|
|
|
$
|
4.76
|
|
|
$
|
11.02
|
|
Generally, restricted stock vests over three to four years and
is subject to the employees continuing service to Cadence.
Cadence issues some of its restricted stock with
performance-based vesting. The terms of these performance-based
restricted stock grants are consistent with grants of restricted
stock described above, with the exception that the vesting of
the shares depends not only upon the completion of the required
period of service, but also on the satisfaction of certain
predetermined performance goals. Each quarterly period, Cadence
estimates the probability of the achievement of these
performance goals and recognizes any related stock-based
compensation expense. The amount of stock-based compensation
expense recognized in any one period can vary based on the
attainment or estimated attainment of the various performance
goals. If such performance goals are not met, no compensation
expense is recognized and any previously recognized compensation
expense is reversed.
Stock-based compensation expense related to performance-based
restricted stock grants for the three and nine months ended
October 3, 2009 and September 27, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Stock-based compensation expense (credits) related to
performance-based grants
|
|
$
|
259
|
|
|
$
|
(5,402
|
)
|
|
$
|
907
|
|
|
$
|
(1,471
|
)
|
Liability-based
Awards
Cadence maintains a performance-based bonus plan under which
payments may be made in Cadence common stock or cash. Each
quarterly period, Cadence estimates the most likely outcome of
predetermined performance goals and recognizes any related
stock-based compensation expense. The amount of stock-based
compensation expense recognized in any one period can vary based
on the attainment or estimated attainment of the various
performance goals. If such performance goals are not met, no
compensation expense is recognized and any previously recognized
compensation expense is reversed. The dollar amount earned under
this performance-based bonus plan is based on the achievement of
the performance goals, and the number of shares to be issued
under the performance-based bonus plan is based on the dollar
amount earned and the average stock price for three days
preceding the grant date. Stock issued under the
performance-based bonus plan vests immediately. During both of
the three and nine month periods ended October 3, 2009 and
September 27, 2008, Cadence elected to make the payments in
cash under this performance-based bonus plan. Stock-based
compensation expense and the cash paid related to this
performance-based bonus plan for the three and nine months ended
October 3, 2009 and September 27, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Stock-based compensation expense related to performance-based
bonus plan
|
|
$
|
936
|
|
|
$
|
1,742
|
|
|
$
|
3,827
|
|
|
$
|
4,569
|
|
Cash paid for performance-based bonus plan
|
|
|
2,866
|
|
|
|
2,948
|
|
|
|
6,097
|
|
|
|
5,626
|
|
12
Employee Stock Purchase Plan
Through the January 31, 2009 purchase date, a majority of
Cadences employees could purchase Cadences common
stock under the ESPP at a price equal to 85% of the lower of the
fair market value at the beginning of the applicable offering
period or at the end of the applicable offering period, in an
amount up to 12% of their gross annual earnings, subject to a
limit in any calendar year of $25,000 worth of common stock.
Currently, the offering periods of the ESPP are six months long
commencing on
February 1st and
August 1st of
each year and ending on
July 31st and
January 31st of
each year, respectively.
On January 30, 2009, because Cadence did not have a
sufficient number of authorized common stock available under the
ESPP to permit all ESPP participants to purchase Cadences
common stock in the full amount that had been set aside for them
through their contributions, Cadence allocated the purchase on a
pro rata basis and refunded the excess contributions to the ESPP
participants. At the annual meeting of Cadences
stockholders on May 13, 2009, an additional
12.5 million shares of Cadences common stock were
authorized under the ESPP.
Cadences Board of Directors administers the ESPP and has
the final authority to construe and interpret both the ESPP and
the rights granted under it. Cadences Board of Directors
also has the authority, subject to the provisions of the ESPP,
to determine when and how the rights to purchase Cadence common
stock will be granted and the provisions of each offering of
these rights, including designating any limits on the percentage
and dollar amount that may be withheld from the ESPP
participants annual gross earnings for a particular
offering period, and Cadences Board of Directors may
modify such limits from time to time. Under the rules currently
in effect under the ESPP: (i) for the offering period that
commenced February 1, 2009, each eligible ESPP participant
was entitled to purchase Cadence common stock in an amount not
to exceed the lower of (A) $7,058.82 or (B) the
difference between (x) $25,000 and (y) the aggregate
amount of Cadences common stock such participant purchased
on January 30, 2009 under the ESPP; and (ii) for the
offering period that commenced August 1, 2009 and
thereafter, each eligible ESPP participant would be entitled to
purchase Cadence common stock in an amount not to exceed
$7,058.82 in any calendar year, subject to a contribution limit
of 5% of such participants gross annual earnings.
Shares of Cadences common stock issued under the ESPP for
the three and nine months ended October 3, 2009 and
September 27, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Cadence shares issued under the ESPP
|
|
|
2,610
|
|
|
|
3,358
|
|
|
|
8,661
|
|
|
|
6,076
|
|
Cash received from the exercise of purchase rights under the ESPP
|
|
|
8,076
|
|
|
|
21,093
|
|
|
|
27,517
|
|
|
|
44,547
|
|
Weighted average purchase price per share
|
|
$
|
3.09
|
|
|
$
|
6.28
|
|
|
$
|
3.18
|
|
|
$
|
7.33
|
|
Stock-based compensation expense is calculated using the fair
value of the employees purchase rights under the
Black-Scholes option pricing model. The weighted average grant
date fair value of purchase rights granted
13
under the ESPP and the weighted average assumptions used in the
model for the three and nine months ended October 3, 2009
and September 27, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Dividend yield
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Expected volatility
|
|
|
48.0%
|
|
|
|
50.3%
|
|
|
|
51.3%
|
|
|
|
48.0%
|
|
Risk-free interest rate
|
|
|
0.28%
|
|
|
|
1.88%
|
|
|
|
0.21%
|
|
|
|
1.95%
|
|
Expected life (in years)
|
|
|
0.50
|
|
|
|
0.50
|
|
|
|
0.32
|
|
|
|
0.48
|
|
Weighted average fair value of purchase rights granted
|
|
$
|
1.70
|
|
|
$
|
2.09
|
|
|
$
|
1.96
|
|
|
$
|
2.40
|
|
The computation of the expected volatility assumption used in
the Black-Scholes option pricing model for new grants is based
on implied volatility when the remaining maturities of the
underlying traded options are at least one year and, when the
remaining maturities of the underlying traded options are less
than one year, it is based on an equal weighting of historical
and implied volatilities. The expected life assumption is based
on the average exercise date for the purchase periods in each
offering period. The risk-free interest rate for the period
within the expected life of the purchase right is based on the
yield of United States Treasury notes in effect at the time of
grant. Cadence has not historically paid dividends, so the
expected dividend yield used in the calculation is zero.
|
|
NOTE 4.
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
Inputs to valuation techniques are observable or unobservable.
Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect Cadences 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.
On a quarterly basis, Cadence measures at fair value certain
financial assets, including cash equivalents,
available-for-sale
securities, time deposits, trading securities held in
Cadences Nonqualified Deferred Compensation Plans, or
NQDCs, and foreign exchange contracts. The fair value of
financial assets and liabilities was determined using the
following levels of inputs as of October 3, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of October 3,2009:
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents Money market mutual funds
|
|
$
|
402,992
|
|
|
$
|
402,992
|
|
|
$
|
----
|
|
|
$
|
----
|
|
Available-for-sale
securities
|
|
|
4,519
|
|
|
|
4,519
|
|
|
|
----
|
|
|
|
----
|
|
Time deposits
|
|
|
237
|
|
|
|
237
|
|
|
|
----
|
|
|
|
----
|
|
Trading securities held in NQDCs
|
|
|
27,576
|
|
|
|
27,576
|
|
|
|
----
|
|
|
|
----
|
|
Foreign currency exchange contracts
|
|
|
650
|
|
|
|
----
|
|
|
|
650
|
|
|
|
----
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
435,974
|
|
|
$
|
435,324
|
|
|
$
|
650
|
|
|
$
|
----
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Cadence determined that certain of its non-marketable securities
were
other-than-temporarily
impaired based on the current prices of similar non-marketable
securities offered by the investees. Cadence wrote down the
investments by $0.6 million during the three months ended
October 3, 2009 and $5.2 million during the nine
months ended October 3, 2009. These amounts are included in
Other income (expense), net in Cadences Condensed
Consolidated Statement of Operations. The fair value of these
non-marketable securities was estimated using Level 2
inputs.
Cadence exited certain facilities in connection with a
restructuring plan and recorded lease losses and adjustments to
the recorded lease losses during the three and nine months ended
October 3, 2009. These losses are included in Restructuring
and other charges (credits) in Cadences Condensed
Consolidated Statement of Operations for the three and nine
months ended October 3, 2009. See Note 5 for
additional details on Cadences lease loss estimates. The
fair value of these lease losses was estimated using
Level 2 inputs.
The fair value of Cadences cash and cash equivalents,
short-term investments, receivables, accounts payable and
foreign currency forward exchange contracts approximate their
carrying value due to the short-term nature of these
instruments. The fair market values of Cadences long-term
investments and installment contract receivables approximate
their carrying values based upon current market rates of
interest. The fair value of Cadences convertible notes is
influenced by interest rates and Cadences stock price and
stock price volatility and is determined by market trading. See
Note 2 for the fair value of Cadences Convertible
Senior Notes, 2023 Notes, and convertible note hedges and
warrants.
|
|
NOTE 5.
|
RESTRUCTURING
AND OTHER CHARGES
|
During the three months ended July 4, 2009, Cadence
initiated a restructuring plan, or the 2009 Restructuring Plan,
to decrease costs by reducing its workforce. Since initiating
the 2009 Restructuring Plan, Cadence has recorded total costs
associated with the 2009 Restructuring Plan of
$21.3 million.
Cadence also initiated a restructuring plan during fiscal 2008,
or the 2008 Restructuring Plan, and restructuring plans in each
year from 2001 through 2005, or the Other Restructuring Plans,
in an effort to operate more efficiently. As of October 3,
2009, Cadence had a liability of $2.5 million related to
the 2008 Restructuring Plan that consisted primarily of
estimated lease losses and a liability of $4.8 million
related to the Other Restructuring Plans that consisted solely
of estimated lease losses.
As of October 3, 2009, Cadences total amount accrued
for the 2009 Restructuring Plan, the 2008 Restructuring Plan and
the Other Restructuring Plans was $13.1 million, consisting
of $6.9 million of estimated lease losses related to these
restructuring plans and $6.2 million of severance and
severance-related benefits. The estimated lease losses will be
adjusted in the future based on changes in the assumptions used
to estimate the lease losses. The lease losses could be as high
as $10.8 million and will be influenced by rental rates and
the amount of time it takes to find suitable tenants to sublease
the facilities, as compared to current expectations. Of the
$13.1 million accrued as of October 3, 2009,
$7.7 million was included in Accounts payable and accrued
liabilities and $5.4 million was included in Other
long-term liabilities on Cadences Condensed Consolidated
Balance Sheets.
Cadence regularly evaluates the adequacy of its lease loss and
severance and related benefits accruals, and adjusts the
balances based on actual costs incurred or changes in estimates
and assumptions. Cadence may incur future charges to reflect
actual costs incurred or for changes in estimates related to
amounts previously recorded under its restructuring plans.
2009 Restructuring Plan
Cadence has recorded total costs associated with the 2009
Restructuring Plan of $21.3 million, which includes
$19.7 million recorded during the three months ended
July 4, 2009 and $1.6 million recorded during the
three months ended October 3, 2009. The costs recorded as
part of the 2009 Restructuring Plan include severance payments,
severance-related benefits and costs for outplacement services
that were communicated to the affected employees before
October 3, 2009, and estimated severance payments and
related benefits that were both probable and estimable as of
October 3, 2009 for employees notified after
October 3, 2009.
15
Cadence provides severance and termination benefits in
compliance with the varying regulations in the jurisdictions and
countries in which Cadence operates. Total severance and
termination benefits of approximately $15.7 million were
paid to employees before October 3, 2009 and severance and
termination benefits of approximately $5.8 million will be
paid after October 3, 2009. Cadence expects to pay
substantially all of the anticipated severance payments and
termination benefits related to the 2009 Restructuring Plan by
July 2, 2010.
The following table presents activity for the 2009 Restructuring
Plan for the three months ended October 3, 2009:
|
|
|
|
|
|
|
Severance
|
|
|
|
and
|
|
|
|
Benefits
|
|
|
|
(In thousands)
|
|
|
Balance, July 4, 2009
|
|
$
|
17,649
|
|
Restructuring and other charges, net
|
|
|
1,632
|
|
Cash payments
|
|
|
(13,588
|
)
|
Effect of foreign currency translation
|
|
|
61
|
|
|
|
|
|
|
Balance, October 3, 2009
|
|
$
|
5,754
|
|
|
|
|
|
|
During the three months ended October 3, 2009, Cadence
recorded additional severance costs of approximately
$2.4 million as part of the 2009 Restructuring Plan,
partially offset by a reversal of $0.8 million related to
termination and related benefits costs that were less than
initially estimated.
The following table presents activity for the 2009 Restructuring
Plan for the nine months ended October 3, 2009:
|
|
|
|
|
|
|
Severance
|
|
|
|
and
|
|
|
|
Benefits
|
|
|
|
(In thousands)
|
|
|
Balance, January 3, 2009
|
|
$
|
----
|
|
Restructuring and other charges, net
|
|
|
21,361
|
|
Cash payments
|
|
|
(15,684
|
)
|
Effect of foreign currency translation
|
|
|
77
|
|
|
|
|
|
|
Balance, October 3, 2009
|
|
$
|
5,754
|
|
|
|
|
|
|
2008 Restructuring Plan
The following table presents activity for the 2008 Restructuring
Plan for the three months ended October 3, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Excess
|
|
|
|
|
|
|
|
|
|
Benefits
|
|
|
Facilities
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance, July 4, 2009
|
|
$
|
984
|
|
|
$
|
3,821
|
|
|
$
|
40
|
|
|
$
|
4,845
|
|
Restructuring and other charges (credits), net
|
|
|
(330
|
)
|
|
|
(1,427
|
)
|
|
|
----
|
|
|
|
(1,757
|
)
|
Non-cash charges
|
|
|
----
|
|
|
|
42
|
|
|
|
----
|
|
|
|
42
|
|
Cash payments
|
|
|
(219
|
)
|
|
|
(346
|
)
|
|
|
(7
|
)
|
|
|
(572
|
)
|
Effect of foreign currency translation
|
|
|
19
|
|
|
|
(39
|
)
|
|
|
2
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 3, 2009
|
|
$
|
454
|
|
|
$
|
2,051
|
|
|
$
|
35
|
|
|
$
|
2,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended October 3, 2009, Cadence
recorded a reversal of $1.7 million, consisting of
$0.3 million in termination and related benefits costs that
were less than initially estimated, and $1.4 million of
16
excess facilities costs due to a reduction in the estimated
lease obligation associated with a facility vacated as part of
the 2008 Restructuring Plan.
The following table presents activity for the 2008 Restructuring
Plan for the nine months ended October 3, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Excess
|
|
|
|
|
|
|
|
|
|
Benefits
|
|
|
Facilities
|
|
|
Other
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance, January 3, 2009
|
|
$
|
29,667
|
|
|
$
|
2,164
|
|
|
$
|
84
|
|
|
$
|
31,915
|
|
Restructuring and other charges (credits), net
|
|
|
(2,880
|
)
|
|
|
515
|
|
|
|
----
|
|
|
|
(2,365
|
)
|
Non-cash charges
|
|
|
----
|
|
|
|
87
|
|
|
|
----
|
|
|
|
87
|
|
Cash payments
|
|
|
(25,969
|
)
|
|
|
(918
|
)
|
|
|
(49
|
)
|
|
|
(26,936
|
)
|
Effect of foreign currency translation
|
|
|
(364
|
)
|
|
|
203
|
|
|
|
----
|
|
|
|
(161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 3, 2009
|
|
$
|
454
|
|
|
$
|
2,051
|
|
|
$
|
35
|
|
|
$
|
2,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cadence has incurred approximately $41.4 million of net
headcount reduction costs associated with the 2008 Restructuring
Plan. These costs included severance payments, severance-related
benefits and costs for outplacement services. Of the
$41.4 million, $0.5 million will be paid after
October 3, 2009. Cadence expects to complete payments for
substantially all of the anticipated benefits related to the
2008 Restructuring Plan by January 2, 2010.
Other Restructuring Plans
The following table presents activity for the three months ended
October 3, 2009 associated with the Other Restructuring
Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
2002
|
|
|
2001
|
|
|
|
|
|
|
Restructuring
|
|
|
2003 Restructuring
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance, July 4, 2009
|
|
$
|
303
|
|
|
$
|
2,733
|
|
|
$
|
52
|
|
|
$
|
1,978
|
|
|
$
|
5,066
|
|
Adjustments to Restructuring and other charges (credits), net
|
|
|
----
|
|
|
|
----
|
|
|
|
(50
|
)
|
|
|
----
|
|
|
|
(50
|
)
|
Non-cash charges
|
|
|
15
|
|
|
|
48
|
|
|
|
(2
|
)
|
|
|
----
|
|
|
|
61
|
|
Cash payments
|
|
|
(36
|
)
|
|
|
(250
|
)
|
|
|
----
|
|
|
|
(1
|
)
|
|
|
(287
|
)
|
Effect of foreign currency translation
|
|
|
(5
|
)
|
|
|
(54
|
)
|
|
|
----
|
|
|
|
83
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 3, 2009
|
|
$
|
277
|
|
|
$
|
2,477
|
|
|
$
|
----
|
|
|
$
|
2,060
|
|
|
$
|
4,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents activity for the nine months ended
October 3, 2009 associated with the Other Restructuring
Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
2002
|
|
|
2001
|
|
|
|
|
|
|
Restructuring
|
|
|
2003 Restructuring
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance, January 3, 2009
|
|
$
|
329
|
|
|
$
|
2,837
|
|
|
$
|
1,065
|
|
|
$
|
2,028
|
|
|
$
|
6,259
|
|
Adjustments to Restructuring and other charges (credits), net
|
|
|
----
|
|
|
|
(101
|
)
|
|
|
(1,015
|
)
|
|
|
(47
|
)
|
|
|
(1,163
|
)
|
Non-cash charges
|
|
|
42
|
|
|
|
137
|
|
|
|
(4
|
)
|
|
|
----
|
|
|
|
175
|
|
Cash payments
|
|
|
(108
|
)
|
|
|
(621
|
)
|
|
|
(46
|
)
|
|
|
(1
|
)
|
|
|
(776
|
)
|
Effect of foreign currency translation
|
|
|
14
|
|
|
|
225
|
|
|
|
----
|
|
|
|
80
|
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 3, 2009
|
|
$
|
277
|
|
|
$
|
2,477
|
|
|
$
|
- - -
|
|
|
$
|
2,060
|
|
|
$
|
4,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
NOTE 6.
|
ALLOWANCE
FOR DOUBTFUL ACCOUNTS
|
Cadence analyzes the creditworthiness of its customers,
historical experience, changes in customer demand, and the
overall economic climate in the industries that Cadence serves,
makes judgments as to its ability to collect outstanding
receivables, and provides allowances for the portion of
receivables when collection becomes doubtful. Provisions are
made based upon a specific review of customer receivables and
are recorded in operating expenses. Receivables and Installment
contract receivables are presented net of allowance for doubtful
accounts of $24.9 million as of October 3, 2009 and
$7.5 million as of January 3, 2009.
Cadences customers are primarily concentrated within the
semiconductor sector, which is experiencing a significant
downturn with limited visibility to the extent and timing of
recovery. Approximately half of Cadences total
Receivables, net and Installment contract receivables, net as of
October 3, 2009 relate to ten customers.
Cadence believes that its allowance for doubtful accounts is
adequate and represents Cadences current best estimate,
but Cadence will continue to monitor customer liquidity and
other economic conditions, which may result in changes to
Cadences estimates regarding its allowance for doubtful
accounts. Such adjustments could be material to Cadences
Condensed Consolidated Financial Statements.
Cadence has recognized $7.3 million of Provision for income
taxes during the nine months ended October 3, 2009 that
should have been recognized during multiple periods between
fiscal 2004 through fiscal 2008. As a result, Cadences Net
income (loss) would have increased (decreased) as follows, with
a corresponding change in Cadences Provision for income
taxes:
|
|
|
|
|
|
|
Increase (decrease) in Net income
|
|
|
|
(loss)
|
|
|
|
(In thousands)
|
|
|
Period:
|
|
|
|
|
2004
|
|
$
|
(4,908
|
)
|
2005
|
|
|
(2,416
|
)
|
2006
|
|
|
(2,089
|
)
|
2007
|
|
|
(258
|
)
|
2008
|
|
|
2,409
|
|
|
|
|
|
|
|
|
$
|
(7,262
|
)
|
|
|
|
|
|
The effects on Cadences fiscal 2009 expected annual
results and the Consolidated Financial Statements for prior
periods is not considered material.
During the nine months ended October 3, 2009, Cadence
determined that it would carryback its anticipated fiscal 2009
federal United States net operating loss to prior year tax
returns which resulted in a tax benefit of approximately
$11.9 million being recognized in the calculation of
Cadences fiscal 2009 annual effective tax rate.
Internal Revenue Service Examinations
The Internal Revenue Service, or IRS, and other tax authorities
regularly examine Cadences income tax returns. In July
2006, the IRS completed its field examination of Cadences
federal income tax returns for the tax years 2000 through 2002
and issued a Revenue Agents Report, or RAR, in which the
IRS proposed to assess an aggregate tax deficiency for the
three-year period of approximately $324.0 million. In
November 2006, the IRS revised the proposed aggregate tax
deficiency for the three-year period to approximately
$318.0 million. The IRS is contesting Cadences
qualification for deferred recognition of certain proceeds
received from restitution and settlement in connection with
litigation during the period. The proposed tax deficiency for
this item is approximately $152.0 million. The remaining
proposed tax deficiency of approximately $166.0 million is
primarily related
18
to proposed adjustments to Cadences transfer pricing
arrangements with its foreign subsidiaries and to Cadences
deductions for foreign trade income. Cadence has filed a timely
protest with the IRS and is seeking resolution of the issues
through the Appeals Office of the IRS, or the Appeals Office.
In May 2009, the IRS completed its field examination of
Cadences federal income tax returns for the tax years 2003
through 2005 and issued a RAR, in which the IRS proposed to
assess an aggregate deficiency for the three-year period of
approximately $94.1 million. In August 2009, the IRS
revised the proposed aggregate tax deficiency for the three-year
period to approximately $60.7 million. The IRS is
contesting Cadences transfer pricing arrangements with its
foreign subsidiaries and deductions for foreign trade income.
The IRS made similar claims against Cadences transfer
pricing arrangements and deductions for foreign trade income in
prior examinations. Cadence has filed a timely protest with the
IRS and will seek resolution of the issues through the Appeals
Office.
Cadence believes that the proposed IRS adjustments are
inconsistent with applicable tax laws and Cadence is vigorously
challenging these proposed adjustments. The RARs are not final
Statutory Notices of Deficiency, but the IRS imposes interest on
the proposed deficiencies until the matters are resolved.
Interest is compounded daily at rates that are published and
adjusted quarterly by the IRS and have been between 4% and 10%
since 2001.
Unrecognized Tax Benefits
Cadence takes a two-step approach to recognizing and measuring
uncertain tax positions. The first step is to evaluate the tax
position for recognition by determining if the weight of
available evidence indicates that it is more likely than not the
tax position will be sustained upon audit, including resolution
of any related appeals or litigation processes. The second step
is to measure the tax benefit as the largest amount that is more
than 50% likely of being realized upon effective settlement.
Upon Cadences adoption of new accounting principles
related to Cadences prior business combinations on the
first day of fiscal 2009, Cadence increased the amount of
unrecognized tax benefits by $22.2 million and which, if
recognized, would reduce Cadences effective tax rate.
Prior to this adoption, these unrecognized tax benefits, if
recognized, were accounted for as an adjustment to goodwill.
Cadences Provision for income taxes for the three months
ended October 3, 2009 included a decrease in unrecognized
tax benefits, penalties and interest of $1.8 million and
current year interest expense related to unrecognized tax
benefits of $3.2 million. Cadences Provision for
income taxes for the nine months ended October 3, 2009
included an increase in unrecognized tax benefits, penalties and
interest of $10.5 million related to prior year tax
positions, and current year interest expense related to
unrecognized tax benefits of $9.5 million.
In May 2009, in a case between Xilinx, Inc. and the IRS, the
U.S. Court of Appeals for the Ninth Circuit, or the Ninth
Circuit, overturned a 2005 ruling by the U.S. Tax Court.
While Cadence was not a named party to the case, the Ninth
Circuits decision impacts Cadences tax position for
certain years prior to fiscal 2004. The Ninth Circuit held that
related parties to a research and development cost sharing
arrangement must share stock option costs, notwithstanding the
U.S. Tax Court finding that unrelated parties in such an
arrangement would not share such costs. As a result of the Ninth
Circuits decision, Cadence increased its liability for
unrecognized tax benefits and decreased Common stock and capital
in excess of par value by approximately $6.4 million during
the nine months ended October 3, 2009.
Cadence believes that it is reasonably possible that the total
amount of unrecognized tax benefits related to the IRS
examination of its federal income tax returns for the tax years
2000 through 2002 could decrease during fiscal 2009 if Cadence
is able to effectively settle the disputed issues with the
Appeals Office. Cadence believes that the range of reasonably
possible outcomes is a decrease in existing unrecognized tax
benefits for the tax years 2000 through 2002 as much as
$244.0 million.
In addition, Cadence believes that it is reasonably possible
that the total amounts of unrecognized tax benefits for its
transfer pricing arrangements with its foreign subsidiaries
could significantly increase or decrease during fiscal 2009 if
the Appeals Office develops new settlement guidelines that
change its measurement of the tax benefits to be recognized upon
effective settlement with the IRS. Because of the uncertain
impact of any potential settlement guidelines, Cadence cannot
currently provide an estimate of the range of possible outcomes.
19
The calculation of Cadences Provision for income taxes
requires significant judgment and involves dealing with
uncertainties in the application of complex tax laws and
regulations. In determining the adequacy of the provision for
income taxes, Cadence regularly assesses the potential
settlement outcomes resulting from income tax examinations.
However, the final outcome of tax examinations, including the
total amount payable or the timing of any such payments upon
resolution of these issues, cannot be estimated with certainty.
In addition, Cadence cannot be certain that such amount will not
be materially different from the amount that is reflected in its
historical income tax provisions and accruals. Should the IRS or
other tax authorities assess additional taxes as a result of a
current or a future examination, Cadence may be required to
record charges to operations in future periods that could have a
material impact on its results of operations, financial position
or cash flows in the applicable period or periods.
|
|
NOTE 8.
|
NET LOSS
PER SHARE
|
Basic and diluted net loss per share is computed by dividing net
loss by the weighted average number of shares of common stock
outstanding, less unvested restricted stock, during the period.
In periods in which a net loss is recorded, potentially dilutive
equity instruments would decrease the loss per share and
therefore are not added to the weighted average shares
outstanding for the diluted net loss per share calculation.
The following table presents the potential shares of
Cadences common stock outstanding for the three and nine
months ended October 3, 2009 and September 27, 2008
that were not included in the computation of diluted net loss
per share because the effect of including these shares would
have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Options to purchase shares of common stock (various expiration
dates through 2019)
|
|
|
37,657
|
|
|
|
39,257
|
|
|
|
37,657
|
|
|
|
39,257
|
|
Non-vested shares of restricted stock
|
|
|
9,630
|
|
|
|
7,673
|
|
|
|
9,630
|
|
|
|
7,673
|
|
2023 Notes
|
|
|
11
|
|
|
|
11
|
|
|
|
11
|
|
|
|
11
|
|
Warrants to purchase shares of common stock related to the
Convertible Senior Notes (various expiration dates through 2014)
|
|
|
23,640
|
|
|
|
23,640
|
|
|
|
23,640
|
|
|
|
23,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total potential common shares excluded
|
|
|
70,938
|
|
|
|
70,581
|
|
|
|
70,938
|
|
|
|
70,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 9.
|
ACCUMULATED
DEFICIT
|
The changes in accumulated deficit for the three and nine months
ended October 3, 2009 were as follows:
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
(In thousands)
|
|
|
Balance as of July 4, 2009
|
|
$
|
(1,116,869
|
)
|
Net loss
|
|
|
(14,047
|
)
|
Losses on re-issuance of treasury stock allocated to accumulated
deficit
|
|
|
(44,619
|
)
|
|
|
|
|
|
Balance as of October 3, 2009
|
|
$
|
(1,175,535
|
)
|
|
|
|
|
|
20
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
|
(In thousands)
|
|
|
Balance as of January 3, 2009, as adjusted (Note 2)
|
|
$
|
(814,679
|
)
|
Net loss
|
|
|
(151,661
|
)
|
Losses on re-issuance of treasury stock allocated to accumulated
deficit
|
|
|
(209,195
|
)
|
|
|
|
|
|
Balance as of October 3, 2009
|
|
$
|
(1,175,535
|
)
|
|
|
|
|
|
Cadence records an adjustment on re-issuance of treasury stock
based on the difference between the total proceeds received in
the re-issuance transaction and the original purchase price of
the treasury stock. If treasury stock is re-issued at a higher
price than its purchase price, the difference is recorded as a
component of Capital in excess of par in Stockholders
Equity. If the treasury stock re-issuance price is lower than
its purchase price, the difference is recorded as a component of
Common stock and capital in excess of par value to the extent
that there are gains to offset the losses. If there are no
treasury stock gains in Common stock and capital in excess of
par value, the losses upon re-issuance of treasury stock are
recorded as a component of Accumulated deficit in
Stockholders Equity.
|
|
NOTE 10.
|
OTHER
COMPREHENSIVE LOSS
|
Other comprehensive loss includes foreign currency translation
adjustments and unrealized gains and losses on
available-for-sale
marketable securities, net of related tax effects. These items
have been excluded from net loss and are reflected instead in
Stockholders Equity. Cadences comprehensive loss for
the three and nine months ended October 3, 2009 and
September 27, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
As Adjusted
|
|
|
|
|
|
As Adjusted
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net loss
|
|
$
|
(14,047
|
)
|
|
$
|
(170,656
|
)
|
|
$
|
(151,661
|
)
|
|
$
|
(222,610
|
)
|
Foreign currency translation adjustments, net of related tax
effects
|
|
|
4,141
|
|
|
|
(417
|
)
|
|
|
2,772
|
|
|
|
2,221
|
|
Changes in unrealized holding gains and losses on
available-for-sale
securities, net of reclassification adjustment for realized
gains and losses and related tax effects
|
|
|
(544
|
)
|
|
|
(6,677
|
)
|
|
|
1,082
|
|
|
|
(1,759
|
)
|
Other
|
|
|
143
|
|
|
|
----
|
|
|
|
108
|
|
|
|
----
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(10,307
|
)
|
|
$
|
(177,750
|
)
|
|
$
|
(147,699
|
)
|
|
$
|
(222,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
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 only
on 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.
21
During fiscal 2008, three complaints were filed in the United
States District Court for the Northern District of California,
or District Court, all alleging violations of
Sections 10(b) and 20(a) of the Exchange Act, and
Rule 10b-5
promulgated thereunder, on behalf of a purported class of
purchasers of Cadences common stock. The first such
complaint was filed on October 29, 2008, captioned
Hu v. Cadence Design Systems, Inc., Michael J. Fister,
William Porter and Kevin S. Palatnik; the second such complaint
was filed on November 4, 2008, captioned Vyas v.
Cadence Design Systems, Inc., Michael J. Fister, and Kevin S.
Palatnik; and the third such complaint was filed on
November 21, 2008, captioned Collins v. Cadence Design
Systems, Inc., Michael J. Fister, John B. Shoven, Kevin S.
Palatnik and William Porter. On March 4, 2009, the District
Court entered an order consolidating these three complaints and
captioning the consolidated case In re Cadence Design
Systems, Inc. Securities Litigation. The District Court
also named a lead plaintiff and lead counsel for the
consolidated litigation. The lead plaintiff filed its
consolidated amended complaint on April 24, 2009, naming
Cadence, Michael J. Fister, Kevin S. Palatnik, William Porter
and Kevin Bushby as defendants, and alleging violations of
Sections 10(b) and 20(a) of the Exchange Act, and
Rule 10b-5
promulgated thereunder, on behalf of a purported class of
purchasers of Cadences common stock who traded
Cadences common stock between April 23, 2008 and
December 10, 2008, or the Alleged Class Period. The
amended complaint alleged that Cadence and the individual
defendants made statements during the Alleged Class Period
regarding Cadences financial results that were false and
misleading because Cadence had recognized revenue that should
have been recognized in subsequent quarters. The amended
complaint requested certification of the action as a class
action, unspecified damages, interest and costs, and unspecified
equitable relief. On June 8, 2009, Cadence and the other
defendants filed a motion to dismiss the amended complaint. On
September 11, 2009, the District Court held that the
plaintiffs had failed to allege a valid claim under the relevant
legal standards, and granted the defendants motion to
dismiss the amended complaint. The District Court gave the
plaintiffs leave to file another amended complaint, and the
plaintiffs did so on October 13, 2009. The amended
complaint filed on October 13, 2009 names the same
defendants. Cadence intends to move to dismiss the
October 13, 2009 amended complaint, and to continue to
vigorously defend these consolidated cases and any other
securities lawsuits that may be filed.
During fiscal 2008, two derivative complaints were filed in
Santa Clara County Superior Court. The first was filed on
November 20, 2008, and captioned Ury Priel, derivatively on
behalf of nominal defendant Cadence Design Systems, Inc. v.
John B. Shoven, Lip-Bu Tan, Alberto Sangiovanni-Vincentelli,
Donald L. Lucas, Sr., Roger Siboni, George Scalise, Michael
J. Fister, and Doe Defendants 1-15. The second was filed on
December 1, 2008, and captioned Mark Levine, derivatively
on behalf of nominal defendant Cadence Design Systems,
Inc. v. John B. Shoven, Lip-Bu Tan, Alberto
Sangiovanni-Vincentelli, Donald L. Lucas, Sr., Roger
Siboni, George Scalise, Michael J. Fister, John Swainson and Doe
Defendants 1-10. These complaints purport to bring suit
derivatively, on behalf of Cadence, against certain of
Cadences current and former directors for alleged breach
of fiduciary duty, abuse of control, gross mismanagement, waste
of corporate assets and unjust enrichment. Many of the
allegations underlying these claims are similar or identical to
the allegations in the consolidated securities class action
lawsuits described above, and the claims also include
allegations that the individual defendants approved compensation
based on inflated financial results. The plaintiffs request
unspecified damages, restitution, equitable relief and their
reasonable attorneys fees, experts fees, costs and
expenses on behalf of Cadence against the individual defendants.
A motion to consolidate these complaints was granted on
January 20, 2009. Cadence is analyzing these derivative
complaints and will respond to them appropriately. The parties
to these cases have agreed to a temporary stay of the
proceedings.
In light of the preliminary status of these lawsuits, Cadence
cannot predict the outcome of these matters. While the outcome
of these litigation matters cannot be predicted with any
certainty, management does not believe that the outcome of any
current matters will have a material adverse effect on
Cadences consolidated financial position, liquidity or
results of operations.
Other Contingencies
Cadence provides its customers with a warranty on sales of
hardware products, generally for a
90-day
period. If the potential loss from any warranty claim is
considered probable and the amount or the range of loss can be
estimated, Cadence accrues a liability for the estimated loss.
To date, Cadence has not incurred any significant costs related
to warranty obligations.
Cadences product license and services agreements typically
include a limited indemnification provision for claims from
third parties relating to Cadences intellectual property.
If the potential loss from any indemnification
22
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. To date, claims under such indemnification
provisions have not been significant.
|
|
NOTE 12.
|
STATEMENT
OF CASH FLOWS
|
The supplemental cash flow information for the nine months ended
October 3, 2009 and September 27, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash Paid During the Period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
3,594
|
|
|
$
|
3,594
|
|
|
|
|
|
|
|
|
|
|
Income taxes, including foreign withholding tax
|
|
$
|
8,630
|
|
|
$
|
25,183
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Stock options assumed for acquisitions
|
|
$
|
----
|
|
|
$
|
1,140
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 13.
|
OTHER
INCOME (EXPENSE), NET
|
Cadences Other income (expense), net, for the three and
nine months ended October 3, 2009 and September 27,
2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Interest income
|
|
$
|
278
|
|
|
$
|
3,989
|
|
|
$
|
2,056
|
|
|
$
|
17,823
|
|
Gains on sale of non-marketable securities
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
884
|
|
Gains (losses) on sale of
available-for-sale
securities
|
|
|
32
|
|
|
|
(9,379
|
)
|
|
|
32
|
|
|
|
(7,945
|
)
|
Gains (losses) on sale of trading securities in Cadences
non-qualified deferred compensation trust
|
|
|
3,652
|
|
|
|
(331
|
)
|
|
|
(4,339
|
)
|
|
|
(4,379
|
)
|
Gains (losses) on foreign exchange
|
|
|
(881
|
)
|
|
|
269
|
|
|
|
1,542
|
|
|
|
689
|
|
Equity in loss from investments, net
|
|
|
(138
|
)
|
|
|
(105
|
)
|
|
|
(369
|
)
|
|
|
(823
|
)
|
Write-down of investment securities
|
|
|
(601
|
)
|
|
|
(2,362
|
)
|
|
|
(5,207
|
)
|
|
|
(10,666
|
)
|
Other income
|
|
|
575
|
|
|
|
205
|
|
|
|
520
|
|
|
|
716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
$
|
2,917
|
|
|
$
|
(7,714
|
)
|
|
$
|
5,765
|
|
|
$
|
(3,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
It is Cadences policy to review the fair value of its
investment securities on a regular basis to determine whether
its investments in these companies are
other-than-temporarily
impaired. This evaluation includes, but is not limited to,
reviewing each companys cash position, financing needs,
earnings or revenue outlook, operational performance, management
or ownership changes and competition. If Cadence believes the
carrying value of an investment is in excess of its fair value,
and this difference is
other-than-temporary,
it is Cadences policy to write down the investment to
reduce its carrying value to fair value.
Cadence determined that certain of its non-marketable securities
were
other-than-temporarily
impaired and Cadence wrote down the investments by
$0.6 million during the three months ended October 3,
2009, $5.2 million during the nine months ended
October 3, 2009 and $2.9 million during the nine
months ended September 27, 2008. Cadence determined that
one of its
available-for-sale
securities was
other-than-temporarily
impaired based on the
23
severity and duration of the impairment and Cadence wrote down
the investment by $2.4 million during the three months
ended September 27, 2008 and $7.8 million during the
nine months ended September 27, 2008.
|
|
NOTE 14.
|
SEGMENT
REPORTING
|
Segment reporting requires disclosures of certain information
regarding operating segments, products and services, geographic
areas of operation and major customers. Segment reporting is
based upon the management approach: how management
organizes the companys operating segments for which
separate financial information is (i) available and
(ii) evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing
performance. Cadences chief operating decision maker is
its President and Chief Executive Officer, or CEO.
Cadences CEO reviews Cadences consolidated results
within one 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 on 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Americas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
87,926
|
|
|
$
|
91,032
|
|
|
$
|
263,877
|
|
|
$
|
339,801
|
|
Other Americas
|
|
|
4,069
|
|
|
|
10,403
|
|
|
|
14,039
|
|
|
|
25,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Americas
|
|
|
91,995
|
|
|
|
101,435
|
|
|
|
277,916
|
|
|
|
365,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe, Middle East and Africa:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
|
12,918
|
|
|
|
12,134
|
|
|
|
36,112
|
|
|
|
38,932
|
|
Other Europe, Middle East and Africa
|
|
|
30,472
|
|
|
|
40,142
|
|
|
|
100,518
|
|
|
|
141,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Europe, Middle East and Africa
|
|
|
43,390
|
|
|
|
52,276
|
|
|
|
136,630
|
|
|
|
180,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan
|
|
|
50,218
|
|
|
|
46,555
|
|
|
|
125,594
|
|
|
|
162,940
|
|
Asia
|
|
|
30,519
|
|
|
|
32,222
|
|
|
|
92,213
|
|
|
|
102,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
216,122
|
|
|
$
|
232,488
|
|
|
$
|
632,353
|
|
|
$
|
811,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No single customer accounted for 10% or more of total revenue
for the three and nine months ended October 3, 2009 or for
the three and nine months ended September 27, 2008.
As of October 3, 2009, one customer accounted for 16% and
one customer accounted for 10% of Cadences Receivables,
net and Installment contract receivables, net. As of
January 3, 2009, two customers each accounted for 11% of
Cadences Receivables, net and Installment contract
receivables, net.
24
The following table presents a summary of long-lived assets by
geography:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
October 3,
|
|
|
January 3,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
As Adjusted
|
|
|
|
(In thousands)
|
|
|
Americas:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
283,181
|
|
|
$
|
320,770
|
|
Other Americas
|
|
|
30
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
Total Americas
|
|
|
283,211
|
|
|
|
320,804
|
|
|
|
|
|
|
|
|
|
|
Europe, Middle East and Africa:
|
|
|
|
|
|
|
|
|
Germany
|
|
|
947
|
|
|
|
1,002
|
|
Other Europe, Middle East and Africa
|
|
|
5,502
|
|
|
|
6,357
|
|
|
|
|
|
|
|
|
|
|
Total Europe, Middle East and Africa
|
|
|
6,449
|
|
|
|
7,359
|
|
|
|
|
|
|
|
|
|
|
Japan
|
|
|
5,665
|
|
|
|
6,415
|
|
Asia
|
|
|
18,073
|
|
|
|
20,274
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
313,398
|
|
|
$
|
354,852
|
|
|
|
|
|
|
|
|
|
|
25
|
|
Item 2.
|
Managements
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 January 3, 2009. Certain of these
statements, including, without limitation, 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, intends, may,
plans, 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 electronic design automation, or EDA, software and
hardware. We license software, sell or lease hardware
technology, provide maintenance for our software and hardware
and provide engineering and education services throughout the
world to help manage and accelerate product development
processes for electronics. Our broad range of products and
services are used by the worlds leading electronics
companies to design and develop complex integrated circuits, or
ICs, and electronics systems.
We primarily generate revenue from licensing our EDA software,
selling or leasing our hardware technology, providing
maintenance for our software and hardware and providing
engineering services. In the past, our revenue has been
significantly affected by the mix of license types executed in
any given period. Our revenue may also be deferred until
payments become due and payable or cash is received from certain
customers and for certain contracts. Substantially all of our
revenue is generated from IC manufacturers and designers and
electronics systems companies and is dependent upon their
commencement of new design projects. As a result, our revenue is
significantly influenced by our customers business outlook
and investment in the introduction of new products and the
improvement of existing products.
The IC, electronics systems and semiconductor industries are
continuing to experience significant challenges, primarily due
to a challenging macroeconomic environment, which could be
characterized by diminished product demand, production
overcapacity, high inventory levels and accelerated erosion of
average selling prices. As a result of this downturn, some of
our customers faced financial challenges during fiscal 2008 and
the first three quarters of fiscal 2009 and may continue to face
such challenges during the remainder of fiscal 2009. It is
unclear when the macroeconomic environment may improve. We are
continuing to see pressures on our customers research and
development budgets, and therefore our customers are still
looking for more flexibility in the type of software and
hardware products they purchase and how and when they purchase
them. The current economic downturn in our customers
industries has contributed to the substantial reduction in our
revenue and could continue to harm our business, operating
results and financial condition.
Facing uncertainty and cost pressures in their own businesses or
otherwise as a result of the overall economic downturn, some of
our customers are continuing to wait to purchase our products
and to seek purchasing terms and conditions that are less
favorable to us, including lower prices and shorter contract
duration. As a result of this trend, we experienced lower
business levels for fiscal 2008 and we have forecasted lower
business levels for fiscal 2009. We incurred net losses for
fiscal 2008 and the first three quarters of fiscal 2009 and we
expect to incur net losses
26
during the last quarter of fiscal 2009. To enable us to keep our
focus on the value of our technology and to assist with customer
demands, we are transitioning to a license mix that will provide
our customers with greater flexibility and will result in a
substantial portion of our revenue being recognized ratably.
Our customers may also experience adverse changes in their
businesses and, as a result, may delay or default on their
payment obligations, file for bankruptcy or modify or cancel
plans to license our products. If our customers are not
successful in generating sufficient cash or are precluded from
securing financing, they may not be able to pay, or may delay
payment of, accounts receivable that are owed to us, although
these obligations are generally not cancelable. Additionally,
our customers may seek to renegotiate existing contractual
commitments. Although we have not yet experienced a material
level of defaults, any material payment default by our customers
or significant reductions in existing contractual commitments
could have a material adverse effect on our financial condition
and operating results.
Our operating results are affected by the mix of license types
executed in any given period. We license software using three
different license types: subscription, term and perpetual.
Product revenue associated with term and perpetual licenses is
generally recognized at the beginning of the license period,
whereas product revenue associated with subscription licenses is
recognized over multiple periods during the term of the
subscription license. The timing of revenue recognition is also
affected by changes in the extent to which existing contracts
contain flexible payment terms and by changes in contractual
arrangements with existing customers (e.g., customers
transitioning from subscription license arrangements to term
license arrangements). Our license mix is changing such that a
substantial proportion of licenses will require ratable revenue
recognition and we expect to have fewer changes in existing
contractual arrangements with existing customers, and this will
result in a decrease in our expected revenue for fiscal 2009.
Due to the lower business levels and the change in the mix of
license types noted above, we expect to incur a net loss for
fiscal year 2009.
We plan operating expense levels primarily based on forecasted
revenue levels. To offset some of the impact of our expected
decrease in revenue, we have implemented cost savings
initiatives, including reducing headcount, decreasing employee
bonuses and reducing other discretionary spending. During both
the second half of fiscal 2008 and the first half of fiscal
2009, we initiated a restructuring plan to decrease costs by
reducing our workforce and by consolidating facilities. We
expect ongoing annual savings of approximately
$180.0 million related to these two restructuring plans and
other expense reductions.
Product performance and size specifications of the mobile and
other consumer electronics markets are requiring electronic
systems to be smaller, consume less power and provide multiple
functions in one
system-on-chip,
or SoC, or
system-in-package,
or SiP. The design challenge is also becoming more complex with
each new generation of electronics because providers of EDA
solutions are required to deliver products that address these
technical challenges and improve the efficiency and productivity
of the design process in a price-conscious environment.
With the addition of emerging nanometer design considerations to
the already burgeoning set of traditional design tasks, complex
SoC or IC design can no longer be accomplished using a
collection of discrete design tools. What previously consisted
of sequential design activities must be merged and accomplished
nearly simultaneously without time-consuming data translation
steps. We combine our design technologies into
platforms addressing four major design activities:
functional verification, digital IC design, custom IC design and
system interconnect design. The four
Cadence®
design platforms are branded as
Incisive®
functional verification,
Encounter®
digital IC design,
Virtuoso®
custom design and
Allegro®
system interconnect design platforms. In addition, we augment
these offerings with a set of design for manufacturing, or DFM,
products that service both the digital and custom IC design
flows. These four offerings, together with our DFM products,
comprise our primary product lines.
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.
27
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 accordingly.
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 under the
heading Critical Accounting Estimates in our Annual
Report on
Form 10-K
for the fiscal year ended January 3, 2009.
Our critical accounting estimate for allowance for doubtful
accounts is described below due to challenges currently
affecting our customers as they adjust to the challenging
economic conditions.
Allowance
for Doubtful Accounts
We make judgments as to our ability to collect outstanding
receivables and provide allowances for a portion of receivables
when collection becomes doubtful. This allowance is based on our
assessment of the creditworthiness of our customers, historical
experience, changes in customer demand and the overall economic
climate in industries that we serve. While we believe that our
allowance for doubtful accounts is adequate and represents our
current best estimate, we will continue to monitor customer
liquidity and other economic conditions, which may result in
changes to our estimates regarding our ability to collect from
our customers. Changes in circumstances, such as an unexpected
material adverse change in a customers ability to meet its
financial obligation to us or the customers payment
trends, may require us to further adjust our estimates of the
recoverability of amounts due to us, which could have a material
adverse effect on our business, financial condition and
operating results. As a result of our assessment of increased
risk of customer delays or defaults on payment obligations, we
have increased our allowance for doubtful accounts to
$24.9 million as of October 3, 2009, as compared to
$7.5 million as of January 3, 2009.
Results
of Operations
Financial results for the three and nine months ended
October 3, 2009 reflected the following:
|
|
|
|
|
Continuing pressures on the research and development budgets in
our customer base due to the deceleration of growth in the IC,
electronics systems and semiconductor industries and the
challenging macroeconomic environment;
|
|
|
Lower business levels due to the challenging macroeconomic
environment and the timing of our contract renewals with
existing customers;
|
|
|
Lower business levels and up-front revenue recognized due to our
transition to a ratable license mix, which began in the third
quarter of fiscal 2008;
|
|
|
Decreased costs throughout the company as a result of our
restructuring plans and other expense reductions;
|
|
|
An increase in our allowance for doubtful accounts and the
proportion of arrangements for which revenue is deferred until
payments become due and payable or cash is received from
customers, as a result of our assessment of the increased risk
of customer delays or defaults on payment obligations; and
|
|
|
Our retrospective adoption of new accounting principles, as
required by the Debt with Conversion and Other
Options subtopic of the FASB Accounting Standards
Codification, or Codification, which increased interest expense
for all periods presented.
|
Revenue
We primarily generate revenue from licensing our EDA software,
selling or leasing our hardware technology, providing
maintenance for our software and hardware and providing
engineering services. We principally utilize
28
three license types: subscription, term and perpetual. The
different license types provide a customer with different
conditions of use for our products, such as:
|
|
|
|
|
The right to access new technology;
|
|
|
The duration of the license; and
|
|
|
Payment timing.
|
Customer decisions regarding these aspects of license
transactions determine the license type, timing of revenue
recognition and potential future business activity. For example,
if a customer chooses a fixed duration of use, this will result
in either a subscription or term license. A business implication
of this decision is that, at the expiration of the license
period, the customer must decide whether to continue using the
technology and therefore renew the license agreement. Because
larger customers generally use products from two or more of our
five product offerings, rarely will a large customer completely
terminate its relationship with us at expiration of the license.
See the discussion under the heading Critical Accounting
Estimates in our Annual Report on
Form 10-K
for the fiscal year ended January 3, 2009 for additional
description of license types and timing of revenue recognition.
We believe that pricing volatility has not generally been a
material component of the change in our revenue from period to
period. We believe that the amount of revenue recognized in
future periods will depend on, among other things, the:
|
|
|
|
|
Competitiveness of our new technology;
|
|
|
Timing of contract renewals with existing customers;
|
|
|
Length of our sales cycle; and
|
|
|
Size, duration, terms and type of:
|
|
|
|
|
|
Contract renewals with existing customers;
|
|
|
Additional sales to existing customers; and
|
|
|
Sales to new customers.
|
A substantial portion of our total revenue is recognized over
multiple periods. In the past, a significant portion of our
product revenue has generally been recognized upon the later of
the effective date of the arrangement or delivery of the
licensed software. We are moving to a license mix that will
result in increased ratable revenue or revenue that will be
recognized during multiple periods as the payments become due
and payable, or as cash is received from certain customers and
for certain contracts. As a result, we expect the percentage of
product revenue from backlog to increase in future years.
Product revenue recognized in any period is also affected by the
extent to which customers purchase subscription, term or
perpetual licenses, and the extent to which contracts contain
flexible payment terms. The timing of revenue recognition is
also affected by changes in the extent to which existing
contracts contain flexible payment terms and by changes in
contractual arrangements with existing customers (e.g.,
customers transitioning from subscription license arrangements
to term license arrangements).
We analyze our software and hardware businesses by product
group, combining revenues for both product and maintenance
because of their interrelationship. We have formulated a design
solution strategy that combines our design technologies in
platforms, which are included in the various product
groups described below.
Functional Verification: Products in this
group, including the Incisive functional verification platform,
are used to verify that the high level, logical representation
of an IC design is functionally correct.
Digital IC Design: Products in this group,
including the Encounter digital IC design platform, are used to
accurately convert the high-level, logical representation of a
digital IC into a detailed physical blueprint and then detailed
design information showing how the IC will be physically
implemented. This data is used for creation of the photomasks
used to manufacture semiconductors.
Custom IC Design: Our custom design products,
including the Virtuoso custom design platform, are used for ICs
that must be designed at the transistor level, including analog,
radio frequency, memories, high performance digital blocks and
standard cell libraries. Detailed design information showing how
an IC will be physically implemented is used for creation of the
photomasks used to manufacture semiconductors.
29
System Interconnect Design: This product group
consists of our printed circuit board, or PCB, and IC package
design products, including the Allegro and
OrCAD®
products. The Allegro system interconnect design platform
enables consistent co-design of interconnects across ICs, IC
packages and PCBs, while the OrCAD line focuses on
cost-effective, entry-level PCB solutions.
Design for Manufacturing: Included in this
product group are our physical verification and analysis
products. These products are used to analyze and verify that the
physical blueprint of the IC has been constructed correctly and
can be manufactured successfully. In connection with our cost
savings initiatives that were implemented during the fourth
quarter of fiscal 2008, we made certain changes to our DFM
product strategy, including focusing on integrating DFM
awareness into our core design platforms of Encounter digital IC
design and Virtuoso custom design.
Revenue
by Period
The following table shows our revenue for the three and nine
months ended October 3, 2009 and September 27, 2008
and the change in revenue between periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
(In millions)
|
|
|
Product
|
|
$
|
96.9
|
|
|
$
|
107.6
|
|
|
$
|
(10.7
|
)
|
|
$
|
286.3
|
|
|
$
|
422.4
|
|
|
$
|
(136.1
|
)
|
Services
|
|
|
26.7
|
|
|
|
32.9
|
|
|
|
(6.2
|
)
|
|
|
83.7
|
|
|
|
98.8
|
|
|
|
(15.1
|
)
|
Maintenance
|
|
|
92.5
|
|
|
|
92.0
|
|
|
|
0.5
|
|
|
|
262.4
|
|
|
|
290.1
|
|
|
|
(27.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
216.1
|
|
|
$
|
232.5
|
|
|
$
|
(16.4
|
)
|
|
$
|
632.4
|
|
|
$
|
811.3
|
|
|
$
|
(178.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue decreased during the three and nine months ended
October 3, 2009, as compared to the three and nine months
ended September 27, 2008, primarily because of lower
business levels due to the challenging macroeconomic
environment, the timing of our contract renewals with existing
customers, our transition to a ratable license mix and a longer
sales cycle. As a result, product revenue decreased for all
product groups, and particularly for Digital IC Design,
Functional Verification and Custom IC Design products.
Services and Maintenance Revenue have also decreased during the
nine months ended October 3, 2009, as compared to the nine
months ended September 27, 2008, due to the timing of
contract renewals with existing customers and an increase in the
proportion of arrangements for which revenue is deferred until
payments become due and payable or cash is received from
customers, primarily as a result of our assessment of the
increased risk of customer delays or defaults on payment
obligations. Maintenance revenue also decreased during the nine
months ended October 3, 2009, primarily due to a decline in
maintenance fees resulting from a reduction in the average
duration of software license arrangements, because the annual
fee for maintenance is lower for arrangements with shorter
durations. During the three months ended October 3, 2009,
Maintenance revenue increased due to an increase in maintenance
payments received during the period under arrangements for which
revenue is recognized when fees are due and payable, partially
offset by a decline in maintenance fees resulting from a general
reduction in average duration of software license arrangements.
30
Revenue
by Product Group
The following table shows for the past five consecutive quarters
the percentage of product and related maintenance revenue
contributed by each of our five product groups, and Services and
other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
October 3,
|
|
|
July 4,
|
|
|
April 4,
|
|
|
January 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
Functional Verification
|
|
|
21%
|
|
|
|
23%
|
|
|
|
20%
|
|
|
|
17%
|
|
|
|
22%
|
|
Digital IC Design
|
|
|
19%
|
|
|
|
24%
|
|
|
|
19%
|
|
|
|
26%
|
|
|
|
20%
|
|
Custom IC Design
|
|
|
28%
|
|
|
|
25%
|
|
|
|
26%
|
|
|
|
23%
|
|
|
|
26%
|
|
System Interconnect
|
|
|
11%
|
|
|
|
10%
|
|
|
|
12%
|
|
|
|
12%
|
|
|
|
11%
|
|
Design for Manufacturing
|
|
|
9%
|
|
|
|
5%
|
|
|
|
9%
|
|
|
|
7%
|
|
|
|
7%
|
|
Services and other
|
|
|
12%
|
|
|
|
13%
|
|
|
|
14%
|
|
|
|
15%
|
|
|
|
14%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100%
|
|
|
|
100%
|
|
|
|
100%
|
|
|
|
100%
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As described under the heading Critical Accounting
Estimates in our Annual Report on
Form 10-K
for the fiscal year ended January 3, 2009, certain of our
licenses allow customers the ability to remix among software
products. Additionally, we have licensed a combination of our
products to customers 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 by
these customers. The actual usage of our products by these
customers may differ and, if that proves to be the case, the
revenue allocation in the above table would differ.
Although we believe the methodology of allocating revenue to
product groups is reasonable, there can be no assurance that
such allocated amounts reflect the amounts that would result if
the customer had individually licensed each specific software
solution at the outset of the arrangement.
Services and other revenue has remained relatively consistent
during each of the three month periods shown in the above table.
Beginning with the three months ended April 4, 2009, the
decrease in Services and other revenue as a percentage of total
revenue is primarily due to lower services revenue as explained
under the heading Revenue by period above.
Revenue
by Geography
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
(In millions)
|
|
|
United States
|
|
$
|
87.9
|
|
|
$
|
91.0
|
|
|
$
|
(3.1
|
)
|
|
$
|
263.9
|
|
|
$
|
339.8
|
|
|
$
|
(75.9
|
)
|
Other Americas
|
|
|
4.1
|
|
|
|
10.4
|
|
|
|
(6.3
|
)
|
|
|
14.0
|
|
|
|
25.8
|
|
|
|
(11.8
|
)
|
Europe, Middle East and Africa
|
|
|
43.4
|
|
|
|
52.3
|
|
|
|
(8.9
|
)
|
|
|
136.7
|
|
|
|
180.4
|
|
|
|
(43.7
|
)
|
Japan
|
|
|
50.2
|
|
|
|
46.6
|
|
|
|
3.6
|
|
|
|
125.6
|
|
|
|
162.9
|
|
|
|
(37.3
|
)
|
Asia
|
|
|
30.5
|
|
|
|
32.2
|
|
|
|
(1.7
|
)
|
|
|
92.2
|
|
|
|
102.4
|
|
|
|
(10.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
216.1
|
|
|
$
|
232.5
|
|
|
$
|
(16.4
|
)
|
|
$
|
632.4
|
|
|
$
|
811.3
|
|
|
$
|
(178.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Revenue
by Geography as a Percent of Total Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
United States
|
|
|
41%
|
|
|
|
39%
|
|
|
|
42%
|
|
|
|
42%
|
|
Other Americas
|
|
|
2%
|
|
|
|
4%
|
|
|
|
2%
|
|
|
|
3%
|
|
Europe, Middle East and Africa
|
|
|
20%
|
|
|
|
23%
|
|
|
|
22%
|
|
|
|
22%
|
|
Japan
|
|
|
23%
|
|
|
|
20%
|
|
|
|
20%
|
|
|
|
20%
|
|
Asia
|
|
|
14%
|
|
|
|
14%
|
|
|
|
14%
|
|
|
|
13%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100%
|
|
|
|
100%
|
|
|
|
100%
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No single customer accounted for 10% or more of total revenue
during the three and nine months ended October 3, 2009 or
during the three and nine months ended September 27, 2008.
Most of our revenue is transacted in the United States dollar.
However, certain revenue transactions are in foreign currencies,
primarily the Japanese yen, and we recognize additional revenue
in periods when the United States dollar weakens in value
against the Japanese yen as the result of foreign currency
translation. For additional description of how changes in
foreign exchange rates affect our Condensed Consolidated
Financial Statements, see the discussion under the heading
Item 3. Quantitative and Qualitative Disclosures
About Market Risk Disclosures About Market
Risk Foreign Currency Risk below.
Stock-based
Compensation Expense Summary
Stock-based compensation expense is reflected throughout our
costs and expenses as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Cost of product
|
|
$
|
----
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
Cost of services
|
|
|
0.9
|
|
|
|
1.1
|
|
|
|
2.7
|
|
|
|
3.2
|
|
Cost of maintenance
|
|
|
0.6
|
|
|
|
0.7
|
|
|
|
1.7
|
|
|
|
2.1
|
|
Marketing and sales
|
|
|
3.3
|
|
|
|
3.9
|
|
|
|
9.7
|
|
|
|
13.0
|
|
Research and development
|
|
|
6.8
|
|
|
|
8.7
|
|
|
|
21.2
|
|
|
|
27.9
|
|
General and administrative
|
|
|
2.9
|
|
|
|
0.1
|
|
|
|
8.3
|
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14.5
|
|
|
$
|
14.6
|
|
|
$
|
43.7
|
|
|
$
|
57.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense decreased by $0.1 million
during the three months ended October 3, 2009, as compared
to the three months ended September 27, 2008, and
$14.0 million during the nine months ended October 3,
2009, as compared to the nine months ended September 27,
2008. The components of this decrease are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
(In millions)
|
|
|
Stock options
|
|
$
|
(3.3
|
)
|
|
$
|
(11.7
|
)
|
Restricted stock awards, restricted stock units and stock bonuses
|
|
|
3.8
|
|
|
|
0.3
|
|
Employee stock purchase plan
|
|
|
(0.6
|
)
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.1
|
)
|
|
$
|
(14.0
|
)
|
|
|
|
|
|
|
|
|
|
32
Stock-based compensation expense related to stock options
decreased during the three and nine months ended October 3,
2009, as compared to the three and nine months ended
September 27, 2008, primarily due to our increased use of
restricted stock awards and restricted stock units instead of
stock options, a decrease in the number of unvested stock
options due to a reduction in headcount associated with our 2008
and 2009 Restructuring Plans and the resignation of certain
executives in the fourth quarter of fiscal 2008, and the
valuation of newly granted stock options at lower fair values.
Stock-based compensation expense related to restricted stock
awards and restricted stock units, collectively and individually
referred to as restricted stock, and stock bonuses increased
during the three and nine months ended October 3, 2009, as
compared to the three and nine months ended September 27,
2008, primarily due to our increased use of restricted stock
instead of stock options.
Cost of
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
October 3,
|
|
September 27,
|
|
|
|
October 3,
|
|
September 27,
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
|
(In millions)
|
|
Product
|
|
$
|
6.4
|
|
|
$
|
11.8
|
|
|
$
|
(5.4
|
)
|
|
$
|
23.8
|
|
|
$
|
39.2
|
|
|
$
|
(15.4
|
)
|
Services
|
|
$
|
21.1
|
|
|
$
|
25.7
|
|
|
$
|
(4.6
|
)
|
|
$
|
69.6
|
|
|
$
|
78.1
|
|
|
$
|
(8.5
|
)
|
Maintenance
|
|
$
|
11.1
|
|
|
$
|
13.9
|
|
|
$
|
(2.8
|
)
|
|
$
|
35.4
|
|
|
$
|
42.9
|
|
|
$
|
(7.5
|
)
|
The following table shows cost of revenue as a percentage of
related revenue for the three and nine months ended
October 3, 2009 and September 27, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Product
|
|
|
7%
|
|
|
|
11%
|
|
|
|
8%
|
|
|
|
9%
|
|
Services
|
|
|
79%
|
|
|
|
78%
|
|
|
|
83%
|
|
|
|
79%
|
|
Maintenance
|
|
|
12%
|
|
|
|
15%
|
|
|
|
13%
|
|
|
|
15%
|
|
Cost of
Product
Cost of product includes costs associated with the sale or lease
of our hardware and licensing of our software products. Cost of
product primarily includes the cost of employee salary, benefits
and other employee-related costs, including stock-based
compensation expense, amortization of acquired intangibles
directly related to our products, the cost of technical
documentation and royalties payable to third-party vendors. Cost
of product associated with our hardware products also includes
materials, assembly and overhead. These additional manufacturing
costs make our cost of hardware product higher, as a percentage
of revenue, than our cost of software product.
A summary of Cost of product is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Product related costs
|
|
$
|
5.8
|
|
|
$
|
7.7
|
|
|
$
|
20.1
|
|
|
$
|
25.7
|
|
Amortization of acquired intangibles
|
|
|
0.6
|
|
|
|
4.1
|
|
|
|
3.7
|
|
|
|
13.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of product
|
|
$
|
6.4
|
|
|
$
|
11.8
|
|
|
$
|
23.8
|
|
|
$
|
39.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product related costs decreased during the three months and nine
months ended October 3, 2009, as compared to the three and
nine months ended September 27, 2008, primarily due to a
decrease in hardware sales. Amortization of acquired intangibles
decreased during the three and nine months ended October 3,
2009, as compared to the three and nine months ended
September 27, 2008, primarily due to the decrease in the
balance of Acquired intangibles,
33
net as a result of our impairment charge taken in the fourth
quarter of fiscal 2008 (as described in our Annual Report on
Form 10-K
for the fiscal year ended January 3, 2009) and because
certain acquired intangible assets became fully amortized during
the period.
Cost of product depends primarily upon the extent to which we
acquire intangible assets, acquire licenses and incorporate
third party technology in our products that are licensed or sold
in any given period, and the actual mix of hardware and software
product sales in any given period.
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. Cost of services
decreased by $4.6 million during the three months ended
October 3, 2009, as compared to the three months ended
September 27, 2008, and $8.5 million during the nine
months ended October 3, 2009, as compared to the nine
months ended September 27, 2008, primarily due to a
decrease in salary, benefits and other employee-related costs.
Cost of
Maintenance
Cost of maintenance includes the cost of customer services, such
as hot-line and
on-site
support, employee salary, benefits and other employee-related
costs, and documentation of maintenance updates. Cost of
maintenance decreased by $2.8 million during the three
months ended October 3, 2009, as compared to the three
months ended September 27, 2008, and $7.5 million
during the nine months ended October 3, 2009, as compared
to the nine months ended September 27, 2008, primarily due
to a decrease in salary, benefits and other employee-related
costs.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
(In millions)
|
|
|
Marketing and sales
|
|
$
|
68.3
|
|
|
$
|
91.1
|
|
|
$
|
(22.8
|
)
|
|
$
|
214.6
|
|
|
$
|
274.0
|
|
|
$
|
(59.4
|
)
|
Research and development
|
|
|
88.0
|
|
|
|
112.5
|
|
|
|
(24.5
|
)
|
|
|
273.4
|
|
|
|
357.9
|
|
|
|
(84.5
|
)
|
General and administrative
|
|
|
28.7
|
|
|
|
32.9
|
|
|
|
(4.2
|
)
|
|
|
101.3
|
|
|
|
105.6
|
|
|
|
(4.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
185.0
|
|
|
$
|
236.5
|
|
|
$
|
(51.5
|
)
|
|
$
|
589.3
|
|
|
$
|
737.5
|
|
|
$
|
(148.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses decreased during the three and nine months
ended October 3, 2009, as compared to the three and nine
months ended September 27, 2008, primarily due to our 2008
and 2009 Restructuring Plans and our cost savings initiatives to
decrease discretionary spending. The primary components of Other
discretionary spending are travel, professional services costs,
computer equipment lease costs and maintenance associated with
third-party software.
The following table shows operating expenses as a percentage of
total revenue for the three and nine months ended
October 3, 2009 and September 27, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Marketing and sales
|
|
|
32%
|
|
|
|
39%
|
|
|
|
34%
|
|
|
|
34%
|
|
Research and development
|
|
|
41%
|
|
|
|
48%
|
|
|
|
43%
|
|
|
|
44%
|
|
General and administrative
|
|
|
13%
|
|
|
|
14%
|
|
|
|
16%
|
|
|
|
13%
|
|
34
Marketing
and Sales
Marketing and sales expense decreased by $22.8 million
during the three months ended October 3, 2009, as compared
to the three months ended September 27, 2008, and
$59.4 million during the nine months ended October 3,
2009, as compared to the nine months ended September 27,
2008. The components of this decrease are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
(In millions)
|
|
|
Salary, commissions, benefits and other employee-related costs
|
|
$
|
(11.2
|
)
|
|
$
|
(33.8
|
)
|
Other discretionary spending
|
|
|
(7.1
|
)
|
|
|
(15.9
|
)
|
Facilities and other infrastructure costs
|
|
|
(3.9
|
)
|
|
|
(6.4
|
)
|
Stock-based compensation
|
|
|
(0.6
|
)
|
|
|
(3.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(22.8
|
)
|
|
$
|
(59.4
|
)
|
|
|
|
|
|
|
|
|
|
Research
and Development
Research and development expense decreased by $24.5 million
during the three months ended October 3, 2009, as compared
to the three months ended September 27, 2008, and
$84.5 million during the nine months ended October 3,
2009, as compared to the nine months ended September 27,
2008. The components of this decrease are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
(In millions)
|
|
|
Salary, benefits and other employee-related costs
|
|
$
|
(17.8
|
)
|
|
$
|
(61.8
|
)
|
Facilities and other infrastructure costs
|
|
|
(3.0
|
)
|
|
|
(7.0
|
)
|
Stock-based compensation
|
|
|
(1.9
|
)
|
|
|
(6.7
|
)
|
Other discretionary spending
|
|
|
(1.8
|
)
|
|
|
(9.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(24.5
|
)
|
|
$
|
(84.5
|
)
|
|
|
|
|
|
|
|
|
|
General
and Administrative
General and administrative expense decreased by
$4.2 million during the three months ended October 3,
2009, as compared to the three months ended September 27,
2008, and $4.3 million during the nine months ended
October 3, 2009, as compared to the nine months ended
September 27, 2008. The components of this decrease are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
(In millions)
|
|
|
Other discretionary spending
|
|
$
|
(4.6
|
)
|
|
$
|
(6.7
|
)
|
Salary, benefits and other employee-related costs
|
|
|
(2.9
|
)
|
|
|
(11.0
|
)
|
Losses on the sale of installment contract receivables
|
|
|
(1.2
|
)
|
|
|
(5.1
|
)
|
Facilities and other infrastructure costs
|
|
|
(1.0
|
)
|
|
|
(5.4
|
)
|
Bad debt expense
|
|
|
1.4
|
|
|
|
21.7
|
|
Impairment of property, plant and equipment
|
|
|
1.3
|
|
|
|
5.2
|
|
Stock-based compensation
|
|
|
2.8
|
|
|
|
(3.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4.2
|
)
|
|
$
|
(4.3
|
)
|
|
|
|
|
|
|
|
|
|
35
Losses on the sale of installment contract receivables decreased
during the three and nine months ended October 3, 2009, as
compared to the three and nine months ended September 27,
2008, due to a reduction in sales of receivables. The change in
our license mix will result in an increased number of
subscription licenses and, therefore, a decrease in the sale of
receivables to financial institutions.
Bad debt expense increased during the three and nine months
ended October 3, 2009, as compared to the three and nine
months ended September 27, 2008, due to the increase in our
allowance for doubtful accounts resulting from our assessment of
the increased risk of customer delays or defaults on payment
obligations.
Amortization
of Acquired Intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
Amortization of acquired intangibles
|
|
$
|
2.7
|
|
|
$
|
5.6
|
|
|
$
|
(2.9
|
)
|
|
$
|
8.7
|
|
|
$
|
17.2
|
|
|
$
|
(8.5
|
)
|
Amortization of acquired intangibles decreased by
$2.9 million during the three months ended October 3,
2009, as compared to the three months ended September 27,
2008, and by $8.5 million during the nine months ended
October 3, 2009, as compared to the nine months ended
September 27, 2008, primarily due to the decrease in the
balance of Acquired intangibles, net as a result of our
impairment charge taken in the fourth quarter of fiscal 2008 (as
described in our Annual Report on
Form 10-K
for the fiscal year ended January 3, 2009). Based on our
current portfolio of intangible assets, we expect our
Amortization of acquired intangibles to remain at its current
level through the remainder of fiscal 2009.
Restructuring
and Other Charges
During the three months ended July 4, 2009, we initiated a
restructuring plan, or the 2009 Restructuring Plan, to decrease
costs by reducing our workforce. The 2009 Restructuring Plan is
expected to decrease costs by reducing our workforce throughout
the company by approximately 245 positions. Since initiating the
2009 Restructuring Plan, we have recorded total costs associated
with the 2009 Restructuring Plan of $21.4 million.
During fiscal 2008, we initiated a restructuring plan, or the
2008 Restructuring Plan, to decrease costs by reducing our
workforce and by consolidating facilities. The 2008
Restructuring Plan has decreased costs by reducing our workforce
throughout the company by approximately 625 positions and
substantially all of such expected workforce reductions have
been completed. We also initiated restructuring plans in each
year from 2001 through 2005, or the Other Restructuring Plans,
in an effort to operate more efficiently. As of October 3,
2009, we had a liability of $2.5 million related to the
2008 Restructuring Plan, which consisted primarily of estimated
lease losses, and a liability of $4.8 million related to
the Other Restructuring Plans that consisted solely of estimated
lease losses.
As of October 3, 2009, our estimate of the accrued lease
losses related to these restructuring plans was
$6.9 million. This amount will be adjusted in the future
based on changes in the assumptions used to estimate the lease
losses. The lease losses could be as high as $10.8 million
and will be influenced by rental rates and the amount of time it
takes to find suitable tenants to sublease the facilities, as
compared to current expectations.
We regularly evaluate the adequacy of our lease loss and
severance and related benefits accruals, and adjust the balances
based on actual costs incurred or changes in estimates and
assumptions. We may incur future charges to reflect actual costs
incurred or for changes in estimates related to amounts
previously recorded under our restructuring plans.
Because the restructuring charges and related benefits are
derived from managements estimates made during the
formulation of the restructuring plans, based on then-currently
available information, our restructuring plans may not achieve
the benefits anticipated on the timetable or at the level
contemplated. Demand for our products and services and,
ultimately, our future financial performance, is difficult to
predict with any degree of certainty and is especially difficult
to predict in light of the current economic challenges and
uncertainty. Accordingly, additional actions, including further
restructuring of our operations, may be required in the future.
36
The following table presents restructuring expense by
Restructuring Plan for the three months ended October 3,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
Excess
|
|
|
|
|
|
|
and Benefits
|
|
|
Facilities
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
2009 Restructuring Plan
|
|
$
|
1.6
|
|
|
$
|
----
|
|
|
$
|
1.6
|
|
2008 Restructuring Plan
|
|
|
(0.3
|
)
|
|
|
(1.4
|
)
|
|
|
(1.7
|
)
|
Other Restructuring Plans
|
|
|
----
|
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1.3
|
|
|
$
|
(1.5
|
)
|
|
$
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents restructuring expense by
Restructuring Plan for the nine months ended October 3,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
Excess
|
|
|
|
|
|
|
and Benefits
|
|
|
Facilities
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
2009 Restructuring Plan
|
|
$
|
21.4
|
|
|
$
|
----
|
|
|
$
|
21.4
|
|
2008 Restructuring Plan
|
|
|
(2.9
|
)
|
|
|
0.5
|
|
|
|
(2.4
|
)
|
Other Restructuring Plans
|
|
|
----
|
|
|
|
(1.2
|
)
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18.5
|
|
|
$
|
(0.7
|
)
|
|
$
|
17.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
Restructuring Plan
During the nine months ended October 3, 2009, we recorded
total costs associated with the 2009 Restructuring Plan of
$21.4 million, which includes $19.7 million recorded
during the three months ended July 4, 2009 and
$1.6 million recorded during the three months ended
October 3, 2009. The costs recorded as part of the 2009
Restructuring Plan include severance payments, severance-related
benefits and costs for outplacement services that were
communicated to the affected employees before October 3,
2009, and estimated severance payments and related termination
benefits that were both probable and estimable as of
October 3, 2009 for employees notified after
October 3, 2009.
We provide severance and termination benefits in compliance with
the varying regulations in the jurisdictions and countries in
which we operate. Total severance and termination benefits of
approximately $15.7 million were paid to employees before
October 3, 2009 and severance and termination benefits of
approximately $5.8 million will be paid after
October 3, 2009. We expect to pay substantially all of the
anticipated severance payments and termination benefits related
to the 2009 Restructuring Plan by July 2, 2010.
2008
Restructuring Plan
During the three months ended October 3, 2009, we recorded
a reversal of $1.7 million, consisting of $0.3 million
in termination and related benefits costs that were less than
initially estimated, and $1.4 million of excess facilities
costs due to a reduction in the estimated lease obligation
associated with a facility vacated as part of the 2008
Restructuring Plan.
We have incurred approximately $41.4 million of headcount
reduction costs associated with the 2008 Restructuring Plan.
These costs included severance payments, severance-related
benefits and costs for outplacement services. Of the
$41.4 million, $0.5 million will be paid after
October 3, 2009. We expect to complete payments for
substantially all of the anticipated benefits related to the
2008 Restructuring Plan by January 2, 2010.
37
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
As Adjusted
|
|
|
As Adjusted
|
|
|
|
(In millions)
|
|
|
Interest expense
|
|
$
|
7.3
|
|
|
$
|
7.0
|
|
|
$
|
21.6
|
|
|
$
|
20.7
|
|
On the first day of fiscal 2009, we adopted new accounting
principles as required by the Debt with Conversion and
Other Options subtopic of the Codification, which requires
issuers of certain types of convertible notes to separately
account for the liability and equity components in a manner that
will reflect the entitys nonconvertible debt borrowing
rate when interest cost is recognized in subsequent periods. The
primary components of Interest expense for the three and nine
months ended October 3, 2009 and September 27, 2008
consisted of the non-cash component associated with the
amortization of the debt discount as required under these new
accounting principles and the contractual interest expense of
our Convertible Senior Notes.
Other Income (Expense), net
Other income (expense), net, for the three and nine months ended
October 3, 2009 and September 27, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
|
|
|
October 3,
|
|
|
|
|
|
|
2009
|
|
|
September 27, 2008
|
|
|
2009
|
|
|
September 27, 2008
|
|
|
|
(In millions)
|
|
|
Interest income
|
|
$
|
0.3
|
|
|
$
|
4.0
|
|
|
$
|
2.1
|
|
|
$
|
17.8
|
|
Gains on sale of non-marketable securities
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
0.9
|
|
Gains (losses) on sale of
available-for-sale
securities
|
|
|
----
|
|
|
|
(9.4
|
)
|
|
|
----
|
|
|
|
(7.9
|
)
|
Gains (losses) on sale of trading securities in Cadences
non-qualified deferred compensation trust
|
|
|
3.6
|
|
|
|
(0.3
|
)
|
|
|
(4.3
|
)
|
|
|
(4.4
|
)
|
Gains (losses) on foreign exchange
|
|
|
(0.9
|
)
|
|
|
0.3
|
|
|
|
1.5
|
|
|
|
0.7
|
|
Equity losses from investments
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.4
|
)
|
|
|
(0.8
|
)
|
Write-down of investments
|
|
|
(0.6
|
)
|
|
|
(2.4
|
)
|
|
|
(5.2
|
)
|
|
|
(10.7
|
)
|
Other income
|
|
|
0.6
|
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
$
|
2.9
|
|
|
$
|
(7.7
|
)
|
|
$
|
5.8
|
|
|
$
|
(3.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income decreased by $3.7 million during the three
months ended October 3, 2009, as compared to the three
months ended September 27, 2008, and by $15.7 million
during the nine months ended October 3, 2009, as compared
to the nine months ended September 27, 2008. The decrease
was due to lower average cash balances and lower interest rates
during the three and nine months ended October 3, 2009.
We determined that certain of our non-marketable securities were
other-than-temporarily
impaired and we wrote down the investments by $0.6 million
during the three months ended October 3, 2009,
$5.2 million during the nine months ended October 3,
2009 and $2.9 million during the nine months ended
September 27, 2008. We determined that one of our
available-for-sale
securities was
other-than-temporarily
impaired based on the severity and duration of the impairment
and we wrote down the investment by $2.4 million during the
three months ended September 27, 2008 and $7.8 million
during the nine months ended September 27, 2008.
38
Income Taxes
The following table presents the Provision (benefit) for income
taxes and the effective tax rate for the three and nine months
ended October 3, 2009 and September 27, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
|
|
|
October 3,
|
|
|
|
|
|
|
2009
|
|
|
September 27, 2008
|
|
|
2009
|
|
|
September 27, 2008
|
|
|
|
|
|
|
As Adjusted
|
|
|
|
|
|
As Adjusted
|
|
|
|
(In millions, except percentages)
|
|
|
Provision (benefit) for income taxes
|
|
$
|
(0.4)
|
|
|
$
|
46.7
|
|
|
$
|
12.0
|
|
|
$
|
46.2
|
|
Effective tax rate
|
|
|
3.1%
|
|
|
|
(37.7)%
|
|
|
|
(8.6)%
|
|
|
|
(26.2)%
|
|
For interim periods, we adjust our Provision (benefit) for
income taxes based on our current estimates of the pre-tax
income or loss for the fiscal year, our annual effective tax
rates and period-specific items of tax expense or benefit. Our
benefit for income taxes for the three months ended
October 3, 2009 primarily reflects our revisions to the
estimated pre-tax loss for fiscal 2009.
Our Provision for income taxes for the nine months ended
October 3, 2009 is primarily due to the recognition of
period-specific items of net tax expense of $17.8 million
which was partially offset by the tax benefit of the fiscal 2009
United States federal net operating losses that can be utilized
in prior years. The largest items of the period-specific net tax
expense included an increase in our unrecognized tax benefits,
penalties and interest related to prior year tax positions of
$10.5 million and current year interest expense related to
unrecognized tax benefits of $9.5 million.
The $10.5 million increase in unrecognized tax benefits,
penalties and interest during the nine months ended
October 3, 2009 included $7.3 million of unrecognized
tax benefits, penalties and interest that should have been
recognized during multiple periods between fiscal 2004 through
fiscal 2008. As a result, our Net income (loss) would have
increased (decreased) as follows, with a corresponding change in
our Provision for income taxes:
|
|
|
|
|
|
|
Increase
|
|
|
|
(decrease) in
|
|
|
|
Net income
|
|
|
|
(loss)
|
|
|
|
(In millions)
|
|
|
Period:
|
|
|
|
|
2004
|
|
$
|
(4.9
|
)
|
2005
|
|
|
(2.4
|
)
|
2006
|
|
|
(2.1
|
)
|
2007
|
|
|
(0.3
|
)
|
2008
|
|
|
2.4
|
|
|
|
|
|
|
|
|
$
|
(7.3
|
)
|
|
|
|
|
|
The effects on our fiscal 2009 expected annual results and our
Consolidated Financial Statements for prior periods is not
considered material.
Our effective tax rates for the three and nine months ended
October 3, 2009 were greater than effective tax rates for
the three and nine months ended September 27, 2008,
primarily due to our decision during the three and nine months
ended September 27, 2008 to repatriate $317.9 million
of previously untaxed earnings from foreign subsidiaries that
resulted in the recognition of a $71.0 million tax expense.
We estimate our annual effective tax rate for fiscal 2009 to be
approximately (10.0)%. With the exception of the fiscal 2009
United States federal net operating loss that can be utilized in
prior years, we expect to record a valuation allowance that will
offset any tax benefit from other fiscal 2009 United States
losses and tax credits. Our effective tax rate for the year
ended January 3, 2009, as adjusted for the adoption of new
accounting principles as required by the Debt with
Conversion and Other Options subtopic of the Codification,
was (14.8)%.
39
Upon our adoption of new accounting principles related to our
prior business combinations on the first day of fiscal 2009, we
increased the amount of unrecognized tax benefits by
$22.2 million and which, if recognized, would reduce our
effective tax rate. Prior to this adoption, these unrecognized
tax benefits, if recognized, were accounted for as an adjustment
to goodwill.
In May 2009, in a case between Xilinx, Inc. and the Internal
Revenue Service, or IRS, the U.S. Court of Appeals for the
Ninth Circuit, or the Ninth Circuit, overturned a 2005 ruling by
the U.S. Tax Court. While we were not a named party to the
case, the Ninth Circuits decision impacts our tax position
for certain years prior to fiscal 2004. The Ninth Circuit held
that related parties to a research and development cost sharing
arrangement must share stock option costs, notwithstanding the
U.S. Tax Court finding that unrelated parties in such an
arrangement would not share such costs. As a result of the Ninth
Circuits decision, we increased our liability for
unrecognized tax benefits and decreased Common stock and capital
in excess of par value by approximately $6.4 million during
the nine months ended October 3, 2009.
The IRS and other tax authorities regularly examine our income
tax returns. In July 2006, the IRS completed its field
examination of our federal income tax returns for the tax years
2000 through 2002 and issued a Revenue Agents Report, or
RAR, in which the IRS proposed to assess an aggregate tax
deficiency for the three-year period of approximately
$324.0 million. In November 2006, the IRS revised the
proposed aggregate tax deficiency for the three-year period to
approximately $318.0 million. The IRS is contesting our
qualification for deferred recognition of certain proceeds
received from restitution and settlement in connection with
litigation during the period. The proposed tax deficiency for
this item is approximately $152.0 million. The remaining
proposed tax deficiency of approximately $166.0 million is
primarily related to proposed adjustments to our transfer
pricing arrangements with our foreign subsidiaries and to our
deductions for foreign trade income. We have filed a timely
protest with the IRS and are seeking resolution of the issues
with the Appeals Office of the IRS, or the Appeals Office.
In May 2009, the IRS completed its field examination of our
federal income tax returns for the tax years 2003 through 2005
and issued a RAR, in which the IRS proposed to assess an
aggregate deficiency for the three-year period of approximately
$94.1 million. In August 2009, the IRS revised the proposed
aggregate tax deficiency for the three-year period to
approximately $60.7 million. The IRS is contesting our
transfer pricing arrangements with our foreign subsidiaries and
our deductions for foreign trade income. The IRS made similar
claims against our transfer pricing arrangements and deductions
for foreign trade income in prior examinations and may make
similar claims in future examinations. We have filed a timely
protest with the IRS and will seek resolution of the issues
through the Appeals Office.
We believe that the proposed IRS adjustments are inconsistent
with applicable tax laws and we are vigorously challenging these
proposed adjustments. The RARs are not final Statutory Notices
of Deficiency, but the IRS imposes interest on the proposed
deficiencies until the matters are resolved. Interest is
compounded daily at rates that are published and adjusted
quarterly by the IRS and have been between 4% and 10% since 2001.
We believe that it is reasonably possible that the total amounts
of unrecognized tax benefits related to the IRS examination of
our federal income tax returns for the tax years 2000 through
2002 could decrease during fiscal 2009 if we are able to
effectively settle the disputed issues with the Appeals Office.
We believe that the range of reasonably possible outcomes is a
decrease in existing unrecognized tax benefits for the tax years
2000 through 2002 as much as $244.0 million.
In addition, we believe that it is reasonably possible that the
total amounts of unrecognized tax benefits for our transfer
pricing arrangements with our foreign subsidiaries could
significantly increase or decrease during the fiscal 2009 if the
Appeals Office develops new settlement guidelines that change
our measurement of the tax benefits to be recognized upon
effective settlement with the IRS. Because of the uncertain
impact of any potential settlement guidelines, we cannot
currently provide an estimate of the range of possible outcomes.
The calculation of our Provision for income taxes requires us to
use significant judgment and involves dealing with uncertainties
in the application of complex tax laws and regulations. In
determining the adequacy of our provision for income taxes, we
regularly assess the potential settlement outcomes resulting
from income tax examinations. However, the final outcome of tax
examinations, including the total amount payable or the timing
of any such payments upon resolution of these issues, cannot be
estimated with certainty. In addition, we cannot be
40
certain that such amount will not be materially different from
the amount that is reflected in our historical income tax
provisions and accruals. Should the IRS or other tax authorities
assess additional taxes as a result of a current or a future
examination, we may be required to record charges to operations
in future periods that could have a material impact on our
results of operations, financial position or cash flows in the
applicable period or periods.
Liquidity
and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
October 3,
|
|
|
January 3,
|
|
|
|
|
|
|
2009
|
|
|
2009
|
|
|
Change
|
|
|
|
As Adjusted
|
|
|
|
(In millions)
|
|
|
Cash, cash equivalents and Short-term investments
|
|
$
|
575.4
|
|
|
$
|
572.1
|
|
|
$
|
3.3
|
|
Net working capital
|
|
$
|
455.9
|
|
|
$
|
389.8
|
|
|
$
|
66.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
(In millions)
|
|
|
Cash provided by operating activities
|
|
$
|
24.7
|
|
|
$
|
37.7
|
|
|
$
|
(13.0
|
)
|
Cash used for investing activities
|
|
$
|
(47.6
|
)
|
|
$
|
(112.4
|
)
|
|
$
|
64.8
|
|
Cash provided by (used for) financing activities
|
|
$
|
21.3
|
|
|
$
|
(441.3
|
)
|
|
$
|
462.6
|
|
Cash and
Cash Equivalents and Short-term Investments
As of October 3, 2009, our principal sources of liquidity
consisted of $575.4 million of Cash and cash equivalents
and Short-term investments, as compared to $572.1 million
as of January 3, 2009.
Our primary sources of cash in the nine months ended
October 3, 2009 were:
|
|
|
|
|
Customer payments under software licenses and from the sale or
lease of our hardware products;
|
|
|
Customer payments for engineering services; and
|
|
|
Cash received for common stock purchases under our employee
stock purchase plan.
|
Our primary uses of cash in the nine months ended
October 3, 2009 were:
|
|
|
|
|
Payments relating to salaries, benefits, other employee-related
costs and other operating expenses, including our restructuring
plans;
|
|
|
Purchases of property, plant and equipment; and
|
|
|
Payments to former shareholders of acquired businesses.
|
Our existing Cash and cash equivalents and Short-term investment
balances may decline during fiscal 2009, in the event of a
further deterioration in the economy or the capital markets, a
reduction in our cash receipts or changes in our cash outlays.
However, we expect that current cash and short-term investment
balances and cash flows that are generated from operations will
be sufficient to meet our working capital and other capital
requirements for at least the next 12 months.
41
Net Working Capital
Net working capital increased by $66.1 million as of
October 3, 2009, as compared to January 3, 2009, due
to the following:
|
|
|
|
|
|
|
Change
|
|
|
|
(In millions)
|
|
|
Decrease in Accounts payable and accrued liabilities
|
|
$
|
101.4
|
|
Decrease in Current portion of deferred revenue
|
|
|
57.6
|
|
Increase in Prepaid expense and other
|
|
|
9.9
|
|
Decrease in Receivables, net
|
|
|
(103.2
|
)
|
Other individually insignificant items
|
|
|
0.4
|
|
|
|
|
|
|
|
|
$
|
66.1
|
|
|
|
|
|
|
Cash Flows from Operating Activities
Net cash from operating activities was $24.7 million during
the nine months ended October 3, 2009, which was a decrease
of $13.0 million, as compared to the nine months ended
September 27, 2008. The components of this decrease are
summarized as follows:
|
|
|
|
|
|
|
Change
|
|
|
|
(In millions)
|
|
|
Net loss, net of non-cash related gains and losses
|
|
$
|
43.9
|
|
Proceeds from the sale of receivables, net
|
|
|
(42.3
|
)
|
Changes in operating assets and liabilities, net of effect of
acquired businesses
|
|
|
(14.6
|
)
|
|
|
|
|
|
|
|
$
|
(13.0
|
)
|
|
|
|
|
|
Cash flows from operating activities include net loss, adjusted
for certain non-cash charges, as well as changes in the balances
of certain assets and liabilities. Our cash flows from operating
activities are significantly influenced by business levels, the
payment terms set forth in our license agreements and by sales
of our receivables. As a result of the challenging economic
environment, our customers, who are primarily concentrated in
the semiconductor sector, have experienced and may continue to
experience adverse changes in their business and as a result,
may delay purchasing our products and services or delay or
default on their payment obligations. Approximately half of our
total Receivables, net and Installment contracts receivables,
net as of October 3, 2009 relate to ten of our customers.
If our customers are not successful in generating sufficient
cash or are precluded from securing financing, they may not be
able to pay, or may delay payment of, accounts receivable that
are owed to us, although these obligations are generally not
cancelable. Our customers inability to fulfill payment
obligations may adversely affect our cash flow. Additionally,
our customers may seek to renegotiate pre-existing contractual
commitments. Though we have not yet experienced a material level
of defaults, any material payment default by our customers or
significant reductions in existing contractual commitments would
have a material adverse effect on our financial condition and
operating results.
We have entered into agreements whereby we may transfer accounts
receivable to certain financial institutions on a non-recourse
or limited-recourse basis. These transfers are recorded as sales
and losses on the sale of receivables are included in General
and administrative expense in the Condensed Consolidated
Statements of Operations. During the nine months ended
October 3, 2009, we transferred accounts receivable, net of
the losses on the sale of the receivables, totaling
$5.8 million, which approximated fair value, to financial
institutions on a non-recourse basis, as compared to
$48.1 million during the nine months ended
September 27, 2008. The change in our license mix will
result in an increased number of subscription licenses and,
therefore, a decrease in the sale of receivables to financial
institutions, so we expect a reduced level of Proceeds from the
sale of receivables throughout fiscal 2009, as compared to
fiscal 2008.
We currently expect our fiscal 2009 cash flows from operating
activities to be positive, but expect it to be less than our
fiscal 2008 cash flows from operating activities.
42
During both the second half of 2008 and the first half of fiscal
2009, we initiated a restructuring plan to decrease costs by
reducing our workforce and by consolidating facilities. As of
October 3, 2009, we had made payments in connection with
these two restructuring plans in the amount of
$58.2 million and we expect to pay an additional amount of
$8.3 million. We expect to complete payments for
substantially all of the anticipated benefits related to these
two restructuring plans by July 2, 2010. We expect ongoing
annual savings of approximately $180.0 million related to
these two restructuring plans and other expense reductions.
Cash Flows from Investing Activities
Our primary investing activities consisted of:
|
|
|
|
|
Purchases of property, plant and equipment;
|
|
|
Payments to former shareholders of acquired businesses; and
|
|
|
Investments in and proceeds from the sale of long-term
investments and
available-for-sale
securities.
|
Net cash from investing activities increased by
$64.8 million during the nine months ended October 3,
2009, as compared to the nine months ended September 27,
2008. The components of this increase are summarized as follows:
|
|
|
|
|
|
|
Change
|
|
|
|
(In millions)
|
|
|
Purchases of
available-for-sale
securities
|
|
$
|
62.4
|
|
Purchases of property, plant and equipment
|
|
|
50.6
|
|
Cash paid in business combinations and asset acquisitions, net
of cash acquired, and acquisition of intangibles
|
|
|
6.5
|
|
Proceeds from the sale of long-term investments
|
|
|
(3.3
|
)
|
Proceeds from the sale of
available-for-sale
securities
|
|
|
(53.6
|
)
|
Other individually insignificant items
|
|
|
2.2
|
|
|
|
|
|
|
|
|
$
|
64.8
|
|
|
|
|
|
|
The decrease of Purchases of property, plant and equipment is
primarily due to the completion of construction on a new
building in San Jose, California during the nine months
ended October 3, 2009 and an effort to reduce capital
spending.
In connection with our acquisitions completed before
October 3, 2009, we may be obligated to pay up to an
aggregate of $15.9 million in cash during the next
35 months if certain defined performance goals are achieved
in full, of which $8.1 million would be expensed as
compensation expense in our Condensed Consolidated Statements of
Operations.
We expect to continue our investing activities, including
purchasing property, plant and equipment, purchasing intangible
assets, purchasing software licenses and making long-term equity
investments.
Cash Flows from Financing Activities
Financing cash flows during the nine months ended
October 3, 2009 consisted primarily of the issuance of
common stock under certain of our equity plans. Net cash from
financing activities increased by $462.6 million
43
during the nine months ended October 3, 2009, as compared
to the nine months ended September 27, 2008. The components
of this increase are summarized as follows:
|
|
|
|
|
|
|
Change
|
|
|
|
(In millions)
|
|
|
Purchases of treasury stock
|
|
$
|
274.0
|
|
Payment of convertible notes due 2023
|
|
|
230.2
|
|
Proceeds from the issuance of common stock
|
|
|
(20.3
|
)
|
Proceeds from receivable sale financing
|
|
|
(18.0
|
)
|
Other individually insignificant items
|
|
|
(3.3
|
)
|
|
|
|
|
|
|
|
$
|
462.6
|
|
|
|
|
|
|
We record a gain or loss on re-issuance of treasury stock based
on the total proceeds received in the transaction. During the
nine months ended October 3, 2009, we recorded losses on
the re-issuance of treasury stock of $209.2 million as a
component of Accumulated deficit.
As of October 3, 2009, we have $854.4 million
remaining under the stock repurchase programs authorized by our
Board of Directors.
Other Factors Affecting Liquidity and Capital Resources
Income
Taxes
We provide for United States income taxes on earnings of our
foreign subsidiaries unless the earnings are considered
indefinitely invested outside the United States. During fiscal
2008, we provided income taxes of $101.1 million on
earnings of $317.2 million from our foreign subsidiaries
that had previously been considered to be indefinitely
re-invested outside of the United States. We repatriated
$250.0 million of the $317.2 million to the United
States during fiscal 2008, and expect to repatriate an
additional $50.0 million of foreign earnings to the United
States during fiscal 2009. We do not expect the fiscal 2009
repatriation to result in significant cash tax payments during
the current fiscal year. We currently intend to indefinitely
re-invest outside of the United States the earnings of our
foreign subsidiaries in excess of the remaining
$17.2 million that was previously designated for future
repatriation, and, accordingly, no additional United States
deferred taxes have been provided.
The IRS and other tax authorities regularly examine our income
tax returns and we have received RARs which the IRS has proposed
to assess tax deficiencies. For additional description of our
IRS Examinations, see the discussion under the heading
Results of Operations Income Taxes,
above.
1.375% Convertible
Senior Notes Due 2011 and 1.500% Convertible Senior Notes
Due 2013
In December 2006, we issued $250.0 million principal amount
of 1.375% Convertible Senior Notes Due 2011, or the 2011
Notes, and $250.0 million principal amount of
1.500% Convertible Senior Notes Due 2013, or the 2013
Notes, and collectively with the 2011 Notes, the Convertible
Senior Notes. The indentures for the Convertible Senior Notes do
not contain any financial covenants. We received net proceeds of
approximately $487.2 million after issuance costs of
approximately $12.8 million, including $12.0 million
of underwriting discounts.
Holders may convert their Convertible Senior Notes prior to
maturity upon the occurrence of one of the following events:
|
|
|
|
|
The price of our common stock reaches $27.50 during certain
periods of time specified in the Convertible Senior Notes;
|
|
|
Specified corporate transactions occur; or
|
|
|
The trading price of the Convertible Senior Notes falls below
98% of the product of (i) the last reported sale price of
our common stock and (ii) the conversion rate on that date.
|
From November 2, 2011, in the case of the 2011 Notes, and
November 1, 2013, in the case of the 2013 Notes, and until
the close of business on the scheduled trading day immediately
preceding the maturity date, holders may
44
convert their Convertible Senior Notes at any time, regardless
of the foregoing circumstances. We may not redeem the
Convertible Senior Notes prior to maturity.
The initial conversion rate for the Convertible Senior Notes is
47.2813 shares of our common stock per $1,000 principal
amount of Convertible Senior Notes, equivalent to a conversion
price of approximately $21.15 per share of our common stock.
Upon conversion, a holder will receive the sum of the daily
settlement amounts, calculated on a proportionate basis for each
day, during a specified observation period following the
conversion date. The daily settlement amount during each date of
the observation period consists of:
|
|
|
|
|
Cash up to the principal amount of the note; and
|
|
|
Our common stock to the extent that the conversion value exceeds
the amount of cash paid upon conversion of the Convertible
Senior Notes.
|
In addition, if a fundamental change occurs prior to maturity
and provided that our stock price is greater than $18.00 per
share, the conversion rate will increase by an additional amount
of up to $8.27 per share, for a holder that elects to convert
its Convertible Senior Notes in connection with such fundamental
change, which amount will be paid entirely in cash. A
fundamental change is any transaction or event (whether by means
of an exchange offer, liquidation, tender offer, consolidation,
merger, combination, reclassification, recapitalization or
otherwise) in which more than 50% of our common stock is
exchanged for, converted into, acquired for or constitutes
solely the right to receive, consideration. No fundamental
change will have occurred if at least 90% of the consideration
received consists of shares of common stock, or depositary
receipts representing such shares, that are:
|
|
|
|
|
Listed on, or immediately after the transaction or event will be
listed on, a United States national securities exchange; or
|
|
|
Approved, or immediately after the transaction or event will be
approved, for quotation on a United States system of automated
dissemination of quotations of securities prices similar to the
NASDAQ National Market prior to its designation as a national
securities exchange.
|
As of October 3, 2009, none of the conditions allowing the
holders of the Convertible Senior Notes to convert had been met.
Contractual interest on the Convertible Senior Notes began
accruing in December 2006 and is payable semi-annually each
December 15th and June 15th.
Concurrently with the issuance of the Convertible Senior Notes,
we entered into hedge transactions with various parties whereby
we have the option to purchase up to 23.6 million shares of
our common stock at a price of $21.15 per share, subject to
adjustment. These options expire on December 15, 2011, in
the case of the 2011 Notes, and December 15, 2013, in the
case of the 2013 Notes, and must be settled in net shares. The
aggregate cost of these hedge transactions was
$119.8 million and has been recorded as a reduction to
Stockholders equity. The estimated fair value of the
hedges acquired in connection with the issuance of the
Convertible Senior Notes was $9.3 million as of
October 3, 2009. Subsequent changes in the fair value of
these hedges will not be recognized in our Condensed
Consolidated Financial Statements as long as the instruments
remain classified as equity.
In separate transactions, we also sold warrants to various
parties for the purchase of up to 23.6 million shares of
our common stock at a price of $31.50 per share in a private
placement pursuant to Section 4(2) of the Securities Act of
1933, as amended. The warrants expire on various dates from
February 2012 through April 2012 in the case of the 2011 Notes,
and February 2014 through April 2014 in the case of the 2013
Notes, and must be settled in net shares. We received
$39.4 million in cash proceeds from the sale of these
warrants, which has been recorded as an increase in
Stockholders equity. The estimated fair value of the
warrants sold in connection with the issuance of the Convertible
Senior Notes was $4.9 million as of October 3, 2009.
Subsequent changes in the fair value of these warrants will not
be recognized in our Condensed Consolidated Financial Statements
as long as the instruments remain classified as equity. The
warrants will be included in diluted earnings per share to the
extent the impact is dilutive.
45
New Accounting Standards
In October 2009, the FASB issued FASB Accounting Standards
Updates
2009-13 and
2009-14.
FASB Accounting Standards Update
2009-13
addresses the accounting for multiple-deliverable arrangements
to enable vendors to account for products or services
(deliverables) separately rather than as a combined unit.
Specifically, this guidance amends the criteria in the
Revenue Recognition - Multiple-Element Arrangements
subtopic of the Codification for separating consideration in
multiple-deliverable arrangements. This guidance establishes a
selling price hierarchy for determining the selling price of a
deliverable, which is based on: (a) vendor-specific
objective evidence; (b) third-party evidence; or
(c) estimates. This guidance also eliminates the residual
method of allocation and requires that arrangement consideration
be allocated at the inception of the arrangement to all
deliverables using the relative selling price method. In
addition, this guidance significantly expands required
disclosures related to a vendors multiple-deliverable
revenue arrangements.
FASB Accounting Standards Update
2009-14
changes the accounting model for revenue arrangements that
include both tangible products and software elements. Under this
guidance, tangible products containing software components and
nonsoftware components that function together to deliver the
tangible products essential functionality are excluded
from the software revenue guidance in the
Software Revenue Recognition subtopic of
the Codification. In addition, hardware components of a tangible
product containing software components are always excluded from
the software revenue guidance.
FASB Accounting Standards Updates
2009-13 and
2009-14 are
effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after
June 15, 2010, with the option to provide retrospective
presentation for prior years. Early adoption is permitted under
both. We are currently evaluating the impact that FASB
Accounting Standards Updates
2009-13 and
2009-14 will
have on our Condensed Consolidated Financial Statements.
46
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Foreign
Currency Risk
Most of our revenue, expenses and material business activity are
transacted in the United States dollar. However, certain of our
operations include transactions in foreign currencies and,
therefore, we benefit from a weaker dollar, and in certain
countries where we invoice customers in the local currency, we
are adversely affected by a stronger dollar relative to major
currencies worldwide. The primary effect of foreign currency
transactions on our results of operations from a weakening
United States dollar is an increase in revenue offset by a
smaller increase in expenses. Conversely, the primary effect of
foreign currency transactions on our results of operations from
a strengthening United States dollar is a reduction in revenue
offset by a smaller reduction in expenses.
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 and, therefore, 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.
Our policy governing hedges of foreign currency risk does not
allow us to use forward contracts for trading purposes. Our
forward contracts generally have maturities of 90 days or
less. The effectiveness of our hedging program depends on our
ability to estimate future asset and liability exposures. We
enter into currency forward exchange contracts based on
estimated 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 currency forward exchange contracts with actual
underlying asset and liability exposures.
The following table provides information, as of October 3,
2009, about our forward foreign currency contracts. 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 prior to or during November
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Notional
|
|
|
Contract
|
|
|
|
Principal
|
|
|
Rate
|
|
|
|
(In millions)
|
|
|
|
|
|
Forward Contracts:
|
|
|
|
|
|
|
|
|
Japanese yen
|
|
$
|
25.9
|
|
|
|
92.33
|
|
European Union euro
|
|
|
20.3
|
|
|
|
0.68
|
|
Indian rupee
|
|
|
11.3
|
|
|
|
48.60
|
|
British pound sterling
|
|
|
11.0
|
|
|
|
0.61
|
|
New Taiwan dollar
|
|
|
8.8
|
|
|
|
32.47
|
|
Israeli shekel
|
|
|
8.5
|
|
|
|
3.75
|
|
Canadian dollar
|
|
|
7.9
|
|
|
|
1.08
|
|
Hong Kong dollar
|
|
|
6.8
|
|
|
|
7.75
|
|
Singapore dollar
|
|
|
4.2
|
|
|
|
1.42
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
104.7
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value
|
|
$
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
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 Cash and cash equivalents.
While we are exposed to interest rate fluctuations in many of
the worlds leading industrialized countries, 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 Cash and cash equivalents and costs associated
with foreign currency hedges.
We invest in high quality credit issuers and, by policy, limit
the amount of our credit exposure to any one issuer. As part of
our policy, our first priority is to reduce the risk of
principal loss. Consequently, we seek to preserve our invested
funds by limiting default risk, market risk and reinvestment
risk. We mitigate default risk by investing in only high quality
credit securities that we believe to have low credit risk and by
positioning our portfolio to respond appropriately to a
significant reduction in a credit rating of any investment
issuer or guarantor. The short-term interest-bearing portfolio
of Cash and cash equivalents includes only marketable securities
with active secondary or resale markets to ensure portfolio
liquidity.
All highly liquid investments with a maturity of three months or
less at the date of purchase are considered to be cash
equivalents. Investments with maturities greater than three
months are classified as
available-for-sale
and are considered to be short-term investments. The carrying
value of our interest-bearing instruments approximated fair
value as of October 3, 2009. The following table presents
the carrying value and related weighted average interest rates
for our interest-bearing instruments, which are all classified
as Cash and cash equivalents on our Condensed Consolidated
Balance Sheet as of October 3, 2009.
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Average
|
|
|
|
Value
|
|
|
Interest Rate
|
|
|
|
(In millions)
|
|
|
|
|
|
Interest-Bearing Instruments:
|
|
|
|
|
|
|
|
|
Cash equivalents variable rate
|
|
$
|
403.0
|
|
|
|
0.23%
|
|
Cash variable rate
|
|
|
63.2
|
|
|
|
0.29%
|
|
Cash fixed rate
|
|
|
43.7
|
|
|
|
0.70%
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing instruments
|
|
$
|
509.9
|
|
|
|
0.28%
|
|
|
|
|
|
|
|
|
|
|
Equity
Price Risk
1.375% Convertible
Senior Notes Due 2011 and 1.500% Convertible Senior Notes
Due 2013
In December 2006, we issued $250.0 million principal amount
of 1.375% Convertible Senior Notes Due 2011, or the 2011
Notes, and $250.0 million of 1.500% Convertible Senior
Notes Due 2013, or the 2013 Notes and collectively with the 2011
Notes, the Convertible Senior Notes. Concurrently with the
issuance of the Convertible Senior Notes, we entered into hedge
transactions with various parties and in separate transactions,
sold warrants to purchase our common stock to various parties to
reduce the potential dilution from the conversion of the
Convertible Senior Notes and to mitigate any negative effect
such conversion may have on the price of our common stock. For
additional description of the Convertible Senior Notes,
including the hedge and warrants transactions, see the
discussion under the heading Liquidity and Capital
Resources Other Factors Affecting Liquidity and
Capital Resources above.
Investments
We have a portfolio of equity investments that includes
marketable equity securities and non-marketable equity
securities. Our equity investments are made primarily in
connection with our strategic investment program.
48
Under our strategic investment program, from time to time we
make cash investments in companies with technologies that are
potentially strategically important to us.
The fair value of our portfolio of
available-for-sale
marketable equity securities, which are included in Short-term
investments on the accompanying Condensed Consolidated Balance
Sheets, was $4.5 million as of October 3, 2009 and
$3.6 million as of January 3, 2009. While we actively
monitor these investments, we do not currently engage in any
hedging activities to reduce or eliminate equity price risk with
respect to these equity investments. Accordingly, we could lose
all or part of our investment portfolio of marketable equity
securities if there is an adverse change in the market prices of
the companies we invest in.
Our investments in non-marketable equity securities would be
negatively affected by an adverse change in equity market prices
generally, although the impact cannot be directly quantified.
Such a change, or any negative change in the financial
performance or prospects of the companies that have issued the
non-marketable securities we own, would harm the ability of
these companies to raise additional capital and the likelihood
of our being able to realize any gains or return of our
investments through liquidity events such as initial public
offerings, acquisitions and private sales. These types of
investments involve a high degree of risk, and there can be no
assurance that any company we invest in will grow or will be
successful or that we will be able to liquidate a particular
investment when desired. Accordingly, we could lose all or part
of our investment.
Our investments in non-marketable equity securities had a
carrying amount of $15.4 million as of October 3, 2009
and $18.7 million as of January 3, 2009. If we
determine that an
other-than-temporary
decline in fair value exists for a non-marketable equity
security, we write down the investment to its fair value and
record the related write-down as an investment loss in our
Condensed Consolidated Statements of Operations.
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|
Item 4.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We carried out an evaluation required by
Rule 13a-15
of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, under the supervision and with the participation
of our management, including the Chief Executive Officer, or
CEO, and the Chief Financial Officer, or CFO, of the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in
Rules 13-15(e)
and
15d-15(e)
under the Exchange Act) as of October 3, 2009.
The evaluation of our disclosure controls and procedures
included a review of our processes and the effect on the
information generated for use in this Quarterly Report on
Form 10-Q.
In the course of this evaluation, we sought to identify any
material weaknesses in our disclosure controls and procedures,
to determine whether we had identified any acts of fraud
involving personnel who have a significant role in our
disclosure controls and procedures, and to confirm that any
necessary corrective action, including process improvements, was
taken. This type of evaluation is done every fiscal quarter so
that our conclusions concerning the effectiveness of these
controls can be reported in our periodic reports filed with the
SEC. The overall goals of these evaluation activities are to
monitor our disclosure controls and procedures and to make
modifications as necessary. We intend to maintain these
disclosure controls and procedures, modifying them as
circumstances warrant.
Based on their evaluation as of October 3, 2009, our CEO
and CFO have concluded that our disclosure controls and
procedures were effective to provide reasonable assurance that
the information required to be disclosed by us in our reports
filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms and is accumulated
and communicated to our management, including the CEO and CFO,
as appropriate to allow timely decisions regarding required
disclosure.
49
Changes
in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting during the quarter ended October 3, 2009 that
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Inherent
Limitations on Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that
our disclosure controls and procedures or our internal control
over financial reporting will prevent or detect all error and
all fraud. Internal control over financial reporting, no matter
how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of internal control
are met. Further, the design of internal control must reflect
the fact that there are resource constraints, and the benefits
of the control must be considered relative to their costs. While
our disclosure controls and procedures and internal control over
financial reporting are designed to provide reasonable assurance
of their effectiveness, because of the inherent limitations in
all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of
fraud, if any, within Cadence have been detected.
50
PART II.
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
From time to time, we are involved in various disputes and
litigation that arise in the ordinary course of business. These
include disputes and lawsuits related to intellectual property,
mergers and acquisitions, licensing, contracts, distribution
arrangements and employee relations matters. At least quarterly,
we review the status of each significant matter and assess 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, we accrue 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 only on the
best information available at the time. As additional
information becomes available, we reassess the potential
liability related to pending claims and litigation matters and
may revise estimates.
During fiscal 2008, three complaints were filed in the United
States District Court for the Northern District of California,
or District Court, all alleging violations of
Sections 10(b) and 20(a) of the Exchange Act, and
Rule 10b-5
promulgated thereunder, on behalf of a purported class of
purchasers of Cadences common stock. The first such
complaint was filed on October 29, 2008, captioned
Hu v. Cadence Design Systems, Inc., Michael J. Fister,
William Porter and Kevin S. Palatnik; the second such complaint
was filed on November 4, 2008, captioned Vyas v.
Cadence Design Systems, Inc., Michael J. Fister, and Kevin S.
Palatnik; and the third such complaint was filed on
November 21, 2008, captioned Collins v. Cadence Design
Systems, Inc., Michael J. Fister, John B. Shoven, Kevin S.
Palatnik and William Porter. On March 4, 2009, the District
Court entered an order consolidating these three complaints and
captioning the consolidated case In re Cadence Design
Systems, Inc. Securities Litigation. The District Court
also named a lead plaintiff and lead counsel for the
consolidated litigation. The lead plaintiff filed its
consolidated amended complaint on April 24, 2009, naming
Cadence, Michael J. Fister, Kevin S. Palatnik, William Porter
and Kevin Bushby as defendants, and alleging violations of
Sections 10(b) and 20(a) of the Exchange Act, and
Rule 10b-5
promulgated thereunder, on behalf of a purported class of
purchasers of Cadences common stock who traded
Cadences common stock between April 23, 2008 and
December 10, 2008, or the Alleged Class Period. The
amended complaint alleged that Cadence and the individual
defendants made statements during the Alleged Class Period
regarding Cadences financial results that were false and
misleading because Cadence had recognized revenue that should
have been recognized in subsequent quarters. The amended
complaint requested certification of the action as a class
action, unspecified damages, interest and costs, and unspecified
equitable relief. On June 8, 2009, we and the other
defendants filed a motion to dismiss the amended complaint. On
September 11, 2009, the District Court held that the
plaintiffs had failed to allege a valid claim under the relevant
legal standards, and granted the defendants motion to
dismiss the amended complaint. The District Court gave the
plaintiffs leave to file another amended complaint, and the
plaintiffs did so on October 13, 2009. The amended
complaint filed on October 13, 2009 names the same
defendants. We intend to move to dismiss the October 13,
2009 amended complaint, and to continue to vigorously defend
these consolidated cases and any other securities lawsuits that
may be filed.
During fiscal 2008, two derivative complaints were filed in
Santa Clara County Superior Court. The first was filed on
November 20, 2008, and captioned Ury Priel, derivatively on
behalf of nominal defendant Cadence Design Systems, Inc. v. John
B. Shoven, Lip-Bu Tan, Alberto Sangiovanni-Vincentelli, Donald
L. Lucas, Sr., Roger Siboni, George Scalise, Michael J.
Fister, and Doe Defendants 1-15. The second was filed on
December 1, 2008, and captioned Mark Levine, derivatively
on behalf of nominal defendant Cadence Design Systems,
Inc. v. John B. Shoven, Lip-Bu Tan, Alberto
Sangiovanni-Vincentelli, Donald L. Lucas, Sr., Roger
Siboni, George Scalise, Michael J. Fister, John Swainson and Doe
Defendants 1-10. These complaints purport to bring suit
derivatively, on behalf of Cadence, against certain of
Cadences current and former directors for alleged breach
of fiduciary duty, abuse of control, gross mismanagement, waste
of corporate assets and unjust enrichment. Many of the
allegations underlying these claims are similar or identical to
the allegations in the consolidated securities class action
lawsuits described above, and the claims also include
allegations that the individual defendants approved compensation
based on inflated financial results. The plaintiffs request
unspecified damages, restitution, equitable relief and their
reasonable attorneys fees, experts fees, costs and
expenses on behalf of Cadence against the individual defendants.
A motion to consolidate
51
these complaints was granted on January 20, 2009. We are
analyzing these derivative complaints and will respond to them
appropriately. The parties to these cases have agreed to a
temporary stay of the proceedings.
In light of the preliminary status of these lawsuits, we cannot
predict the outcome of these matters. While the outcome of these
litigation matters cannot be predicted with any certainty,
management does not believe that the outcome of any current
matters will have a material adverse effect on our consolidated
financial position, liquidity or results of operations.
52
Our business faces many risks. Described below are what we
believe to be the material risks that we face. If any of the
events or circumstances described in the following risks
actually occurs, our business, financial condition or results of
operations could suffer. The descriptions below include any
material changes to and supersede the description of the risk
factors as previously disclosed in Item 1A to Part I
of our Annual Report on
Form 10-K
for the fiscal year ended January 3, 2009, filed with the
SEC on March 2, 2009.
Risks
Related to Our Business
We are subject to the cyclical nature of the integrated
circuit and electronics systems industries, and any downturn in
these industries may reduce our revenue.
Purchases of our products and services are dependent upon the
commencement of new design projects by IC manufacturers and
electronics systems companies. The IC and electronics systems
industries are cyclical and are characterized by constant and
rapid technological change, rapid product obsolescence and price
erosion, evolving standards, short product life cycles and wide
fluctuations in product supply and demand.
The IC and electronics systems industries experienced
significant challenges in 2008 and are continuing to face
challenges in 2009 as a result of a decline in the macroeconomic
environment. The IC and electronic systems industries also from
time to time experience downturns in connection with, or in
anticipation of, maturing product cycles of both these
industries and their customers products. As in the
past, the current economic downturn is characterized by
diminished product demand, production overcapacity, high
inventory levels and accelerated erosion of average selling
prices. The current economic downturn in the industries we serve
has contributed to the substantial reduction in our revenue and
could continue to harm our business, operating results and
financial condition.
Our failure to respond quickly to technological developments
could make our products uncompetitive and obsolete.
The industries in which we compete experience rapid technology
developments, changes in industry standards, changes in customer
requirements and frequent new product introductions and
improvements. Currently, the industries we serve are
experiencing the following trends:
|
|
|
|
|
Migration to nanometer design: the size of features such as
wires, transistors and contacts on ICs continuously shrink due
to the ongoing advances in the semiconductor manufacturing
processes. Process feature sizes refer to the width of the
transistors and the width and spacing of interconnect on the IC.
Feature size is normally identified by the transistor length,
which is shrinking rapidly to 32 nanometers and smaller. This is
commonly referred to in the semiconductor industry as the
migration to nanometer design. It represents a major challenge
for participants in the semiconductor industry, from IC design
and design automation to design of manufacturing equipment and
the manufacturing process itself. Shrinkage of transistor length
to such proportions is challenging the industry in the
application of more complex physics and chemistry that is needed
to realize advanced silicon devices. For EDA tools, models of
each components electrical properties and behavior become
more complex as do requisite analysis, design and verification
capabilities. Novel design tools and methodologies must be
invented quickly to remain competitive in the design of
electronics in the smallest nanometer ranges.
|
|
|
The challenges of nanometer design are leading some customers to
work with older, less risky manufacturing processes. This may
reduce their need to upgrade or enhance their EDA products and
design flows.
|
|
|
The ability to design SoCs increases the complexity of managing
a design that, at the lowest level, is represented by billions
of shapes on the fabrication mask. In addition, SoCs typically
incorporate microprocessors and digital signal processors that
are programmed with software, requiring simultaneous design of
the IC and the related software embedded on the IC.
|
|
|
With the availability of seemingly endless gate capacity, there
is an increase in design reuse, or the combining of
off-the-shelf
design IP with custom logic to create ICs. The unavailability of
high-quality
|
53
|
|
|
|
|
design IP that can be reliably incorporated into a
customers design with our IC implementation products and
services could reduce demand for our products and services.
|
|
|
|
|
|
Increased technological capability of the Field-Programmable
Gate Array, which is a programmable logic chip, creates an
alternative to IC implementation for some electronics companies.
This could reduce demand for our IC implementation products and
services.
|
|
|
A growing number of low-cost engineering services businesses
could reduce the need for some IC companies to invest in EDA
products.
|
If we are unable to respond quickly and successfully to these
trends, we may lose our competitive position, and our products
or technologies may become uncompetitive or obsolete. To compete
successfully, we must develop or acquire new products and
improve our existing products and processes on a schedule that
keeps pace with technological developments and the requirements
for products addressing a broad spectrum of designers and
designer expertise in our industries. We must also be able to
support a range of changing computer software, hardware
platforms and customer preferences. We cannot guarantee that we
will be successful in this effort.
We have experienced varied operating results, and our
operating results for any particular fiscal period are affected
by the timing of significant orders for our software products,
fluctuations in customer preferences for license types and the
timing of revenue recognition under those license types.
We have experienced, and may continue to experience, varied
operating results. In particular, we incurred net losses during
fiscal 2008 and the first three quarters of fiscal 2009, and we
expect to incur net losses during the last quarter of fiscal
2009. Various factors affect our operating results and some of
them are not within our control. Our operating results for any
period are affected by the timing of significant orders for our
software products.
Our operating results are also affected by the mix of license
types executed in any given period. We license software using
three different license types: subscription, term and perpetual.
Product revenue associated with term and perpetual licenses is
generally recognized at the beginning of the license period,
whereas product revenue associated with subscription licenses is
recognized over multiple periods during the term of the license.
Revenue may also be deferred under term and perpetual licenses
until payments become due and payable from customers with
nonlinear payment terms or as cash is collected from customers
with lower credit ratings. In addition, revenue is impacted by
the timing of license renewals, the extent to which contracts
contain flexible payment terms, changes in existing contractual
arrangements with customers and the mix of license types (i.e.,
perpetual, term or subscription) for existing customers, which
changes could have the effect of accelerating or delaying the
recognition of revenue from the timing of recognition under the
original contract. Our license mix has changed such that a
substantial proportion of licenses require ratable revenue
recognition and we expect the change in license mix, combined
with the difficult economic environment, will result in a
decrease in our revenue for fiscal 2009 as compared to fiscal
2008.
We plan operating expense levels primarily based on forecasted
revenue levels. These expenses and the impact of long-term
commitments are relatively fixed in the short term. In addition,
revenue levels are harder to forecast in a difficult economic
environment. A shortfall in revenue could lead to operating
results below expectations because we may not be able to quickly
reduce these fixed expenses in response to these short-term
business changes.
The majority of our contracts are executed in the final few
weeks of a fiscal quarter. This makes it difficult to determine
with accuracy how much business will be executed in each fiscal
quarter. Due to the volume or complexity of transactions that we
review at the very end of the quarter, or due to operational
matters regarding particular agreements, we may not finish
processing or ship products under some contracts that have been
signed during that fiscal quarter, which means that the
associated revenue cannot be recognized in that particular
period.
You should not view our historical results of operations as
reliable indicators of our future performance. If our revenue,
operating results or business outlook for future periods fall
short of the levels expected by securities analysts or
investors, the trading price of our common stock could decline.
54
Our operating results and revenue could be adversely affected
by customer payment delays, customer bankruptcies and defaults
or modifications of licenses or supplier modifications in
response to the economic environment.
As a result of the challenging economic environment, our
customers, who are primarily concentrated in the semiconductor
sector, have experienced and may continue to experience adverse
changes in their business and, as a result, may delay or default
on their payment obligations, file for bankruptcy or modify or
cancel plans to license our products, and our suppliers may
significantly and quickly increase their prices or reduce their
output. If our customers are not successful in generating
sufficient cash or are precluded from securing financing, they
may not be able to pay, or may delay payment of, accounts
receivable that are owed to us, although these obligations are
generally not cancelable. Our customers inability to
fulfill payment obligations may adversely affect our revenue and
cash flow. Additionally, our customers may seek to renegotiate
pre-existing contractual commitments. Though we have not yet
experienced a material level of defaults, any material payment
default by our customers or significant reductions in existing
contractual commitments would have a material adverse effect on
our financial condition and operating results. Because of the
challenges in the global capital markets and financial
institutions, including a tightening in the capital and credit
markets, if we were to seek funding from the capital or credit
markets in response to any material level of customer defaults,
we may not be able to secure funding on terms acceptable to us
or at all.
Our stock price has been subject to fluctuations and has
experienced a significant decline, and may continue to be
subject to fluctuations and decline.
The market price of our common stock has experienced
fluctuations and a significant decline and may fluctuate or
decline in the future, and as a result you could lose the value
of your investment. The market price of our common stock may be
affected by a number of factors, such as:
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|
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|
|
Announcements of our quarterly operating results and revenue and
earnings forecasts that fail to meet or are inconsistent with
earlier projections or the expectations of our securities
analysts or investors;
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|
|
Changes in our revenue and earnings estimates;
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|
Announcements of a restructuring plan;
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|
Changes in management;
|
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|
Accounting charges relating to the impairment of goodwill;
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|
A gain or loss of a significant customer or market segment share;
|
|
|
Announcements of new products by us, our competitors or our
customers; and
|
|
|
Market conditions in the IC, electronics systems and
semiconductor industries.
|
In addition, equity markets in general have experienced extreme
price and volume fluctuations and the market prices of many
technology companies equities have decreased
substantially, particularly electronic systems and semiconductor
companies. Such price and volume fluctuations may adversely
affect the market price of our common stock for reasons
unrelated to our business or operating results.
Litigation could adversely affect our financial condition or
operations.
We are currently, and in the future may be, involved in various
disputes and litigation that arise in the ordinary course of
business. These include disputes and lawsuits related to
intellectual property, mergers and acquisitions, licensing,
contracts, distribution arrangements and employee relations
matters. We are also currently engaged in a consolidated
securities class action lawsuit and shareholder derivative
lawsuits. For information regarding the litigation matters in
which we are currently engaged, please refer to the discussion
under Item 1, Legal Proceedings. We cannot
provide any assurances that the final outcome of these lawsuits
or any other proceedings that may arise in the future will not
have a material adverse effect on our business, operating
results, financial condition or cash flows. Litigation can be
time-consuming and expensive and could divert managements
time and attention from our business, which could have a
material adverse effect on our revenues and operating results.
The adverse resolution of any specific lawsuit or proceeding
could also have a material adverse effect on our business,
operating results, financial condition and cash flows.
55
Matters relating to or arising from our recent restatement
and weaknesses in our internal controls could have a material
adverse effect on our business, operating results and financial
condition.
In connection with the restatement of our previously issued
financial statements for the periods ended March 29, 2008
and June 28, 2008 and our reassessment of our disclosure
controls and procedures under Item 307 of
Regulation S-K,
management concluded that as of March 29, 2008,
June 28, 2008 and September 27, 2008, our disclosure
controls and procedures were not effective and that we had a
material weakness in our internal control over financial
reporting. Please refer to the discussion under Item 9A,
Controls and Procedures in our Annual Report on
Form 10-K
for the year ended January 3, 2009 for further discussion
of the remediation of this material weakness as of
January 3, 2009. Should we identify any other material
weakness and be unable to remediate any such other material
weakness promptly and effectively, such weakness could harm our
operating results, result in a material misstatement of our
financial statements, cause us to fail to meet our financial
reporting obligations or prevent us from providing reliable and
accurate financial reports or avoiding or detecting fraud. This,
in turn, could result in a loss of investor confidence in the
accuracy and completeness of our financial reports, which could
have an adverse effect on our stock price. Any litigation or
other proceeding or adverse publicity relating to our remediated
material weakness or any future material weakness could have a
material adverse effect on our business and operating results.
Our future revenue is dependent in part upon our installed
customer base continuing to license or buy additional products,
renew maintenance agreements and purchase additional
services.
Our installed customer base has traditionally generated
additional new license, service and maintenance revenues. In
future periods, customers may not necessarily license or buy
additional products or contract for additional services or
maintenance. Maintenance is generally renewable annually at a
customers option, and there are no mandatory payment
obligations or obligations to license additional software. If
our customers decide not to renew their maintenance agreements
or license additional products or contract for additional
services, or if they reduce the scope of the maintenance
agreements, our revenue could decrease, which could have an
adverse effect on our operating results. Our customers, which
include large semiconductor companies, often have significant
bargaining power in negotiations with us. Mergers or
acquisitions of our customers can reduce the total level of
purchases of our software and services, and in some cases,
increase customers bargaining power in negotiations with
their suppliers, including us.
We depend upon our management team and key employees, and our
management changes or our failure to attract, train, motivate
and retain management and key employees may make us less
competitive in our industries and therefore harm our results of
operations.
Our business depends upon the efforts and abilities of our
executive officers and other key employees, including key
development personnel. From time to time, there may be changes
in our management team resulting from the hiring and departure
of executive officers, and as a result, we may experience
disruption to our business that may harm our operating results
and our relationships with our employees, customers and
suppliers may be adversely affected. In addition, our
competitors may seek to use the changes in our management team
and the related potential disruptions to gain a competitive
advantage over us.
Competition for highly skilled executive officers and employees
can be intense, particularly in geographic areas recognized as
high technology centers such as the Silicon Valley area, where
our principal offices are located, and the other locations where
we maintain facilities. To attract, retain and motivate
individuals with the requisite expertise, we may be required to
grant large numbers of stock options or other stock-based
incentive awards, which may be dilutive to existing stockholders
and increase compensation expense, and pay significant base
salaries and cash bonuses, which could harm our operating
results. The high cost of training new employees, not fully
utilizing these employees, or losing trained employees to
competing employers could also reduce our gross margins and harm
our business or operating results.
In addition, the NASDAQ Marketplace Rules require stockholder
approval for new equity compensation plans and significant
amendments to existing equity compensation plans, including
increases in shares available for issuance under such plans, and
prohibit NASDAQ member organizations from giving a proxy to vote
on equity compensation plans unless the beneficial owner of the
shares has given voting instructions. These regulations could
56
make it more difficult for us to grant equity compensation to
employees in the future. To the extent that these regulations
make it more difficult or expensive to grant equity compensation
to employees, we may incur increased compensation costs or find
it difficult to attract, retain and motivate employees, which
could materially and adversely affect our business.
We may not be able to effectively implement our restructuring
plans, and our restructuring plans may not result in the
expected benefits, which would negatively impact our future
operating results.
During fiscal 2008 and fiscal 2009, we initiated restructuring
plans in an effort to decrease costs by reducing our workforce
and by consolidating facilities. We cannot assure you that we
will be able to successfully complete and realize the expected
benefits of our restructuring plans, such as improvements in
operating margins and cash flows, in the restructuring periods
contemplated. The restructuring plans may involve higher costs
or a longer timetable than we currently anticipate or may fail
to improve our operating results as we anticipate. Our inability
to realize these benefits may result in an inefficient business
structure that could negatively impact our results of
operations. We also expect our restructuring plans to cause us
to incur substantial costs related to severance and other
employee-related costs. Our restructuring plans may also subject
us to litigation risks and expenses. In addition, our
restructuring plans may have other consequences, such as
attrition beyond our planned reduction in workforce or a
negative impact on employee morale and our competitors may seek
to gain a competitive advantage over us. Together with our
changes in management, the restructuring plans could also cause
our remaining employees to leave or result in reduced
productivity by our remaining employees, which in turn may
affect our revenue and other operating results in the future.
We may not receive significant revenue from our current
research and development efforts for several years, if at
all.
Developing EDA technology and integrating acquired technology
into existing platforms is expensive, and these investments
often require a long time to generate returns. Our strategy
involves significant investments in research and development and
related product opportunities. We believe that we must continue
to dedicate a significant amount of resources to our research
and development efforts in order to maintain our competitive
position. However, we cannot predict that we will receive
significant, if any, revenue from these investments.
The competition in our industries is substantial and we may
not be able to continue to successfully compete in our
industries.
The EDA market and the commercial electronics engineering
services industries are highly competitive. If we fail to
compete successfully in these industries, it could seriously
harm our business, operating results or financial condition. To
compete in these industries, we must identify and develop or
acquire innovative and cost-competitive EDA products, integrate
them into platforms and market them in a timely manner. We must
also gain industry acceptance for our engineering services and
offer better strategic concepts, technical solutions, prices and
response time, or a combination of these factors, than those of
other design companies and the internal design departments of
electronics manufacturers. We cannot assure you that we will be
able to compete successfully in these industries. Factors that
could affect our ability to succeed include:
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The development by others of competitive EDA products or
platforms and engineering services, which could result in a
shift of customer preferences away from our products and
services and significantly decrease revenue;
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Decisions by electronics manufacturers to perform engineering
services internally, rather than purchase these services from
outside vendors due to budget constraints or excess engineering
capacity;
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The challenges of developing (or acquiring externally-developed)
technology solutions that are adequate and competitive in
meeting the requirements of next-generation design challenges;
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The significant number of current and potential competitors in
the EDA industry and the low cost of entry;
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Intense competition to attract acquisition targets, which may
make it more difficult for us to acquire companies or
technologies at an acceptable price or at all; and
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The combination of or collaboration among many EDA companies to
deliver more comprehensive offerings than they could
individually.
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We compete in the EDA products market with Synopsys, Inc., Magma
Design Automation, Inc. and Mentor Graphics Corporation. We also
compete with numerous smaller EDA companies, with manufacturers
of electronic devices that have developed or have the capability
to develop their own EDA products, and with numerous electronics
design and consulting companies. Manufacturers of electronic
devices may be reluctant to purchase engineering services from
independent vendors such as us because they wish to promote
their own internal design departments.
We may need to change our pricing models to compete
successfully.
The highly competitive markets in which we compete can put
pressure on us to reduce the prices of our products. If our
competitors offer deep discounts on certain products in an
effort to recapture or gain market segment share or to sell
other software or hardware products, we may then need to lower
our prices or offer other favorable terms to compete
successfully. Any such changes would be likely to reduce our
profit margins and could adversely affect our operating results.
Any substantial changes to our prices and pricing policies could
cause sales and software license revenues to decline or be
delayed as our sales force implements and our customers adjust
to the new pricing policies. Some of our competitors may bundle
products for promotional purposes or as a long-term pricing
strategy or provide guarantees of prices and product
implementations. These practices could, over time, significantly
constrain the prices that we can charge for our products. If we
cannot offset price reductions with a corresponding increase in
the number of sales or with lower spending, then the reduced
license revenues resulting from lower prices could have an
adverse effect on our results of operations.
We have acquired and expect to acquire other companies and
businesses and may not realize the expected benefits of these
acquisitions.
We have acquired and expect to acquire other companies and
businesses in the future. While we expect to carefully analyze
each potential acquisition before committing to the transaction,
we may not consummate any particular transaction, which can
nevertheless result in significant costs, or if a transaction is
consummated, we may not be able to integrate and manage acquired
products and businesses effectively. In addition, acquisitions
involve a number of risks. If any of the following events occurs
after we acquire another business, it could seriously harm our
business, operating results or financial condition:
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Difficulties in combining previously separate businesses into a
single unit;
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The substantial diversion of managements attention from
day-to-day
business when evaluating and negotiating these transactions and
integrating an acquired business;
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The discovery, after completion of the acquisition, of
liabilities assumed from the acquired business or of assets
acquired for which we cannot realize the anticipated value and
the exposure to such assumed liabilities;
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The failure to realize anticipated benefits such as cost savings
and revenue enhancements;
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The failure to retain key employees of the acquired business;
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Difficulties related to integrating the products of an acquired
business in, for example, distribution, engineering and customer
support areas;
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Unanticipated costs;
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Customer dissatisfaction with existing license agreements with
us, which may dissuade them from licensing or buying products
acquired by us after the effective date of the license; and
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The failure to understand and compete effectively in markets in
which we have limited experience.
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In a number of our previously completed acquisitions, we have
agreed to make future payments, either in the form of employee
bonuses or contingent purchase price payments, or earnouts,
based on the performance of the acquired businesses or the
employees who joined us with the acquired businesses. The
performance goals pursuant to which these future payments may be
made generally relate to achievement by the acquired business or
the employees who joined us with the acquired business of
certain specified bookings, revenue, run rate, product
proliferation, product development or employee retention goals
during a specified period following completion of the applicable
acquisition. Future acquisitions may involve issuances of stock
as full or partial payment of the purchase price for the
acquired business, grants of incentive stock or options to
employees of the acquired businesses (which may be dilutive to
existing stockholders), expenditure of substantial cash
resources or the incurrence of material amounts of debt.
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The specific performance goal levels and amounts and timing of
employee bonuses or contingent purchase price payments vary with
each acquisition. While we expect to derive value from an
acquisition in excess of such contingent payment obligations,
our strategy may change and we may be required to make certain
contingent payments without deriving the anticipated value. In
connection with our acquisitions completed before
October 3, 2009, we may be obligated to pay up to an
aggregate of $15.9 million in cash during the next
35 months if certain defined performance goals are achieved
in full, of which $8.1 million would be expensed as
compensation expense in our Condensed Consolidated Statements of
Operations.
We rely on our proprietary technology as well as software and
other intellectual property rights licensed to us by third
parties, and we cannot assure you that the precautions taken to
protect our rights will be adequate or that we will continue to
be able to adequately secure such intellectual property rights
from third parties.
Our success depends, in part, upon our proprietary technology.
We generally rely on patents, copyrights, trademarks, trade
secret laws, licenses and restrictive agreements to establish
and protect our proprietary rights in technology and products.
Despite precautions we may take to protect our intellectual
property, third parties have tried in the past, and may try in
the future, to challenge, invalidate or circumvent these
safeguards. The rights granted under our patents or attendant to
our other intellectual property may not provide us with any
competitive advantages and there is no guarantee that patents
will be issued on any of our pending applications and future
patents may not be sufficiently broad to protect our technology.
Furthermore, the laws of foreign countries may not protect our
proprietary rights in those countries to the same extent as
applicable law protects these rights in the United States. The
protection of our intellectual property may require the
expenditure of significant financial and managerial resources.
Litigation can be time-consuming and expensive and could divert
managements time and attention from our business, which
could have a material adverse effect on our revenues and
operating results. Moreover, the steps we take to protect our
intellectual property may not adequately protect our rights or
prevent third parties from infringing or misappropriating our
proprietary rights. Many of our products include software or
other intellectual property licensed from third parties. We may
have to seek new or renew existing licenses for such software
and other intellectual property in the future. Our engineering
services business holds licenses to certain software and other
intellectual property owned by third parties, including that of
our competitors. Our failure to obtain software or other
intellectual property licenses or other intellectual property
rights that is necessary or helpful for our business on
favorable terms, or the need to engage in litigation over these
licenses or rights, could seriously harm our business, operating
results or financial condition.
We could lose key technology or suffer serious harm to our
business because of the infringement of our intellectual
property rights by third parties or because of our infringement
of the intellectual property rights of third parties.
There are numerous patents in the EDA industry and new patents
are being issued at a rapid rate. It is not always practicable
to determine in advance whether a product or any of its
components infringes the patent rights of others. As a result,
from time to time, we may be compelled to respond to or
prosecute intellectual property infringement claims to protect
our rights or defend a customers rights.
Intellectual property infringement claims, regardless of merit,
could consume valuable management time, result in costly
litigation, or cause product shipment delays, all of which could
seriously harm our business, operating results or financial
condition. In settling these claims, we may be required to enter
into royalty or licensing agreements with the third parties
claiming infringement. These royalty or licensing agreements, if
available, may not have terms favorable to us. Being compelled
to enter into a license agreement with unfavorable terms could
seriously harm our business, operating results or financial
condition. Any potential intellectual property litigation could
compel us to do one or more of the following:
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Pay damages (including the potential for treble damages),
license fees or royalties (including royalties for past periods)
to the party claiming infringement;
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Stop licensing products or providing services that use the
challenged intellectual property;
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Obtain a license from the owner of the infringed intellectual
property to sell or use the relevant technology, which license
may not be available on reasonable terms, or at all; or
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Redesign the challenged technology, which could be
time-consuming and costly, or not be accomplished.
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If we were compelled to take any of these actions, our business
or operating results may suffer.
If our security measures are breached and an unauthorized
party obtains access to customer data, our information systems
may be perceived as being unsecure and customers may curtail or
stop their use of our products and services.
Our products and services involve the storage and transmission
of customers proprietary information, and breaches of our
security measures could expose us to a risk of loss or misuse of
this information, litigation and potential liability. Because
techniques used to obtain unauthorized access or to sabotage
information systems change frequently and generally are not
recognized until launched against a target, we may be unable to
anticipate these techniques or to implement adequate preventive
measures. If an actual or perceived breach of our security
occurs, the market perception of the effectiveness of our
security measures could be harmed and we could lose existing
customers and our ability to obtain new customers.
The long sales cycle of our products and services makes the
timing of our revenue difficult to predict and may cause our
operating results to fluctuate unexpectedly.
Generally, we have a long sales cycle that can extend up to six
months or longer. The length of the sales cycle may cause our
revenue or operating results to vary from quarter to quarter.
The complexity and expense associated with our business
generally require a lengthy customer education, evaluation and
approval process. Consequently, we may incur substantial
expenses and devote significant management effort and expense to
develop potential relationships that do not result in agreements
or revenue and may prevent us from pursuing other opportunities.
In addition, sales of our products and services have been and
may in the future be delayed if customers delay approval or
commencement of projects because of:
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The timing of customers competitive evaluation
processes; or
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Customers budgetary constraints and budget cycles.
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Long sales cycles for acceleration and emulation hardware
products subject us to a number of significant risks over which
we have limited control, including insufficient, excess or
obsolete inventory, variations in inventory valuation and
fluctuations in quarterly operating results.
The majority of our contracts are executed in the final few
weeks of a fiscal quarter. This makes it difficult to determine
with accuracy how much business will be executed in each fiscal
quarter. Also, because of the timing of large orders and our
customers buying patterns, we may not learn of bookings
shortfalls, revenue shortfalls, earnings shortfalls or other
failures to meet market expectations until late in a fiscal
quarter. These factors may cause our operating results to
fluctuate unexpectedly, which can cause significant fluctuations
in the trading price of our common stock.
We may not be able to sell certain installment contracts to
generate cash, which may impact our operating cash flows for any
particular fiscal period.
We sell certain installment contracts to certain financial
institutions on a non-recourse or limited-recourse basis to
generate cash. Our ability to complete these sales of
installment contracts is affected by a number of factors,
including the:
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Economic conditions in the securities markets;
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Credit policies of the financial institutions; and
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Credit quality of customers with installment contracts we wish
to sell.
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Disruptions in the financial markets have and may adversely
impact the availability and cost of financing transactions for
the installment contract sales that we have already arranged or
may arrange. The change in our license mix will result in an
increased number of subscription licenses and, therefore, a
decrease in the sale of receivables to financial institutions,
so we expect a reduced level of Proceeds from the sale of
receivables throughout fiscal 2009. If we are unable to sell
certain installment contracts, our operating cash flows would be
60
adversely affected. There can be no assurance that funding will
be available to us or, if available, that it will be on terms
acceptable to us. If sources of funding are not available to us
on a regular basis for any reason, including the occurrence of
events of default, deterioration in credit quality in the
underlying pool of receivables or otherwise, it would have a
material adverse effect on our operating cash flows.
The effect of foreign exchange rate fluctuations and other
risks to our international operations may seriously harm our
financial condition.
We have significant operations outside the United States. Our
revenue from international operations as a percentage of total
revenue was approximately 59% for the three months ended
October 3, 2009 and approximately 61% for the three months
ended September 27, 2008. We expect that revenue from our
international operations will continue to account for a
significant portion of our total revenue. We also transact
business in various foreign currencies, primarily the Japanese
yen. The volatility of foreign currencies in certain regions,
most notably the Japanese yen, European Union euro, British
pound and Indian rupee have had, and may in the future have, a
harmful effect on our revenue or operating results.
Fluctuations in the rate of exchange between the United States
dollar and the currencies of other countries in which we conduct
business could seriously harm our business, operating results or
financial condition. For example, when a foreign currency
declines in value relative to the United States dollar, it takes
more of the foreign currency to purchase the same amount of
United States dollars than before the change. If we price our
products and services in the foreign currency, we receive fewer
United States dollars than we did before the change. If we price
our products and services in United States dollars, the decrease
in value of the local currency results in an increase in the
price for our products and services compared to those products
of our competitors that are priced in local currency. This could
result in our prices being uncompetitive in markets where
business is transacted in the local currency. On the other hand,
when a foreign currency increases in value relative to the
United States dollar, it takes more United States dollars to
purchase the same amount of the foreign currency. As we use the
foreign currency to pay for payroll costs and other operating
expenses in our international operations, this results in an
increase in operating expenses.
Exposure to foreign currency transaction risk can arise when
transactions are conducted in a currency different from the
functional currency of one of our subsidiaries. A
subsidiarys functional currency is generally the currency
in which it primarily conducts its operations, including product
pricing, expenses and borrowings. Although we attempt to reduce
the impact of foreign currency fluctuations, significant
exchange rate movements may hurt our results of operations as
expressed in United States dollars.
Our international operations may also be subject to other risks,
including:
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The adoption or expansion of government trade restrictions;
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Limitations on repatriation of earnings;
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Limitations on the conversion of foreign currencies;
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Reduced protection of intellectual property rights in some
countries;
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Recessions in foreign economies;
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Longer collection periods for receivables and greater difficulty
in collecting accounts receivable;
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Difficulties in managing foreign operations;
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Political and economic instability;
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Unexpected changes in regulatory requirements;
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Tariffs and other trade barriers; and
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United States and other governments licensing requirements
for exports, which may lengthen the sales cycle or restrict or
prohibit the sale or licensing of certain products.
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We have offices throughout the world, including key research and
development facilities outside of the United States. Our
operations are dependent upon the connectivity of our operations
throughout the world. Activities that interfere with our
international connectivity, such as computer hacking or the
introduction of a virus into our computer systems, could
significantly interfere with our business operations.
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Our operating results could be adversely affected as a result
of changes in our effective tax rates.
Our future effective tax rates could be adversely affected by
the following:
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Earnings being lower than anticipated in countries where we are
taxed at lower rates as compared to the United States federal
and state statutory tax rates;
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An increase in expenses not deductible for tax purposes,
including certain stock-based compensation and impairment of
goodwill;
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Changes in the valuation allowance against our deferred tax
assets;
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Changes in tax laws or the interpretation of such tax laws;
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Changes in judgment from the evaluation of new information that
results in a recognition, derecognition, or change in
measurement of a tax position taken in a prior period;
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Increases to interest expenses classified in the financial
statements as income taxes;
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New accounting standards or interpretations of such standards;
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A change in our decision to indefinitely reinvest foreign
earnings outside the United States; or
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Results of tax examinations by the IRS and state and foreign tax
authorities.
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Any significant change in our future effective tax rates could
adversely impact our results of operations for future periods.
We have received examination reports from the IRS proposing
deficiencies in certain of our tax returns, and the outcome of
current and future tax examinations may have a material adverse
effect on our results of operations and cash flows.
The IRS and other tax authorities regularly examine our income
tax returns. In July 2006, the IRS completed its field
examination of our federal income tax returns for the tax years
2000 through 2002 and issued a RAR, in which the IRS proposed to
assess an aggregate tax deficiency for the three-year period of
approximately $324.0 million. In November 2006, the IRS
revised the proposed aggregate tax deficiency for the three-year
period to approximately $318.0 million. The IRS is
contesting our qualification for deferred recognition of certain
proceeds received from restitution and settlement in connection
with litigation during the period. The proposed tax deficiency
for this item is approximately $152.0 million. The
remaining proposed tax deficiency of approximately
$166.0 million is primarily related to proposed adjustments
to our transfer pricing arrangements with foreign subsidiaries
and to our deductions for foreign trade income. We have filed a
timely protest with the IRS and are seeking resolution of the
issues through the Appeals Office of the IRS, or the Appeals
Office.
In May 2009, the IRS completed its field examination of our
federal income tax returns for the tax years 2003 through 2005
and issued a RAR, in which the IRS proposed to assess an
aggregate deficiency for the three-year period of approximately
$94.1 million. In August 2009, the IRS revised the proposed
aggregate tax deficiency for the three-year period to
approximately $60.7 million. The IRS is contesting our
transfer pricing arrangements with our foreign subsidiaries and
deductions for foreign trade income. The IRS made similar claims
against our transfer pricing arrangements and deductions for
foreign trade income in prior examinations and may make similar
claims in future examinations. We have filed a timely protest
with the IRS and will seek resolution of the issues through the
Appeals Office.
We believe that the proposed IRS adjustments are inconsistent
with applicable tax laws and we are vigorously challenging these
proposed adjustments. The RARs are not final Statutory Notices
of Deficiency, but the IRS imposes interest on the proposed
deficiencies until the matters are resolved. Interest is
compounded daily at rates published and adjusted quarterly by
the IRS and have been between 4% and 10% since 2001.
The calculation of our provision for income taxes requires us to
use significant judgment and involves dealing with uncertainties
in the application of complex tax laws and regulations. In
determining the adequacy of our provision for income taxes, we
regularly assess the potential settlement outcomes resulting
from income tax examinations. However, the final outcome of tax
examinations, including the total amount payable or the timing
of any such payments upon resolution of these issues, cannot be
estimated with certainty. In addition, we cannot be certain that
such amount will not be materially different from the amount
that is reflected in our historical income tax provisions and
accruals. Should the IRS or other tax authorities assess
additional taxes as a result of a current or a
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future examination, we may be required to record charges to
operations in future periods that could have a material impact
on the results of operations, financial position or cash flows
in the applicable period or periods.
Forecasting our estimated annual effective tax rate is
complex and subject to uncertainty, and material differences
between forecasted and actual tax rates could have a material
impact on our results of operations.
Forecasts of our income tax position and resultant effective tax
rate are complex and subject to uncertainty because our income
tax position for each year combines the effects of estimating
our annual income or loss, the mix of profits and losses earned
by us and our subsidiaries in tax jurisdictions with a broad
range of income tax rates, as well as benefits from available
deferred tax assets, the impact of various accounting rules and
changes to these rules and results of tax audits. To forecast
our global tax rate, pre-tax profits and losses by jurisdiction
are estimated and tax expense by jurisdiction is calculated. If
our estimate of the pre-tax profit and losses, the mix of our
profits and losses, our ability to use deferred tax assets, the
results of tax audits, or effective tax rates by jurisdiction is
different than those estimates, our actual tax rate could be
materially different than forecasted, which could have a
material impact on our results of operations.
Failure to obtain export licenses could harm our business by
rendering us unable to ship products and transfer our technology
outside of the United States.
We must comply with regulations of the United States and of
certain other countries in shipping our software products and
transferring our technology outside the United States and to
foreign nationals. Although we have not had any significant
difficulty complying with such regulations so far, any
significant future difficulty in complying could harm our
business, operating results or financial condition.
Errors or defects in our products and services could expose
us to liability and harm our reputation.
Our customers use our products and services in designing and
developing products that involve a high degree of technological
complexity, each of which has its own specifications. Because of
the complexity of the systems and products with which we work,
some of our products and designs can be adequately tested only
when put to full use in the marketplace. As a result, our
customers or their end users may discover errors or defects in
our software or the systems we design, or the products or
systems incorporating our design and intellectual property may
not operate as expected. Errors or defects could result in:
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Loss of customers;
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Loss of market segment share;
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Failure to attract new customers or achieve market acceptance;
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Diversion of development resources to resolve the problem;
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Loss of or delay in revenue;
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Increased service costs; and
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Liability for damages.
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If we become subject to unfair hiring claims, we could be
prevented from hiring needed employees, incur liability for
damages and incur substantial costs in defending ourselves.
Companies in our industry that lose employees to competitors
frequently claim that these competitors have engaged in unfair
hiring practices or that the employment of these persons would
involve the disclosure or use of trade secrets. These claims
could prevent us from hiring employees or cause us to incur
liability for damages. We could also incur substantial costs in
defending ourselves or our employees against these claims,
regardless of their merits. Defending ourselves from these
claims could also divert the attention of our management away
from our operations.
Our business is subject to the risk of earthquakes.
Our corporate headquarters, including certain of our research
and development operations and certain of our distribution
facilities, is located in the Silicon Valley area of Northern
California, which is a region known to experience seismic
activity. If significant seismic activity were to occur, our
operations may be interrupted, which would adversely impact our
business and results of operations.
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We maintain research and development and other facilities in
parts of the world that are not as politically stable as the
United States, and as a result we may face a higher risk of
business interruption from acts of war or terrorism than
businesses located only or primarily in the United States.
We maintain international research and development and other
facilities, some of which are in parts of the world that are not
as politically stable as the United States. Consequently, we may
face a greater risk of business interruption as a result of
terrorist acts or military conflicts than businesses located
domestically. Furthermore, this potential harm is exacerbated
given that damage to or disruptions at our international
research and development facilities could have an adverse effect
on our ability to develop new or improve existing products as
compared to other businesses which may only have sales offices
or other less critical operations abroad. We are not insured for
losses or interruptions caused by acts of war or terrorism.
Risks
Related to Our Securities and Indebtedness
Our debt obligations expose us to risks that could adversely
affect our business, operating results or financial condition,
and could prevent us from fulfilling our obligations under such
indebtedness.
We have a substantial level of debt. As of October 3, 2009,
we had outstanding indebtedness with a principal balance of
$500.2 million as follows:
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$250.0 million related to our 1.375% Convertible
Senior Notes Due 2011, or the 2011 Notes;
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$250.0 million related to our 1.500% Convertible
Senior Notes Due 2013, or the 2013 Notes and, together with the
2011 Notes, the Convertible Senior Notes; and
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$0.2 million related to our Zero Coupon Zero Yield Senior
Convertible Notes Due 2023, or the 2023 Notes.
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The level of our current or future indebtedness, among other
things, could:
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Make it difficult for us to satisfy our payment obligations on
our debt as described below;
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Make us more vulnerable in the event of a downturn in our
business;
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Reduce funds available for use in our operations;
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Make it difficult for us to incur additional debt or obtain any
necessary financing in the future for working capital, capital
expenditures, debt service, acquisitions or general corporate
purposes;
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Impose operating or financial covenants on us;
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Limit our flexibility in planning for or reacting to changes in
our business; or
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Place us at a possible competitive disadvantage relative to less
leveraged competitors and competitors that have greater access
to capital resources.
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While we are not currently a party to any loans that would
prohibit us from making payment on our outstanding convertible
notes, we are not prevented by the terms of the convertible
notes from entering into other loans that could prohibit such
payments. If we are prohibited from paying our outstanding
indebtedness, we could try to obtain the consent of the lenders
under those arrangements to make such payment, or we could
attempt to refinance the borrowings that contain the
restrictions. If we do not obtain the necessary consents or
refinance the borrowings, we may be unable to satisfy our
outstanding indebtedness. Any such failure would constitute an
event of default under our indebtedness, which could, in turn,
constitute a default under the terms of any other indebtedness
then outstanding.
If we are unable to generate sufficient cash flow or otherwise
obtain funds necessary to make required payments, or if we fail
to comply with the various requirements of our indebtedness, we
would be in default, which would permit the holders of our
indebtedness to accelerate the maturity of the indebtedness and
could cause defaults under any other indebtedness as well.
We have in the past and may in the future attempt to access the
capital or credit markets in order to obtain funding to meet
particular liquidity needs. Because of the challenges in the
global capital markets and financial institutions, including a
tightening in the capital and credit markets, compounded by the
increasingly challenging and price-conscious economic
environment and our lower levels of business, we may not be able
to secure additional funding on terms acceptable to us or at
all, which could adversely impact our business and operating
results.
64
Any default under our indebtedness could have a material adverse
effect on our business, operating results and financial
condition. In addition, a material default on our indebtedness
could suspend our eligibility to register securities using
certain registration statement forms under SEC guidelines that
permit incorporation by reference of substantial information
regarding us, which could potentially hinder our ability to
raise capital through the issuance of our securities and will
increase the costs of such registration to us.
We retrospectively adopted new accounting principles as required
by the Debt with Conversion and Other Options
subtopic of the Codification, on the first day of fiscal 2009
and adjusted all periods for which the Convertible Senior Notes
were outstanding before the date of adoption. This adoption had
an adverse effect on our operating results and financial
condition, particularly with respect to interest expense ratios
commonly referred to by lenders, and could potentially hinder
our ability to raise capital through the issuance of debt or
equity securities.
Conversion of the Convertible Senior Notes will dilute the
ownership interests of existing stockholders.
The terms of the Convertible Senior Notes permit the holders to
convert the Convertible Senior Notes into shares of our common
stock. The terms of the Convertible Senior Notes stipulate a net
share settlement, which upon conversion of the Convertible
Senior Notes requires us to pay the principal amount in cash and
the conversion premium, if any, in shares of our common stock
based on a daily settlement amount, calculated on a
proportionate basis for each day of the relevant 20
trading-day
observation period. The initial conversion rate for the
Convertible Senior Notes is 47.2813 shares of our common
stock per $1,000 principal amount of Convertible Senior Notes,
equivalent to a conversion price of approximately $21.15 per
share of our common stock. The conversion price is subject to
adjustment in some events but will not be adjusted for accrued
interest, except in limited circumstances. The conversion of
some or all of the Convertible Senior Notes will dilute the
ownership interest of our existing stockholders. Any sales in
the public market of the common stock issuable upon conversion
could adversely affect prevailing market prices of our common
stock.
Each $1,000 of principal of the Convertible Senior Notes is
initially convertible into 47.2813 shares of our common
stock, subject to adjustment upon the occurrence of specified
events. Holders of the Convertible Senior Notes may convert
their notes at their option on any day before the close of
business on the scheduled trading day immediately preceding
December 15, 2011 in the case of the 2011 Notes and
December 15, 2013 in the case of the 2013 Notes, in each
case only if:
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The price of our common stock reaches $27.50 during certain
periods of time specified in the Convertible Senior Notes;
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Specified corporate transactions occur; or
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The trading price of the Convertible Senior Notes falls below
98% of the product of (i) the last reported sale price of
our common stock and (ii) the conversion rate on that date.
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From November 2, 2011, in the case of the 2011 Notes, and
November 1, 2013, in the case of the 2013 Notes, and until
the close of business on the scheduled trading day immediately
preceding the maturity date of such Convertible Senior Notes,
holders may convert their Convertible Senior Notes at any time,
regardless of the foregoing circumstances. As of October 3,
2009, none of the conditions allowing holders of the Convertible
Senior Notes to convert had been met.
Although the conversion price of the Convertible Senior Notes is
currently $21.15 per share, we entered into hedge and separate
warrant transactions concurrent with the issuance of the
Convertible Senior Notes to reduce the potential dilution from
the conversion of the Convertible Senior Notes. However, we
cannot guarantee that such hedges and warrant instruments will
fully mitigate the dilution. In addition, the existence of the
Convertible Senior Notes may encourage short selling by market
participants because the conversion of the Convertible Senior
Notes could depress the price of our common stock.
At the option of the holders of the Convertible Senior Notes,
under certain circumstances we may be required to repurchase the
Convertible Senior Notes in cash or shares of our common
stock.
Under the terms of the Convertible Senior Notes, we may be
required to repurchase the Convertible Senior Notes following a
fundamental change in our corporate ownership or
structure, such as a change of control in which substantially
all of the consideration does not consist of publicly traded
securities, prior to maturity of the
65
Convertible Senior Notes. The repurchase price for the
Convertible Senior Notes in the event of a fundamental change
must be paid solely in cash. This repayment obligation may have
the effect of discouraging, delaying or preventing a takeover of
our company that may otherwise be beneficial to investors.
Hedge and warrant transactions entered into in connection
with the issuance of the Convertible Senior Notes may affect the
value of our common stock.
We entered into hedge transactions with various financial
institutions, at the time of issuance of the Convertible Senior
Notes, with the objective of reducing the potential dilutive
effect of issuing our common stock upon conversion of the
Convertible Senior Notes. We also entered into separate warrant
transactions with the same financial institutions. In connection
with our hedge and warrant transactions, these financial
institutions purchased our common stock in secondary market
transactions and entered into various
over-the-counter
derivative transactions with respect to our common stock. These
entities or their affiliates are likely to modify their hedge
positions from time to time prior to conversion or maturity of
the Convertible Senior Notes by purchasing and selling shares of
our common stock, other of our securities or other instruments
they may wish to use in connection with such hedging. Any of
these transactions and activities could adversely affect the
value of our common stock and, as a result, the number of shares
and the value of the common stock holders will receive upon
conversion of the Convertible Senior Notes. In addition, subject
to movement in the price of our common stock, if the hedge
transactions settle in our favor, we could be exposed to credit
risk related to the other party with respect to the payment we
are owed from such other party. If the financial institutions
with which we entered into these hedge transactions were to fail
or default, our ability to settle on these transactions could be
harmed or delayed.
Rating agencies may provide unsolicited ratings on the
Convertible Senior Notes that could reduce the market value or
liquidity of our common stock.
We have not requested a rating of the Convertible Senior Notes
from any rating agency and we do not anticipate that the
Convertible Senior Notes will be rated. However, if one or more
rating agencies independently elects to rate the Convertible
Senior Notes and assigns the Convertible Senior Notes a rating
lower than the rating expected by investors, or reduces such
rating in the future, the market price or liquidity of the
Convertible Senior Notes and our common stock could be harmed.
Should a decline in the market price of the Convertible Senior
Notes result, as compared to the price of our common stock, this
may trigger the right of the holders of the Convertible Senior
Notes to convert the Convertible Senior Notes into cash and
shares of our common stock.
Anti-takeover defenses in our certificate of incorporation
and bylaws and certain provisions under Delaware law could
prevent an acquisition of our company or limit the price that
investors might be willing to pay for our common stock.
Our certificate of incorporation and bylaws and certain
provisions of the Delaware General Corporation Law that apply to
us could make it difficult for another company to acquire
control of our company. For example:
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Our certificate of incorporation allows our Board of Directors
to issue, at any time and without stockholder approval,
preferred stock with such terms as it may determine. No shares
of preferred stock are currently outstanding. However, the
rights of holders of any of our preferred stock that may be
issued in the future may be superior to the rights of holders of
our common stock.
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Section 203 of the Delaware General Corporation Law
generally prohibits a Delaware corporation from engaging in any
business combination with a person owning 15% or more of its
voting stock, or who is affiliated with the corporation and
owned 15% or more of its voting stock at any time within three
years prior to the proposed business combination, for a period
of three years from the date the person became a 15% owner,
unless specified conditions are met.
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All or any one of these factors could limit the price that
certain investors would be willing to pay for shares of our
common stock and could delay, prevent or allow our Board of
Directors to resist an acquisition of our company, even if a
proposed transaction were favored by a majority of our
independent stockholders.
66
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Item 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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In fiscal 2008, our Board of Directors authorized two programs
to repurchase shares of our common stock in the open market with
a value of up to $1,000.0 million in the aggregate. The
following table sets forth the repurchases we made during the
three months ended October 3, 2009:
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Maximum Dollar
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Value of Shares that
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Total Number of
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May Yet
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Shares Purchased
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Be Purchased Under
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Total Number
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Average
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as Part of
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Publicly Announced
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of Shares
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Price
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Publicly Announced
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Plan or Program*
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Period
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Purchased*
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Per Share
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Plan or Program
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(In millions)
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July 5, 2009 August 8, 2009
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28,821
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$
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5.72
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----
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$
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854.4
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August 9, 2009 September 5, 2009
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28,775
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$
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5.87
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----
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$
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854.4
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September 6, 2009 October 3, 2009
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181,388
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$
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7.10
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----
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$
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854.4
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Total
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238,984
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$
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6.78
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----
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* |
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Shares purchased that were not part of our publicly announced
repurchase program represent the surrender of shares of
restricted stock to pay income taxes due upon vesting, and do
not reduce the dollar value that may yet be purchased under our
publicly announced repurchase program. |
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Item 3.
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Defaults
Upon Senior Securities
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None.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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None.
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Item 5.
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Other
Information
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None.
(a) The following exhibits are filed herewith:
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Incorporated by Reference
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Exhibit
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Exhibit
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Filing
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Provided
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Number
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Exhibit Title
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Form
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File No.
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No.
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Date
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Herewith
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31.01
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Certification of the Registrants Chief Executive Officer,
Lip-Bu Tan, pursuant to Rule 13a-14 of the Securities Exchange
Act of 1934.
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X
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31.02
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Certification of the Registrants Chief Financial Officer,
Kevin S. Palatnik, pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934.
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X
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32.01
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Certification of the Registrants Chief Executive Officer,
Lip-Bu Tan, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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X
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32.02
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Certification of the Registrants Chief Financial Officer,
Kevin S. Palatnik, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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X
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67