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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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(Mark One)
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x
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the fiscal year ended
December 29, 2007
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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
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77-0148231
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(State or Other Jurisdiction of
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(I.R.S. Employer
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Incorporation or Organization)
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Identification No.)
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2655 Seely Avenue, Building 5, San Jose, California
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95134
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(Address of Principal Executive Offices)
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(Zip Code)
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(408) 943-1234
(Registrants Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Names of Each Exchange on which Registered
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Common Stock, $0.01 par value per share
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NASDAQ
Global Select Market
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes [ X ] No [ ]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes [ ] No [ X ]
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. [ ]
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 ]
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Accelerated
filer [ ]
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Non-accelerated filer [ ]
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Smaller
reporting company [ ]
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(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 Act). Yes [ ]
No [ X ]
The aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price
at which the common equity was last sold as of the last business
day of the registrants most recently completed second
fiscal quarter ended June 30, 2007 was $6,247,841,818.
On February 2, 2008, approximately 278,205,971 shares
of the Registrants Common Stock, $0.01 par value,
were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Cadence
Design Systems, Inc. 2008 Annual Meeting are incorporated by
reference into Part III hereof.
CADENCE
DESIGN SYSTEMS, INC.
2007
FORM 10-K
ANNUAL REPORT
Table of Contents
PART I.
This Annual Report on
Form 10-K
and the documents incorporated by reference in this Annual
Report contain forward-looking statements. Certain of such
statements, including, but not limited to, statements regarding
the extent and timing of future revenues and expenses and
customer demand, statements regarding the deployment of our
products, statements regarding our reliance on third parties and
other statements using words such as anticipates,
believes, could, estimates,
expects, 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 Proprietary
Technology, Competition, Risk
Factors, Results of Operations,
Disclosures About Market Risk and Liquidity
and Capital Resources sections contained in this Annual
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 Annual Report.
All subsequent written or spoken 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
Annual Report are made only as of the date of this Annual
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
and provide design, methodology and education services
throughout the world to help manage and accelerate electronics
product development processes. 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 have approximately
5,300 employees, in approximately 60 sales offices, design
centers and research and development facilities located around
the world.
We were formed as a Delaware corporation in April 1987. Our
headquarters is located at 2655 Seely Avenue, San Jose,
California 95134. Our telephone number is
(408) 943-1234.
Our website can be accessed at www.cadence.com. We make
available free of charge copies of our SEC filings and
submissions on the investor relations page of our website at
www.cadence.com as soon as practicable after
electronically filing or furnishing such documents with the SEC.
Our Corporate Governance Guidelines, Code of Business Conduct
and the charters of the Audit Committee, Compensation Committee
and Corporate Governance and Nominating Committee of our Board
of Directors are also posted on the investor relations page of
our website at www.cadence.com. Stockholders may also
request copies of these documents by writing to our Corporate
Secretary at the address above.
Factors
Driving the Electronic Design Automation Industry
Communications, computing and consumer electronics markets drove
the growth in the electronics industry for most of the past
decade. However, in recent years, the consumer market has been
the fastest growing end market for electronics and the most
influential in setting requirements for time-to-market, low
cost, miniaturization and increasing functionality. These market
and technology forces pose major challenges for the global
electronics design community.
During 2007, we saw increasing pressures on research and
development budgets in our customer base, due to the
deceleration of growth in the electronics equipment and
semiconductor industries and a deteriorating macroeconomic
environment. Semiconductor volumes grew during 2007, fueled by
strong consumer demand in traditional and emerging markets, but
at the same time average selling prices declined.
Electronic systems companies respond to demand for increased
functionality and miniaturization by combining
subsystems such as radio frequency wireless
communication, or RF, video signal processing, and
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microprocessors onto a single silicon chip, creating
a
system-on-chip,
or SoC, or multiple chips into a single chip package in a format
referred to as
system-in-package,
or SiP. These trends toward subsystem integration have required
chip makers to find solutions to challenges previously addressed
by system companies, such as verifying system-level
functionality and hardware-software interoperability.
SoC designs put many more transistors on each chip, increasing
the need for tight control over power consumption. This is done
not only to increase battery life in portable devices, but also
to minimize energy cost for computing and networking equipment.
Higher power devices generate more heat, which further increases
both system cost as well as operating expenses for cooling.
Evolving semiconductor manufacturing processes with smaller
features (transistors and wires) and lower supply voltages
address both of these issues to some degree, but introduce new
challenges of their own. Contemporary portable electronic
devices contain chips in which individual features can be as
small as 45 nanometers 45/1,000,000ths of a
millimeter. Because of the electrical characteristics of the
materials used to construct the transistors (which are
essentially microscopic switches), chips continue to consume
power even when transistors in the device are switched off. To
overcome these and other power-related issues, specific
low power design techniques must be developed and
are most effective if they are integrated throughout the design
flow, from logic design and verification through physical
implementation.
Variability in the processes and materials used to manufacture
silicon chips have become so pervasive at 65 nanometers and
below that traditional connections between design and
manufacturing teams are insufficient to ensure chip performance
and yield. Integrating detailed models of the manufacturing
process into the chip design environment is desirable so
engineers can craft the design to avoid or overcome these
manufacturing process variations. Similarly, manufacturing teams
can optimize their processes if, along with the design, they are
provided with information about the most critical parts of the
chip. However, sharing information between design and
manufacturing processes is complicated because current data
formats used to describe the chip design differ from data
formats used to describe the manufacturing process and control
the manufacturing equipment. Moreover, design and manufacturing
often take place within two or more separate companies, since
multiple companies may participate in the design of the chip,
and multiple companies may participate in the manufacturing and
assembly of the final device.
These trends represent significant new challenges for
electronics design processes. Specifically, product performance
and size requirements of the mobile consumer electronics market
require microelectronic systems to be smaller, consume less
power and provide multiple functions all in one SoC or SiP
package. This requires designers to pay close attention to many
electrical, physical and manufacturing effects that were
inconsequential in previous generations of chip designs. The
design challenge becomes more complex with each new generation
of electronics, and providers of EDA solutions must deliver
products that address these technical challenges, while
improving the efficiency and productivity of the design process.
Operating
Segment
Our chief operating decision maker is our President and Chief
Executive Officer, or CEO. Our CEO reviews our consolidated
results within only one operating segment.
Products
Our products are engineered to improve our customers
design productivity and resulting design quality by providing a
comprehensive set of EDA design tools. Product revenues include
all fees earned from granting licenses to use our software, and
from sales and leases of our hardware products, and exclude
revenues derived from maintenance and services. We offer
customers three license types for our software: perpetual, term
and subscription. See Software Licensing
Arrangements below for additional discussion of our
license types.
Product revenue was $1,104.0 million, or 68% of our total
revenue, in 2007, $982.7 million, or 66% of our total
revenue, in 2006 and $851.5 million, or 64% of our total
revenue, in 2005.
Product
Strategy
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 for four major
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design activities: functional verification, digital IC design,
custom IC design and system interconnect design. The four
Cadence®
design platforms are
Incisive®
functional verification,
Encounter®
digital IC design,
Virtuoso®
custom design and
Allegro®
system interconnect design platforms. In addition, we augment
these platform product offerings with a comprehensive set of
design for manufacturing, or DFM, products that service both the
digital and custom IC design flows. These four platforms,
together with our DFM products, comprise our primary product
lines.
In order to provide our customers with products that are
optimized and scaled to their specific project requirements, we
introduced three product tiers. The L tier provides
competitive technology for mainstream design projects. The
XL tier is differentiated for more complex and
leading edge design projects. The GXL tier is highly
differentiated to address the most complex and challenging
design projects in the industry.
Incisive
Functional Verification Platform
The Incisive functional verification platform enables our
customers to employ enterprise-level verification process
automation, including verification planning, management and
process tracking, with coordination of all verification
activities across teams of specialists and different execution
platforms.
The Incisive platform is tailored for three customer segments:
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Logic design engineers using traditional hardware description
languages and testing techniques;
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Logic design teams that are also responsible for verification
and need more automation; and
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Multi-specialist enterprise teams comprised of logic design
engineers, dedicated verification engineers, software
development engineers and system validation engineers.
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The Incisive platform includes verification process automation
technologies, methodologies, and verification intellectual
property, or VIP, for many standard protocols. The Incisive
platform is comprised of the following core solutions:
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The Incisive Management solution, which automates and guides the
verification process and then analyzes data, from planning to
closure;
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The Incisive Simulation Analysis solution, which offers
mixed-language
testbench support, dynamic assertion checking, transaction-level
support, hardware description language, or HDL, analysis and a
complete debug environment;
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The Incisive Formal solution, which improves productivity
starting at the designers desktop, providing a formal
means of verifying register transfer level, or RTL, functional
correctness with assertions, without the need of testbench
simulation, resulting in fast RTL block
bring-up;
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The Incisive Verification IP, which improves productivity while
reducing project risks associated with standard protocol
compliance, providing a catalogue of the most popular standard
protocols equipped with a Compliance Management System; and
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The
Palladium®
and
Xtreme®
series of emulation and acceleration hardware solutions, which
accelerate the verification process and enable first working
silicon with first working software.
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The Incisive Plan-to-Closure methodology and the SoC Functional
Verification Kit are designed to enable the scalable deployment
of best practices by our technical field experts and to mitigate
our customers language, technology and methodology
adoption risks.
Encounter
Digital IC Design Platform
The Encounter digital IC design platform enables our customers
to implement all aspects of their digital nanometer-scale
designs. It is based on a single user interface and unified
in-memory data model, and is specifically designed to facilitate
the analysis and optimization of chip performance, power
consumption, and silicon area and manufacturability throughout
our customers design processes. The Encounter platform is
comprised of the following core technologies:
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Silicon virtual prototyping for enabling designers to plan the
complete implementation of a chip before committing to a
specific design strategy;
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Global RTL and physical synthesis for creating and physically
locating logic on the chip, while simultaneously optimizing
performance, power, cost and yield;
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Signal integrity and yield-aware routing for connecting high
performance physical interconnect between the logic gates;
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Signal integrity and nanometer delay analysis;
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Comprehensive design-for-test capability as well as post-silicon
test diagnostics; and
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Logic equivalence checking and design constraint management
capability for designers to verify that their RTL specification
is equivalent to the final IC layout.
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Unlike traditional front-end/back-end systems, the
Encounter platform does not require customers to perform
time-consuming translations between common tasks such as
placement, power distribution, routing, and timing and crosstalk
analysis. The Encounter platform supports hierarchical designs,
with support for designs containing hundreds of millions of
transistors on a single chip. Since 2005, the Encounter platform
has been marketed in three tiers: Encounter L, XL and GXL. These
tiers are scaled to provide customers with technologies tailored
to specific degrees of design complexity in the digital IC space.
Virtuoso
Custom Design Platform
The Virtuoso custom design platform provides designers with an
integrated solution for design creation, validation and
implementation of silicon-accurate analog, custom digital,
mixed-signal and RF designs, while ensuring that these designs
are ready for manufacturing, through our integrated DFM
capabilities.
The Virtuoso platform reduces design time by providing:
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Reference flows for analog, mixed-signal, RF and analog-digital
integration focused at the wireless and analog/mixed-signal
markets;
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Automatic analog circuit sizing and optimization (including
yield optimization);
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Multi-mode simulation (digital, analog, mixed-signal and RF)
using a common syntax and model, and common equations;
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Fast custom layout technologies;
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Process migration technology;
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Electrical vs. physical effects analysis; and
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Physical design integration and silicon analysis for complex
custom, cell-based and mixed custom designs.
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The latest Virtuoso 6.1.0 release provides a unified design
environment tying together the design, layout, and verification
tasks based on innovative constraint-driven design capabilities,
which significantly improve our customers productivity.
The end-to-end simulation and verification technology called
multi-mode simulation is integrated into the unified
environment enabling a complete design-to-verification
methodology.
The Virtuoso 6.1.0 platform relies on the
OpenAccesstm
database (described below in Third Party Programs and
Initiatives), which provides a common foundation for the
designers as they move through the design cycle and is also a
mechanism to interoperate with applications developed by
partners and customers.
The Virtuoso L, XL and GXL offerings provide designers the
ability to choose the right products to match their needs for
custom design ranging from the simplest entry-level component
design to the most complex DFM-aware SoC designs.
Allegro
System Interconnect Design Platform
The Allegro system interconnect design platform enables design
teams to design high-performance electronic products across the
domains of IC, package and printed circuit board, or PCB,
reducing cost and time to market. The system
interconnect between input-output buffers and across
ICs, packages and PCBs can be optimized through the
platforms co-design methodology, reducing both hardware
costs and design cycles. Designers use the Allegro
platforms constraint-driven methodology and advanced
capabilities for design capture, signal integrity and physical
implementation. Silicon design-in kits speed time to market by
allowing IC companies to shorten new device adoption time and
allowing systems companies to accelerate PCB system design
cycles. In 2007, we shipped our next generation PCB design
products that include our new global route environment
technology as part of the Allegro 16.0 release. We also expanded
sales of our IC Packaging and SiP products. The Allegro family
products are marketed in three product tiers: Allegro L, XL and
GXL.
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The system interconnect design product group includes the
Allegro system interconnect design platform, the
OrCAD®
product line of PCB design products which are engineered for
individual or small design team productivity and a family of IC
packaging and SiP technologies. The OrCAD product line is
marketed worldwide through a network of resellers.
Design for Manufacturing
With the advent of finer geometries in silicon manufacturing
technologies (65 nanometer, 45 nanometer and below),
semiconductor companies are increasingly concerned about
manufacturability of their designs. The physical layout of each
IC requires detailed analysis and optimization to ensure that
the design can be manufactured in volume while performing as
expected.
Cadences strategy is to integrate silicon foundry-endorsed
model-based manufacturability analysis and sign-off into the
proven IC design implementation flows from both the Virtuoso as
well as the Encounter platforms. The benefits of this integrated
manufacturability design flow include reduction of catastrophic
and parametric yield issues and enablement of design
implementation for maximized performance.
Some of our products that deliver DFM capabilities for nanometer
SoC design include:
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QRC, Fire &
Ice®
QX and
Assura®
RCX parasitic extraction products, which take the
designers physical representation of an IC and extract the
electrical properties of that design representation to enable
further analyses, such as simulation and timing analysis;
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Products in the
VoltageStorm®
family analyze on-chip power distribution for digital, analog
and SoC designs. VoltageStorm detects unanticipated voltage
drop, enabling the customer to correct fatal conditions, thereby
preventing extensive troubleshooting and delay during initial
manufacturing;
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Our physical verification products, including Cadence Physical
Verification System, or PVS, Assura,
Diva®
and
Dracula®,
which perform manufacturing design rule checks to ensure the
proposed design meets the requirements of the foundrys
manufacturing process rules;
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Mask data preparation tools, such as MaskCompose and QuickView,
which help customer mask shops create mask and reticle layouts
for chips being manufactured in nanometer processes;
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Cadence CMP Predictor, which helps designers to understand the
impact of chemical-mechanical polishing, or CMP, one of the
major steps in the semiconductor manufacturing process, which
potentially impacts the chip performance at advanced silicon
geometries;
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Litho Physical Analyzer and Litho Electrical Analyzer, both
lithography analysis tools for physical and electrical effects,
which offer silicon foundry endorsed model-based layout
printability and electrical variation analysis tools;
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Advanced pattern synthesis tools for next generation optical and
process proximity correction of layouts targeted for finer
geometries, especially extremely dense layouts such as full chip
memory designs; and
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Other products for random yield analysis as well as chip failure
diagnostics.
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Kits
Todays growing silicon complexity creates an array of
design challenges for semiconductor and systems design teams.
Among these challenges is the application of EDA technologies to
overcome design hurdles in certain key markets driving the
semiconductor industry, such as the wireless and networking
segments. Cadence kits are designed to allow companies in these
sectors to achieve shorter, more predictable design cycles and
greater design productivity by greatly simplifying the
application and integration of EDA technologies to address major
design challenges in the analog mixed-signal, RF, SiP, low power
and SoC functional verification markets.
A Cadence kit assembles technologies from our broad portfolio
into ready-to-use design flows, enhanced by application specific
design methodologies, expert knowledge, and best practices, and
applied to a segment representative IC design. The kits
accelerate the adoption of latest design methodologies and offer
customers improved productivity. In 2007, we introduced the Low
Power Kit and the SoC Functional Verification Kit.
Verification
and Application-Specific Programming Services
We offer verification and application-specific programming, or
ASP, services, which provide customers with consulting services,
project services
and/or
complete turnkey services for verification acceleration and
system
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emulation. QuickCycles allows customers access to our Palladium
simulation acceleration and emulation products either on the
customer internet site or remotely over a high-speed, secure
network connection.
Third
Party Programs and Initiatives
We recognize that certain of our customers may also use
internally-developed design tools or design tools provided by
other EDA companies, as well as IP available from multiple
suppliers. We support the integration of third party design
products through participation in the OpenAccess Initiative, the
Connections®
and OpenChoice IP programs. OpenAccess is a full-featured EDA
database that supports access and manipulation of its internal
EDA data via a fully documented and freely available programming
interface. This provides an open application program interface
through which applications developed by our customers, by their
other EDA vendors, or by university research groups can all
operate within a single database and with our products. We have
licensed the OpenAccess database to the OpenAccess Coalition,
which is operated by the Silicon Integration Initiative, or Si2,
an organization of EDA, electronic system and semiconductor
industry leaders focused on improving productivity and reducing
cost in creating and producing integrated silicon systems.
The Connections Program provides member companies with access to
our products to ensure that our products work well with third
party tools. The OpenChoice IP program was instituted to enable
interoperability and facilitate open collaboration with leading
providers of library, processor, memory core and verification IP
to build, validate and deliver accurate models optimized for
Cadence design and verification solutions. The program aims to
ensure IP quality and provide our customers with access to a
broad IP portfolio that works with our products. A key component
of the OpenChoice program is to assist and support library
providers in the integration of our design and verification
products and model formats into customer-owned tooling, or COT,
library solutions.
In 2007, the Power Forward Initiative membership grew to 24
electronics industry leaders who recognized the urgent need for
an automated, power-aware design infrastructure to facilitate
the production of ICs that consume significantly less power.
This group participated in the refinement and standardization of
the Common Power Format, or CPF. CPF is a specification language
that holistically captures low-power design intent so that it
can be communicated consistently throughout the IC design
process. We have contributed the CPF specification to Si2, which
manages the standardization, maintenance and distribution of CPF
for the benefit of the electronics industry.
In addition, we work with vendors of Application-Specific
Integrated Circuits, or ASICs, to ensure predictable and smooth
handoff of design data from mutual customers to ASIC
implementation. These programs foster relationships throughout
the silicon design chain with leading IP partners, silicon
manufacturers and library provider partners to support both ASIC
and COT solutions for our customers. They are integral to
providing complete design chain solutions to IC and electronic
systems designers who depend on coordinated offerings from
multiple suppliers.
Maintenance
We provide technical support to our customers to facilitate
their use of our software and hardware products. A high level of
customer service and support is critical to the adoption and
successful use of our products. We have a global customer
support organization and specialized field application
engineering teams located in each of our operating regions to
provide assistance to customers where and when they need it.
Standard maintenance support includes three major components:
our
Sourcelink®
online support portal, which provides 24 hour access to
real-time technical information on our products; contact center
support (telephone, email and web access to our support
engineers); and software updates (periodic updates with
regression-tested critical fixes and updated functionality
available via CDs or secure internet download).
Maintenance is offered to customers as an integral,
non-cancelable component of our subscription license agreements,
or as a separate agreement subject to annual renewal for our
term and perpetual license customers.
Some of our customers have relocated, or expanded the presence
of their design teams, away from their headquarters or
historical locations to locations in emerging growth regions.
Accordingly, to provide responsive and effective support for
these customers, we expect to continue expanding the presence of
our own support and application engineering teams in these
emerging growth regions.
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Maintenance revenue was $385.2 million, or 24% of our total
revenue, in 2007, $366.3 million, or 25% of our total
revenue, in 2006 and $351.5 million, or 26% of our total
revenue, in 2005. We expect that maintenance revenue in 2008
will be generated predominantly from backlog.
Services
We offer a number of fee-based services, including engineering
and education services related to IC design and methodology.
These services may be sold separately or sold and performed in
conjunction with the sale, lease or license of our products.
Services revenue was $125.8 million, or 8% of our total
revenue, in 2007, $134.9 million, or 9% of our total
revenue, in 2006 and $126.2 million, or 9% of our total
revenue, in 2005.
Engineering
Services
We offer engineering services and reusable design technologies
to aid customers with the design of complex ICs and the
implementation of design capabilities. We focus our offerings
primarily on SoC devices, including both ASICs and
Application-Specific Standard Parts, and on analog and
mixed-signal ICs. The customers for these services primarily
consist of semiconductor and systems companies developing
products for the communications, computing and consumer markets.
We offer engineering capabilities to assist customers from
product concept through volume manufacturing.
We also make our design IP portfolio available to customers as
part of our technology and services solutions. These reusable
design and methodology components enable us to more efficiently
deliver our services, and allow our customers to reduce the
design complexity and time to market for the development of
complex SoCs.
In our design and methodology service practices, we leverage our
cumulative experience and knowledge of design techniques and
leading practices with many customers and different design
environments to improve our own service teams and our
customers productivity. We work with customers using
outsourcing, consultative and collaborative models depending on
their projects and needs. Our Virtual Computer-Aided Design, or
VCAD, model enables our engineering teams at one or more of our
locations to virtually work
side-by-side
with our customers teams located elsewhere during the
course of their design and engineering projects through a secure
private network infrastructure.
Through collaboration with our customers, we are able to design
advanced ICs and gain direct and early visibility to industry
design issues that may not be addressed adequately by
todays EDA technologies. This enables us to accelerate the
development of new software technology and products to meet the
markets current and future design requirements.
Education
Services
Our education services offerings include internet, classroom and
custom courses, the content of which ranges from how to use the
most recent features of our EDA products to instruction in the
latest IC design techniques. The primary focus of education
services is to accelerate our customers path to
productivity in the use of Cadence products and increase
awareness of the total solution required for engineering success.
Marketing
and Sales
We generally use a direct sales force consisting of sales people
and applications engineers to market our products and provide
maintenance and services to existing and prospective customers.
Applications engineers provide technical pre-sales and
post-sales support for software products. Due to the complexity
of many of our EDA products and the electronic design process in
general, the sales cycle is generally long, requiring three to
six months or more. During the sales cycle, our direct sales
force generally provides technical presentations, product
demonstrations and support for
on-site
customer evaluation of our software. We also use traditional
marketing approaches to promote our products and services,
including advertising, direct mail, telemarketing, trade shows,
public relations and the internet. As EDA products mature and
become widely understood by the marketplace, we selectively
utilize value added resellers to broaden our reach and reduce
cost of sales. All OrCAD and selected Incisive products are
primarily marketed through these channels. With respect to
international sales, we generally market and support our
products and services through our subsidiaries.
7
Software
Licensing Arrangements
We sell software using three license types: subscription, term
and perpetual. Customers who prefer to license technology for a
specified, limited period of time will choose either a
subscription or term license, and customers who prefer to have
the right to use the technology continuously without time
restriction will choose a perpetual license. Customers who
desire rights to remix in new technology during the life of the
contract will select a subscription license, which allows them
limited access to unspecified new technology on a
when-and-if-available
basis, as opposed to a term or perpetual license which does not
include remix rights to new technology. Payment terms for
subscription and term licenses generally provide for payments to
be made in installments over the license period and payment
terms for perpetual licenses generally are net 30 days.
Our revenue recognition depends on a number of contract-specific
terms and conditions, including the license type, payment terms,
creditworthiness of the customer and other factors as more fully
described in this Annual Report under the heading Critical
Accounting Estimates under Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations. Revenue associated
with subscription licenses is recognized over multiple periods
during the license term, whereas product revenue associated with
term and perpetual licenses is generally recognized upon the
later of the effective date of the license or delivery of the
product, assuming all other criteria for revenue recognition
have been met. The amount of product revenue recognized from
backlog varies from quarter to quarter. For the past three years
the amount of product revenue recognized from backlog generally
has been approximately two-thirds of total product revenue.
Our revenue and results of operations may miss expectations due
to a shortfall in product revenue generated from current
transactions or variance in the actual mix of license types
executed in any given period, and due to other contract-specific
terms and conditions as discussed above. We are subject to
greater credit risk on subscription and term licenses, as
compared to perpetual licenses, due to the installment payment
terms generally associated with those license types. Otherwise,
the particular risks of one license type versus another type do
not vary considerably.
From time to time we sell receivables generated by our licenses
with installment payment terms to third party financing
institutions on a non-recourse or limited-recourse basis.
For a further description of our license agreements, revenue
recognition policies and results of operations, please refer to
the discussion under the heading Critical Accounting
Estimates under Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
Research
and Development
Our investment in research and development was
$494.0 million in 2007, $460.1 million in 2006 and
$390.7 million in 2005.
The primary areas of our research and development include SoC
design, the design of silicon devices in the nanometer range,
high-performance IC packaging, SiP and PCB design, system-level
modeling and verification, high-performance logic verification
technology and hardware/software co-verification. Because the
electronics industry combines rapid innovation with rapidly
increasing design and manufacturing complexity, we make
significant investments in enhancing our current products, as
well as creating new products and technologies and integrating
those products and technologies together into segmented
solutions.
Our future performance depends largely on our ability to
maintain and enhance our current product development and
commercialization, to develop, acquire or operate with new
products from third parties, and to develop solutions that meet
increasingly demanding productivity, quality, predictability and
cost requirements. In addition to our product development team,
which focuses on new and existing products, we maintain Cadence
Laboratories, an advanced research group responsible for
exploring new technologies, moving those technologies into
product development and maintaining strong industry
relationships.
Manufacturing
and Distribution
Our software production consists of configuring the
customers order, recording the product electronically or
on CD-ROM, and producing unique access keys that allow customers
to use licensed products. Software and documentation are
primarily distributed to customers by secure electronic
delivery. User manuals and other
8
documentation are generally available by secure electronic
delivery or on CD-ROM, but are occasionally supplied in hard
copy format.
Cadence performs final assembly and test of its hardware
verification, acceleration and emulation products in
San Jose, California. Subcontractors manufacture all major
subassemblies, including all individual PCBs and custom ICs, and
supply them for qualification and testing prior to their
incorporation into the assembled product.
Proprietary
Technology
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.
Many of our products include software or other intellectual
property licensed from third parties. We may have to seek new
licenses or renew existing licenses for this third party
software and other intellectual property in the future. As part
of performing design and methodology services for customers, our
design and methodology services business uses certain software
and other intellectual property licensed from third parties,
including that of our competitors.
Competition
We compete in the EDA market for products and maintenance
primarily with three companies: Synopsys, Inc., Mentor Graphics
Corporation and Magma Design Automation, Inc. 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. We generally compete on the
basis of product quality, product features, level of integration
or compatibility with other tools, price, payment terms and
maintenance offerings.
Our maintenance business flows directly from our product
business. The competitive issues associated with our maintenance
business are substantially similar to those for our product
business in that every maintenance contract is the direct result
of a product contract, and once we have entered into a product
contract, maintenance is generally purchased by the customer to
ensure access to bug fixes and service releases, as and when
they are made available, and other continued support.
Certain competitive factors in the design and methodology
services business as described herein differ from those of the
products and maintenance businesses. While we do compete with
other EDA companies in the design and methodology services
business, our principal competitors are independent design and
methodology service businesses. These companies vary greatly in
focus, geographic location, capability, cost structure and
pricing. In addition, manufacturers of electronic devices may be
reluctant to purchase services from independent vendors, such as
Cadence, because they wish to promote their own internal design
departments. We compete with these companies by focusing on the
design of complex analog and digital ICs. It is our strategy to
use design and methodology services as a differentiator to
further promote our products and maintenance businesses.
Backlog
Our backlog on December 29, 2007 was approximately
$2.0 billion, as compared to approximately
$1.9 billion on December 30, 2006. Backlog consists of
revenue to be recognized in future fiscal periods after
December 29, 2007 from a variety of license types which
generally include, but are not limited to:
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Subscription licenses for software products;
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Sale or lease of hardware;
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Maintenance contracts on hardware and software products;
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Orders for hardware and software products sold on perpetual and
term licenses on which customers have delivery dates after
December 29, 2007;
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Licenses with payments that are outside our customary
terms; and
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The undelivered portion of design and methodology services
contracts.
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The substantial majority of our backlog is generated by our
product and maintenance businesses because customer licenses
generally include both product and maintenance components.
Historically, we have not experienced significant cancellations
of our contracts with customers. However, we occasionally
reschedule the required completion dates of design and
methodology services contracts which, at times, defers revenue
recognition
9
under those contracts beyond the original expected completion
date. Changes in customer license types or payment terms also
can impact the timing of revenue recognition.
Revenue
Seasonality
Historically, orders and revenue have been lowest in our first
quarter and highest in our fourth quarter, with a material
decline between the fourth quarter of one year and the first
quarter of the next year. We expect the first quarter will
remain our lowest quarter for orders and revenues.
International
Operations
We have approximately 60 sales offices, design centers and
research and development facilities located around the world. We
consider customer sales and support requirements, the
availability of a skilled workforce, and costs and efficiencies,
among other relative benefits, when determining what operations
to locate internationally. For additional information regarding
our international operations, see the discussion under the
heading The effect of foreign exchange rate
fluctuations and other risks to our international operations may
seriously harm our financial condition in
Item 1A, Risk Factors and Note 22 to our
Consolidated Financial Statements.
Employees
As of December 29, 2007, we employed approximately 5,300
individuals, with approximately 2,000 in sales, services,
marketing, support and manufacturing activities, approximately
2,600 in product research and development and approximately 700
in management, administration and finance. None of our employees
is represented by a labor union, and we have experienced no work
stoppages. We believe that our employee relations are good.
Item 1A. Risk
Factors
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.
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 have experienced
significant downturns, often connected with, or in anticipation
of, maturing product cycles of both these industries and
their customers products and a decline in general economic
conditions. These downturns have been characterized by
diminished product demand, production overcapacity, high
inventory levels and accelerated erosion of average selling
prices. Any economic downturn in the industries we serve could
harm our business, operating results or 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 several revolutionary trends:
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Migration to nanometer design: the size of features such as
wires, transistors and contacts on ICs continuously shrink due
to the ongoing advances in 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 65 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
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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.
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The challenges of nanometer design are leading some customers to
work with older, less risky manufacturing processes. This may
reduce their need to upgrade their EDA products and design flows.
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The ability to design
system-on-a-chip
devices, or 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.
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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 design IP that can be reliably
incorporated into a customers design with Cadence IC
implementation products and services could reduce demand for our
products and services.
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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 Cadences IC implementation
products and services.
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A growing number of low-cost design and methodology services
businesses could reduce the need for some IC companies to invest
in EDA products.
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If we are unable to respond quickly and successfully to these
developments, 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 have experienced net losses
for some past periods and we may experience net losses in future
periods. 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 because a significant number of licenses
for our software products are in excess of $5.0 million.
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.
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. 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 two
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
11
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 revenue,
operating results or our business outlook for future periods
fall short of the levels expected by public market analysts or
investors, the trading price of our common stock could decline.
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 results of operations.
We may
not receive significant revenue from our current research and
development efforts for several years, if at
all.
Internally developing software products, integrating acquired
software products and integrating intellectual property into
existing platforms is expensive, and these investments often
require a long time to generate returns. Our strategy involves
significant investments in software 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 to maintain our competitive position.
However, we cannot predict that we will receive significant, if
any, revenue from these investments.
Our
failure to attract, train, motivate and retain key employees may
make us less competitive in our industries and therefore
harm our results of operations.
Our business depends on the efforts and abilities of our
employees. The high cost of training new employees, not fully
utilizing these employees, or losing trained employees to
competing employers could reduce our gross margins and harm our
business or operating results. Competition for highly skilled
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. We may also be
required to pay key employees significant base salaries and cash
bonuses, which could harm our operating results.
In addition, the NASDAQ Marketplace Rules require stockholder
approval for new equity compensation plans and significant
amendments to existing 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 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
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 be able to integrate and manage acquired products and
businesses effectively. In addition, acquisitions involve a
number of risks. If any
12
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;
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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
Cadence which may dissuade them from licensing or buying
products acquired by Cadence 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, 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.
The specific performance goal levels and amounts and timing of
employee bonuses or contingent purchase price payments vary with
each acquisition. In connection with our acquisitions completed
prior to December 29, 2007, we may be obligated to pay up
to an aggregate of $45.0 million in cash during the next
53 months if certain performance goals related to one or
more of the criteria mentioned above are achieved in full.
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 design and
methodology 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 design and
methodology 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 design and methodology 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 design and
methodology 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.,
Mentor Graphics Corporation and Magma Design Automation, Inc. 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
design and methodology 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
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. 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 design and methodology services
business holds licenses to certain software and other
intellectual property owned by third parties, including that of
our competitors. Our failure to obtain, for our use, software or
other intellectual property licenses or other intellectual
property rights 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
14
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 results of operations 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.
We may
not be able to effectively implement our restructuring
activities, and our restructuring activities may not result
in the expected benefits, which would negatively impact our
future results of operations.
The EDA market and the commercial electronics design and
methodology services industries are highly competitive and
change quickly. We have responded to increased competition and
changes in the industries in which we compete, in part, by
restructuring our operations and at times reducing the size of
our workforce. Despite our restructuring efforts in prior years,
we may not achieve all of the operating expense reductions and
improvements in operating margins and cash flows anticipated
from those restructuring activities in the periods contemplated.
Our inability to realize these benefits may result in an
inefficient business structure that could negatively impact our
results of operations.
We have reduced the workforce in certain revenue-generating
portions of our business. These reductions in staffing levels
could require us to forego certain future opportunities due to
resource limitations, which could negatively affect our
long-term revenues. We may need to implement further
restructuring activities or reductions in our workforce based on
changes in the markets and industries in which we compete or
that any future restructuring efforts will be successful.
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 may 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 two
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 financing
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 financing institutions; and
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Credit quality of customers whose installment contracts are
expected to be sold.
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If we are unable to sell certain installment contracts, our
operating cash flows would be 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 54% in 2007, 48% in 2006 and 54% in
2005. 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. Recent economic and political uncertainty and 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.
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, write-offs of
acquired in-process technology and impairment of goodwill;
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Changes in the valuation of 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 Internal Revenue Service, or
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 Internal Revenue
Service 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 an 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 be 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 that we had with foreign
subsidiaries and to our deductions for foreign trade income. The
IRS may make similar claims against our transfer pricing
arrangements and deductions for foreign trade income in future
examinations. We have filed a timely protest with the IRS and
will seek resolution of the issues through the Appeals Office of
the IRS, or 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 RAR is not a final Statutory Notice of
Deficiency but the IRS imposes interest on the proposed
deficiencies until the matters are resolved. Interest is
compounded daily at rates published
17
by the IRS, which rates are adjusted quarterly and have been
between 4% and 10% since 2001. The IRS is currently examining
our federal income tax returns for the tax years 2003 through
2005.
We adopted the provisions of the Financial Accounting Standards
Board, or FASB, Interpretation, or FIN, No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109, on
December 31, 2006, which was the first day of our 2007
fiscal year. FIN No. 48 prescribes a new recognition
threshold and measurement attribute for the financial statement
recognition and measurement of an income tax position taken or
expected to be taken in a tax return. Under
FIN No. 48, only income tax positions that meet the
more likely than not recognition threshold may be
recognized in the financial statements. An income tax position
that meets the more likely than not recognition
threshold shall initially and subsequently be measured as the
largest amount of tax benefit that is greater than 50% likely of
being realized upon effective settlement with a taxing authority
that has full knowledge of all relevant information.
Significant judgment is required in applying the principles of
FIN No. 48 and Statement of Financial Accounting
Standard, or SFAS, No. 109. The calculation of our
provision for income taxes 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 than that which 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 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 a 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 the mix of profits and losses,
our ability to use tax credits, 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 whose employees accept positions with
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.
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 December 29,
2007, we had $730.4 million of outstanding indebtedness 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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$230.4 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 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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Limit our flexibility in planning for or reacting to changes in
our business;
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Make us more vulnerable in the event of an increase in interest
rates if we must incur new debt to satisfy our obligations under
the Convertible Senior Notes or the 2023 Notes; 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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19
If we experience a decline in revenue due to any of the factors
described in this section entitled Risk Factors, or
otherwise, we could have difficulty paying amounts due on our
indebtedness. In the case of the 2023 Notes, although they
mature in 2023, the holders of the 2023 Notes may require us to
repurchase for cash all or any portion of the 2023 Notes on
August 15, 2008 for 100.25% of the principal amount,
August 15, 2013 for 100.00% of the principal amount and
August 15, 2018 for 100.00% of the principal amount. As a
result, although the 2023 Notes mature in 2023, the holders may
require us to repurchase the 2023 Notes at an additional premium
in 2008, which makes it probable that we will be required to
repurchase the 2023 Notes in 2008 if they have not first been
repurchased by us or are not otherwise converted.
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 our other indebtedness as well. 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.
In August 2007, the FASB issued Proposed FASB Staff Position, or
FSP, APB14-a, Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement), which, if issued in its present form,
would require us to recognize additional non-cash interest
expense related to our Convertible Senior Notes in our
Consolidated Income Statements. If adopted in its present form,
FSP APB 14-a
will have 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 2023 Notes or the Convertible Senior Notes will dilute
the ownership interests of existing stockholders.
The terms of the 2023 Notes and the Convertible Senior Notes
permit the holders to convert the 2023 Notes and the Convertible
Senior Notes into shares of our common stock. The 2023 Notes are
convertible into our common stock initially at a conversion
price of $15.65 per share, which would result in an aggregate of
approximately 14.7 million shares of our common stock being
issued upon conversion, subject to adjustment upon the
occurrence of specified events. 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 2023 Notes or 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.
Prior to conversion of the 2023 Notes, if the trading price of
our common stock exceeds $22.69 per share over specified
periods, basic net income per share will be diluted. We may
redeem for cash all or any part of the 2023 Notes on or after
August 15, 2008 for 100.00% of the principal amount. The
holders of the 2023 Notes may require us to repurchase for cash
all or any portion of their 2023 Notes on August 15, 2008
for 100.25% of the principal amount, on August 15, 2013 for
100.00% of the principal amount, or on August 15, 2018 for
100.00% of the principal amount, by providing to the paying
agent a written repurchase notice. The repurchase notice must be
delivered during the period commencing 30 business days prior to
the relevant repurchase date and ending on the
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close of business on the business day prior to the relevant
repurchase date. We may redeem for cash all or any part of the
2023 Notes on or after August 15, 2008 for 100.00% of the
principal amount, except for those 2023 Notes that holders have
required us to repurchase on August 15, 2008 or on other
repurchase dates, as described above.
Each $1,000 of principal of the 2023 Notes is initially
convertible into 63.879 shares of our common stock, subject
to adjustment upon the occurrence of specified events. Holders
of the 2023 Notes may convert their 2023 Notes prior to maturity
only if:
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The price of our common stock reaches $22.69 during certain
periods of time specified in the 2023 Notes;
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Specified corporate transactions occur;
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The 2023 Notes have been called for redemption; or
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The trading price of the 2023 Notes falls below a certain
threshold.
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As a result, although the 2023 Notes mature in 2023, the holders
may require us to repurchase their notes at an additional
premium in 2008, which makes it probable that we will be
required to repurchase the 2023 Notes in 2008 if they have not
first been repurchased by us or are not otherwise converted. As
of December 29, 2007, none of the conditions allowing
holders of the 2023 Notes to convert had been met.
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 prior to 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 a
certain threshold.
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On and after November 2, 2011, in the case of the 2011
Notes, and November 1, 2013, in the case of 2013 Notes,
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
December 29, 2007, none of the conditions allowing holders
of the Convertible Senior Notes to convert had been met.
Although the conversion price of the 2023 Notes is currently
$15.65 per share, the hedge and warrant transactions that we
entered into in connection with the issuance of the 2023 Notes
effectively increased the conversion price of the 2023 Notes
until various dates in 2008 to approximately $23.08 per share,
which would result in an aggregate issuance upon conversion
prior to August 15, 2008 of approximately 10.2 million
shares of our common stock. We entered into hedge and warrant
transactions to reduce the potential dilution from the
conversion of the 2023 Notes. However, we cannot guarantee that
such hedge and warrant instruments will fully mitigate the
dilution. In addition, the existence of the 2023 Notes may
encourage short selling by market participants because the
conversion of the 2023 Notes could depress the price of our
common stock.
Although the conversion price of the Convertible Senior Notes is
currently $21.15 per share, we entered into hedge and separate
warrant transactions 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 2023 Noteholders and the Convertible Senior
Noteholders under certain circumstances, we may be required to
repurchase the 2023 Notes and the Convertible Senior Notes, as
the case may be, in cash or shares of our common
stock.
Under the terms of the 2023 Notes and the Convertible Senior
Notes, we may be required to repurchase the 2023 Notes and 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 2023 Notes and the Convertible Senior
Notes, as the case may be.
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Following a fundamental change, in certain circumstances, we may
choose to pay the repurchase price of the 2023 Notes in cash,
shares of our common stock or a combination of cash and shares
of our common stock. If we choose to pay all or any part of the
repurchase price of the 2023 Notes in shares of our common
stock, this would result in dilution to the holders of our
common stock. The repurchase price for the Convertible Senior
Notes in the event of a fundamental change must be paid solely
in cash. These repayment obligations 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 and the 2023 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 and the 2023 Notes, with the objective of reducing the
potential dilutive effect of issuing our common stock upon
conversion of the Convertible Senior Notes and the 2023 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 and the
2023 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 and the 2023 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.
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.
22
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
We own land and buildings at our headquarters campus, which is
located in San Jose, California. We also own buildings in
India. As of December 29, 2007, the total square footage of
our owned buildings was approximately 750,000, with an
additional 208,000 square feet under construction at our
headquarters campus.
In January 2007, we completed the sale of certain of our land
and buildings in San Jose, California. Concurrently with
the sale, we leased back from the purchaser all available space
in the buildings. The lease agreement includes an initial term
of two years, with two options to extend the lease for six
months each. We will use the approximately 262,500 square
feet of leased space until the facility construction described
above is completed.
We lease additional facilities in the United States and various
other countries. We sublease certain of these facilities where
space is not fully utilized or has been involved in
restructuring activities.
We believe that these facilities and the facility under
construction at our headquarters campus are adequate for our
current needs and that suitable additional or substitute space
will be available as needed to accommodate any expansion of our
operations.
Item 3.
Legal Proceedings
From time to time, we are involved in various disputes and
litigation matters 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 in
accordance with SFAS No. 5, Accounting for
Contingencies. 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.
On February 8, 2007, we, Magma Design Automation, Inc., or
Magma, Altera Corp., or Altera, and Mentor Graphics Corp., or
Mentor, filed a complaint in the United States District Court
for the Northern District of California against an individual,
Narpat Bhandari, or Bhandari, and Vanguard Systems, Inc., or
Vanguard. The complaint sought a declaratory judgment that
U.S. Patent No. 5,663,900, or the 900 Patent,
which discloses an electronic simulation and emulation system
and is allegedly owned by Bhandari and Vanguard, is not
infringed and is invalid and unenforceable. The Complaint
further sought a declaratory judgment that LSI Logic
Corporation, or LSI, has an ownership interest in the 900
Patent that precludes Bhandari and Vanguard from asserting the
patent without first joining LSI. In March 2007, Cadence, Magma,
Altera and Mentor amended the complaint to further plead
non-infringement on the basis of obtaining a license to the
900 Patent from its co-owner, LSI. In April 2007, Bhandari
and Vanguard answered the amended complaint, asserting
counterclaims alleging that certain products of ours and the
other plaintiffs infringed the 900 Patent. In a case
management conference held on May 21, 2007, the court
granted the request of us, Magma, Altera and Mentor to bifurcate
the case and stay all issues except for the question of
LSIs ownership interest in the 900 Patent. We,
Magma, Altera and Mentor filed a Motion for Summary Judgment
that LSI was a joint-owner and that the license from LSI
warranted dismissal of Bhandari and Vanguards claim, which
the court granted in favor of us, Magma, Altera and Mentor. On
December 4, 2007, the court issued an order entering
judgment in favor of us, Magma, Altera and Mentor and against
Bhandari and Vanguard, thus bringing this matter to a close.
On May 30, 2007, Ahmed Higazi, a former Cadence employee,
filed suit against us in the United States District Court for
the Northern District of California alleging that we improperly
classified him and a class of other Cadence information
technology employees as exempt from overtime pay. The suit
alleges claims for unpaid overtime under the federal Fair Labor
Standards Act and California law, waiting-time penalties under
the California Labor Code, failure to provide proper earnings
statements under California law, failure to provide meal periods
and rest breaks as required by California law, unfair business
practices under California Business & Professions Code
section 17200, and
23
unpaid 401(k) contributions in violation of the Employee
Retirement Income Security Act, or ERISA. On June 20, 2007,
we answered plaintiffs complaint, denying its material
allegations and raising a number of affirmative defenses, and on
December 19, 2007, we filed an amended answer. A period of
discovery conducted by both sides then ensued, followed, in
January 2008, by a private mediation of the case. At the
mediation, the parties were successful in resolving their
respective differences, and have entered into a settlement
agreement without contesting the merits of the claims or
admitting liability. The parties are in the process of
preparing the various papers for court approval of the
settlement. Final approval is not expected to occur until the
third quarter of 2008.
While the outcome of these disputes and 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.
Item 4.
Submission of Matters to a Vote of Security
Holders
None.
Executive
Officers of the Registrant
The executive officers of Cadence are as follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Positions and Offices
|
|
Michael J. Fister
|
|
|
53
|
|
|
President, Chief Executive Officer and Director
|
Kevin Bushby
|
|
|
52
|
|
|
Executive Vice President, Worldwide Field Operations
|
James S. Miller, Jr.
|
|
|
45
|
|
|
Executive Vice President, Products and Technologies Organization
|
William Porter
|
|
|
53
|
|
|
Executive Vice President and Chief Financial Officer
|
R.L. Smith McKeithen
|
|
|
64
|
|
|
Senior Vice President, General Counsel and Secretary
|
Executive officers are appointed by the Board of Directors and
serve at the discretion of the Board.
MICHAEL J. FISTER has served as President and Chief Executive
Officer of Cadence since May 2004. Mr. Fister has been a
member of the Cadence Board of Directors since July 2004. Prior
to joining Cadence, from 1987 to 2004, Mr. Fister held
several positions with Intel Corporation, most recently as
Senior Vice President and General Manager for the Enterprise
Platforms Group. Mr. Fister is a director of Autodesk, Inc.
KEVIN BUSHBY has served as Executive Vice President, Worldwide
Field Operations of Cadence since 2001. From 1995 to 2001,
Mr. Bushby served as Vice President and General Manager,
European Operations of Cadence. Prior to joining Cadence, from
1990 to 1995, Mr. Bushby held several positions with Unisys
Corporation, most recently as Vice President Sales and
Marketing, Client Server Systems Division.
JAMES S. MILLER, JR. has served as Executive Vice President,
Products and Technologies Organization of Cadence since February
2006. From 2004 to 2006, Mr. Miller served as Senior Vice
President, Development of Cadence. Prior to joining Cadence,
Mr. Miller was at Intel Corporation from 2003 to 2004,
where he was most recently Enterprise Platform Design Manager
for both a multiprocessor platform and server memory technology
for the Enterprise Products Group. From 1999 to 2002,
Mr. Miller was Vice President of Silicon Development at
Silicon Spice, and later Technical Director with Broadcom
Corporation following its acquisition of Silicon Spice. From
1986 to 1998, Mr. Miller was at Intel where he held a
number of leadership roles, including management of the server
and workstation chipset organization and the
Itanium®
processor and
Pentium®
II processor organizations.
WILLIAM PORTER has served as Executive Vice President and Chief
Financial Officer of Cadence since February 2006. From 1999 to
2006, Mr. Porter served as Senior Vice President and Chief
Financial Officer of Cadence. From 1994 to 1999, Mr. Porter
served as Vice President, Corporate Controller and Assistant
Secretary of Cadence. Prior to joining Cadence, Mr. Porter
served as Technical Accounting and Reporting Manager and as
Controller of Cupertino Operations with Apple Computer, Inc.
R.L. SMITH MCKEITHEN has served as Senior Vice President,
General Counsel and Secretary of Cadence since 1998. From 1996
to 1998, Mr. McKeithen served as Vice President, General
Counsel and Secretary of Cadence. Prior to joining Cadence, from
1994 to 1996, Mr. McKeithen served as Vice President,
General Counsel and Secretary of Strategic Mapping, Inc., a
software company. From 1988 to 1994, Mr. McKeithen served
as Vice President, General Counsel and Secretary of Silicon
Graphics, Inc.
24
PART II.
Item 5.
Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the NASDAQ Global Select Market
under the symbol CDNS. We have never declared or paid any cash
dividends on our common stock in the past, and we do not plan to
pay cash dividends in the foreseeable future. As of
February 2, 2008, we had approximately 1,054 registered
stockholders and approximately 61,307 beneficial owners of our
common stock.
The following table sets forth the high and low sales prices for
Cadence common stock for each fiscal quarter in the two-year
period ended December 29, 2007:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
21.23
|
|
|
$
|
17.65
|
|
Second Quarter
|
|
|
24.90
|
|
|
|
20.94
|
|
Third Quarter
|
|
|
22.99
|
|
|
|
19.53
|
|
Fourth Quarter
|
|
|
22.45
|
|
|
|
15.96
|
|
2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
18.56
|
|
|
$
|
16.33
|
|
Second Quarter
|
|
|
19.65
|
|
|
|
16.33
|
|
Third Quarter
|
|
|
17.52
|
|
|
|
14.93
|
|
Fourth Quarter
|
|
|
18.99
|
|
|
|
16.70
|
|
25
The graph below matches Cadence Design Systems, Inc.s
cumulative
5-year total
shareholder return on common stock with the cumulative total
returns of the S&P 500 index, the S&P Information
Technology index, and the NASDAQ Composite index. The graph
assumes that the value of the investment in our common stock,
and in each index (including reinvestment of dividends) was $100
on December 28, 2002 and tracks it through
December 29, 2007.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among
Cadence Design Systems, Inc., The S&P 500 Index,
The NASDAQ Composite Index And The S&P Information
Technology Index
* $100
invested on 12/28/02 in stock or on 12/31/02 in index-including
reinvestment of dividends.
Indexes calculated on month-end basis.
Copyright
©
2007, Standard & Poors, a division of The
McGraw-Hill Companies, Inc. All rights reserved.
www.researchdatagroup.com/S&P.htm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/28/02
|
|
|
1/3/04
|
|
|
1/1/05
|
|
|
12/31/05
|
|
|
12/30/06
|
|
|
12/29/07
|
|
|
|
|
|
|
Cadence Design Systems, Inc.
|
|
|
100.00
|
|
|
|
149.92
|
|
|
|
113.38
|
|
|
|
138.92
|
|
|
|
147.04
|
|
|
|
139.82
|
|
S & P 500
|
|
|
100.00
|
|
|
|
128.68
|
|
|
|
142.69
|
|
|
|
149.70
|
|
|
|
173.34
|
|
|
|
182.87
|
|
NASDAQ Composite
|
|
|
100.00
|
|
|
|
149.75
|
|
|
|
164.64
|
|
|
|
168.60
|
|
|
|
187.83
|
|
|
|
205.22
|
|
S & P Information Technology
|
|
|
100.00
|
|
|
|
147.23
|
|
|
|
150.99
|
|
|
|
152.49
|
|
|
|
165.32
|
|
|
|
192.28
|
|
The stock price performance included in this graph is not
necessarily indicative of future stock price performance
26
ISSUER
PURCHASES OF EQUITY SECURITIES
In December 2006, our Board of Directors authorized a program to
repurchase shares of our common stock with a value of up to
$500.0 million in the aggregate. In February 2008, our
Board of Directors authorized a new program to repurchase shares
of our common stock in the open market with a value of up to
$500.0 million in the aggregate. The following table sets
forth the repurchases we made during the three months ended
December 29, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Dollar
|
|
|
|
|
|
|
|
|
Value of Shares that
|
|
|
|
|
|
|
Total Number of
|
|
May Yet
|
|
|
|
|
|
|
Shares Purchased
|
|
Be Purchased Under
|
|
|
Total Number
|
|
Average
|
|
as Part of
|
|
Publicly Announced
|
|
|
of Shares
|
|
Price Paid
|
|
Publicly Announced
|
|
Plans or Programs *
|
Period
|
|
Purchased *
|
|
Per Share
|
|
Plans or Programs
|
|
(In millions)
|
|
September 30, 2007 November 3, 2007
|
|
|
615,621
|
|
$
|
19.41
|
|
|
500,000
|
|
$
|
145.8
|
November 4, 2007 December 1, 2007
|
|
|
1,047,957
|
|
$
|
17.40
|
|
|
1,000,000
|
|
$
|
128.3
|
December 2, 2007 December 29, 2007
|
|
|
249,949
|
|
$
|
17.16
|
|
|
----
|
|
$
|
128.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,913,527
|
|
$
|
18.01
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Shares surrendered to pay withholding taxes due upon vesting of
restricted stock are included in total number of shares
purchased, but do not reduce the dollar value that may yet be
purchased under our publicly announced repurchase programs.
|
27
|
|
Item 6.
|
Selected
Financial Data Unaudited
|
The following selected consolidated financial data should be
read in conjunction with our Consolidated Financial Statements
and the Notes thereto and the information contained in
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations. Historical
results are not necessarily indicative of future results. The
notes below the table are provided for comparability purposes
due to adoptions of recently issued accounting pronouncements on
a prospective basis from the date of adoption.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five fiscal years ended December 29, 2007
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
2003
|
|
|
|
(In millions, except per share amounts)
|
|
|
Revenue
|
|
$
|
1,615.0
|
|
$
|
1,483.9
|
|
$
|
1,329.2
|
|
$
|
1,197.5
|
|
|
$
|
1,119.5
|
|
Income (loss) from operations *
|
|
|
317.9
|
|
|
224.6
|
|
|
118.8
|
|
|
104.1
|
|
|
|
(21.5
|
)
|
Other income (expense), net
|
|
|
58.5
|
|
|
70.4
|
|
|
15.1
|
|
|
(11.5
|
)
|
|
|
(4.0
|
)
|
Net income (loss)
*u
|
|
|
296.3
|
|
|
142.6
|
|
|
49.3
|
|
|
74.5
|
|
|
|
(17.6
|
)
|
Net income (loss) per share assuming dilution
*u
|
|
|
1.01
|
|
|
0.46
|
|
|
0.16
|
|
|
0.25
|
|
|
|
(0.07
|
)
|
Total assets
u
|
|
|
3,871.2
|
|
|
3,442.8
|
|
|
3,401.3
|
|
|
2,989.8
|
|
|
|
2,817.9
|
|
Convertible notes
|
|
|
730.4
|
|
|
730.4
|
|
|
420.0
|
|
|
420.0
|
|
|
|
420.0
|
|
Other long-term debt
|
|
|
----
|
|
|
----
|
|
|
128.0
|
|
|
----
|
|
|
|
0.1
|
|
Stockholders equity
u
|
|
|
2,080.1
|
|
|
1,699.3
|
|
|
1,844.7
|
|
|
1,700.0
|
|
|
|
1,572.3
|
|
|
|
|
|
*
|
We adopted SFAS No. 123R, Share-Based
Payment on January 1, 2006 using the modified
prospective transition method. Using the modified prospective
transition method, we began recognizing compensation expense for
equity-based awards granted on or after January 1, 2006 and
unvested awards granted prior to January 1, 2006.
|
|
|
|
|
u
|
We adopted the provisions of FIN No. 48 on
December 31, 2006, which was the first day of our 2007
fiscal year. FIN No. 48 prescribes a new recognition
threshold and measurement attribute for the financial statement
recognition and measurement of an income tax position taken or
expected to be taken in a tax return. The cumulative effect of
applying the provisions of FIN No. 48 have been
reported as an adjustment to our opening balance of retained
earnings or other appropriate components of equity or net assets
in our Consolidated Balance Sheet as of the beginning of fiscal
year 2007.
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included
elsewhere in this Annual Report on
Form 10-K.
Certain of such statements, including, but not limited to,
statements regarding the extent and timing of future revenues
and expenses and customer demand, statements regarding the
deployment of our products, statements regarding our reliance on
third parties and other statements using words such as
anticipates, believes,
could, estimates, expects,
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 Competition,
Proprietary Technology, Risk Factors,
Results of Operations, Disclosures About
Market Risk and Liquidity and Capital
Resources sections contained in this Annual Report and the
risks discussed in our other 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 Annual Report.
All subsequent written or spoken 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
Annual Report are made only as of the date of this Annual
Report. We do not intend, and undertake no obligation, to update
these forward-looking statements.
28
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 design, methodology and education services
throughout the world to help manage and accelerate electronics
product development processes. 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.
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 Incisive functional verification, Encounter digital IC
design, Virtuoso custom design and Allegro system interconnect
design platforms. In addition, we augment these platform product
offerings with a comprehensive set of DFM products that service
both the digital and custom IC design flows. These four
platforms, together with our DFM products, comprise our primary
product lines.
Digital implementation was the fastest growing product group in
2007 in terms of revenue, driven by the focus on complex chips,
advanced nodes and low power. Design challenges at the 65
nanometer and 45 nanometer process nodes drove upgrades in the
digital, custom and DFM product groups. Also during 2007, the
Allegro system interconnect design platform had a complete
technology update and the custom simulation business had a
significant product update.
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 more fully below
under the heading Results of Operations below.
Critical
Accounting Estimates
In preparing our 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
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. We believe that the assumptions, judgments
and estimates involved in the accounting for revenue
recognition, accounting for income taxes and valuation of
stock-based awards have the greatest potential impact on our
Consolidated Financial Statements; therefore, we consider these
to be our critical accounting estimates. Historically, our
assumptions, judgments and estimates relative to our critical
accounting estimates have not differed materially from actual
results. For further information on our significant accounting
policies, see Note 2 to our Consolidated Financial
Statements.
Revenue
recognition
We apply the provisions of Statement of Position, or SOP,
97-2,
Software Revenue Recognition, as amended by
SOP 98-9,
Modification of
SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions, to all software licensing transactions and
to all product revenue transactions where the software is not
incidental. We also apply the provisions of
SFAS No. 13, Accounting for Leases, to all
hardware lease transactions. We recognize revenue when
persuasive evidence of an arrangement exists, the product has
been delivered, the fee is fixed or determinable, collection of
the resulting receivable is probable, and vendor-specific
objective evidence of fair value, or VSOE, exists.
We license software using three different license types:
|
|
|
|
|
Subscription licenses;
|
|
|
Term licenses; and
|
|
|
Perpetual licenses.
|
For many of our term and subscription license arrangements, we
use our proprietary internet-based delivery mechanism,
eDA-on-tap,
to facilitate the delivery of our software products. To maximize
the efficiency of this
29
delivery mechanism, we created what we refer to as eDA
Cards, of which there are two types. Subscription license
customers may purchase what we refer to as an eDA Platinum
Card, which provides the customer access to and use of all
software products delivered at the outset of the arrangement and
the ability to use additional unspecified software products that
may become commercially available during the term of the
arrangement. Term license customers may purchase what we refer
to as an eDA Gold Card, which provides the customer
access to and use of all software products delivered at the
outset of the arrangement. Overall, the eDA Cards provide
greater flexibility for our customers in how and when they
deploy and use our software products.
Subscription licenses Our subscription
license arrangements offer our customers the right to:
|
|
|
|
|
Access and use all software products delivered at the outset of
an arrangement throughout the entire term of the arrangement,
generally two to four years, with no rights to return;
|
|
|
Use unspecified additional software products that become
commercially available during the term of the
arrangement; and
|
|
|
Remix among the software products delivered at the outset of the
arrangement, as well as the right to remix into other
unspecified additional software products that may become
available during the term of the arrangement, so long as the
cumulative value of all products in use does not exceed the
total license fee determined at the outset of the arrangement.
These remix rights may be exercisable multiple times during the
term of the arrangement. The right to remix all software
products delivered pursuant to the license agreement is not
considered an exchange or return of software because all
software products have been delivered and the customer has the
continuing right to use them.
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Customers that purchase an eDA Platinum Card have the ability
during the term of the arrangement to use software products
delivered at the outset of the arrangement, and to use other
unspecified additional software products that may become
commercially available during the term of the arrangement, until
the fees have been depleted.
In general, revenue associated with subscription licenses is
recognized ratably over the term of the license commencing upon
the later of the effective date of the arrangement or delivery
of the software product. Subscription license revenue is
allocated to product and maintenance revenue. The allocation to
maintenance revenue is based on vendor specific objective
evidence, or VSOE, of fair value of the undelivered maintenance
that was established in connection with the sale of our term
licenses.
In the event that a subscription license arrangement is
terminated by mutual agreement and a new term license
arrangement is entered into either concurrently with or
subsequent to the termination of the subscription license
arrangement, the revenue associated with the new term license
arrangement is recognized upon the later of the effective date
of the arrangement or delivery of the software product, assuming
all other criteria in
SOP 97-2
have been met.
Term licenses Our term license arrangements
offer our customers the right to:
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Access and use all software products delivered at the outset of
an arrangement throughout the entire term of the arrangement,
generally two to four years, with no rights to return; and
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Remix among the software products delivered at the outset of the
arrangement, so long as the cumulative value of all products in
use does not exceed the total license fee determined at the
outset of the arrangement. These remix rights may be exercisable
multiple times during the term of the arrangement. The right to
remix all software products delivered pursuant to the license
agreement is not considered an exchange or return of software
because all software products have been delivered and the
customer has the continuing right to use them.
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Customers that purchase an eDA Gold Card have the ability during
the term of the arrangement to use software products delivered
at the outset of the arrangement until the fees relating to the
arrangement have been depleted.
In general, revenue associated with term licenses is recognized
upon the later of the effective date of the arrangement or
delivery of the software product.
Perpetual licenses Our perpetual licenses
consist of software licensed on a perpetual basis with no right
to return or exchange the licensed software. In general, revenue
associated with perpetual licenses is recognized upon the later
of the effective date of the license or delivery of the licensed
product.
30
Persuasive evidence of an arrangement
Generally, we use a contract signed by the customer as evidence
of an arrangement for subscription and term licenses and
hardware leases. If a contract signed by the customer does not
exist, we have historically used a purchase order as evidence of
an arrangement for perpetual licenses, hardware sales,
maintenance renewals and small fixed-price service projects,
such as training classes and small methodology service
engagements of approximately $10,000 or less. For all other
service engagements, we use a signed professional services
agreement and a statement of work to evidence an arrangement. In
cases where both a signed contract and a purchase order exist,
we consider the signed contract to be the most persuasive
evidence of the arrangement. Sales through our distributors are
evidenced by a master agreement governing the relationship,
together with binding purchase orders from the distributor on a
transaction-by-transaction
basis.
Product delivery Software and the
corresponding access keys are generally delivered to customers
electronically. Electronic delivery occurs when we provide the
customer access to the software. Occasionally, we will deliver
the software on a compact disc with standard transfer terms of
free-on-board,
or F.O.B., shipping point. Our software license agreements
generally do not contain conditions for acceptance. With respect
to hardware, delivery of an entire system is deemed to occur
upon its successful installation. For certain hardware products,
installation is the responsibility of the customer, as the
system is fully functional at the time of shipment. For these
products, delivery is deemed to be complete when the products
are shipped with freight terms of F.O.B. shipping point.
For customers who purchase eDA Gold or eDA Platinum Cards,
delivery occurs when the customer has been provided with access
codes that allow the customer to download the software pursuant
to the terms of the software license agreement.
Fee is fixed or determinable We assess
whether a fee is fixed or determinable at the outset of the
arrangement, primarily based on the payment terms associated
with the transaction. We have established a history of
collecting under the original contract without providing
concessions on payments, products or services. For our
installment contracts that do not include a substantial up front
payment, we only consider that a fee is fixed or determinable if
the arrangement has payment periods that are equal to or less
than the term of the licenses and the payments are collected in
equal or nearly equal installments, when evaluated over the
entire term of the arrangement. We have a history of collecting
receivables under installment contracts of up to five years.
Significant judgment is involved in assessing whether a fee is
fixed or determinable. We must also make these judgments when
assessing whether a contract amendment to a term arrangement
(primarily in the context of a license extension or renewal)
constitutes a concession. Our experience has been that we are
able to determine whether a fee is fixed or determinable for
term licenses. While we do not expect that experience to change,
if we no longer were to have a history of collecting under the
original contract without providing concessions on term
licenses, revenue from term licenses would be required to be
recognized when payments under the installment contract become
due and payable. Such a change could have a material impact on
our results of operations.
Collection is probable We assess the
probability of collecting from each customer at the outset of
the arrangement based on a number of factors, including the
customers payment history and its current
creditworthiness. We have concluded that collection is not
probable for license arrangements executed with customers in
certain countries. If in our judgment collection of a fee is not
probable, we defer the revenue until the uncertainty is removed,
which generally means revenue is recognized upon receipt of cash
payment. Our experience has been that we are able to estimate
whether collection is probable. While we do not expect that
experience to change, if we were to determine that collection is
not probable for any license arrangement, particularly those
with installment payment terms, revenue from such license would
be recognized generally upon the receipt of cash payment. Such a
change could have a material impact on our results of operations.
Vendor-specific objective evidence of fair
value Our VSOE for certain product elements of
an arrangement is based upon the pricing in comparable
transactions when the element is sold separately. VSOE for
maintenance is generally based upon the customers stated
annual renewal rates. VSOE for services is generally based on
the price charged when the services are sold separately. For
multiple element arrangements, VSOE must exist to allocate the
total fee among all delivered and undelivered elements of a term
or perpetual license arrangement. If VSOE does not exist for all
elements to support the allocation of the total fee among all
delivered and undelivered elements of the arrangement, revenue
is deferred until such evidence does exist for the undelivered
elements, or until all elements are delivered, whichever is
earlier. If VSOE of all undelivered elements exists but VSOE
does not exist for one or
31
more delivered elements, revenue is recognized using the
residual method. Under the residual method, the VSOE of the
undelivered elements is deferred, and the remaining portion of
the arrangement fee is recognized as revenue as the elements are
delivered. Our experience has been that we are able to determine
VSOE for maintenance and time-based services, but not for
product.
Finance fee revenue Finance fees result from
discounting to present value the product revenue derived from
our installment contracts in which the payment terms extend
beyond one year from the effective date of the contract. Finance
fees are recognized using a method that approximates the
effective interest method over the relevant license term and are
classified as product revenue. Finance fee revenue represented
approximately 2% of total revenue for each of the years ended
December 29, 2007, December 30, 2006 and
December 31, 2005. Upon the sale of an installment
contract, we recognize the remaining finance fee revenue
associated with the installment contract.
Services revenue Services revenue consists
primarily of revenue received for performing design and
methodology services. These services are not related to the
functionality of the products licensed. Revenue from service
contracts is recognized either on the time and materials method,
as work is performed, or on the percentage-of-completion method.
For contracts with fixed or not-to-exceed fees, we estimate on a
monthly basis the percentage-of-completion, which is based on
the completion of milestones relating to the arrangement. We
have a history of accurately estimating project status and the
costs necessary to complete projects. A number of internal and
external factors can affect our estimates, including labor
rates, utilization and efficiency variances and specification
and testing requirement changes. If different conditions were to
prevail such that accurate estimates could not be made, then the
use of the completed contract method would be required and the
recognition of all revenue and costs would be deferred until the
project was completed. Such a change could have a material
impact on our results of operations.
Accounting
for income taxes
We provide for the effect of income taxes in our Consolidated
Financial Statements in accordance with SFAS No. 109,
Accounting for Income Taxes and FIN No. 48.
Under SFAS No. 109, income tax expense or benefit is
recognized for the amount of taxes payable or refundable for the
current year, and for deferred tax assets and liabilities for
the tax consequences of events that have been recognized in an
entitys financial statements or tax returns. We must make
significant assumptions, judgments and estimates to determine
our current provision for income taxes, our deferred tax assets
and liabilities and any valuation allowance to be recorded
against our deferred tax assets. Our judgments, assumptions and
estimates relating to the current provision for income taxes
include the geographic mix and amount of income, our
interpretation of current tax laws, and possible outcomes of
current and future audits conducted by foreign and domestic tax
authorities. Our judgments also include anticipating the tax
positions we will take on tax returns prior to actually
preparing and filing the tax returns. Changes in our business,
tax laws or our interpretation of tax laws, and developments in
current and future tax audits, could significantly impact the
amounts provided for income taxes in our results of operations,
financial position or cash flows. Our assumptions, judgments and
estimates relating to the value of our net deferred tax assets
take into account predictions of the amount and category of
future taxable income from various sources, including tax
planning strategies that would, if necessary, be implemented to
prevent a loss carryforward or tax credit carryforward from
expiring unused. Actual operating results or other events that
cause us to change our expectations of the amount and category
of income in future years could render our current assumptions,
judgments and estimates of recoverable net deferred taxes
inaccurate, thus materially affecting our consolidated financial
position or results of operations.
Under FIN No. 48, we may only recognize an income tax
position in our financial statements that we judge is more
likely than not to be sustained solely on its technical
merits in a tax audit including resolution of any related
appeals or litigation processes. To make this judgment, we must
interpret the application of complex and sometimes ambiguous tax
laws, regulations, and practices. If an income tax position
meets the more likely than not recognition
threshold, then we must measure the amount of the tax benefit to
be recognized by determining the largest amount of tax benefit
that has a greater than a 50% likelihood of being realized upon
effective settlement with a taxing authority that has full
knowledge of all of the relevant facts. It is inherently
difficult and subjective to estimate such amounts, as this
requires us to determine the probability of various possible
settlement outcomes. To determine if a tax position is
effectively settled, we must also estimate the likelihood that a
taxing authority would review a tax position after a tax
examination had otherwise been completed. We must also determine
when it is
32
reasonably possible that the amount of unrecognized tax benefits
will significantly increase or decrease in the 12 months
after each reporting date. These judgments are difficult because
a taxing authority may change its behavior as a result of our
disclosures in our financial statements that are based on the
requirements of FIN No. 48. We must re-evaluate our
income tax positions on a quarterly basis to consider factors
such as changes in facts or circumstances, changes in tax law,
effectively settled issues under audit, and new audit activity.
Such a change in recognition or measurement would result in
recognition of a tax benefit or an additional charge to the tax
provision.
Valuation
of stock-based awards
We account for stock-based compensation in accordance with the
fair value recognition provisions of SFAS No. 123R,
Share-Based Payment. Under SFAS No. 123R,
stock-based compensation expense is measured at the grant date
based on the value of the award and is recognized as expense
over the vesting period. Determining the fair value of
stock-based awards at the grant date requires judgment,
including estimating the following:
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Expected volatility of our stock;
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Expected term of stock options;
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Risk-free interest rate for the period;
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Expected dividends, if any; and
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Expected forfeitures.
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The computation of the expected volatility assumption used in
the Black-Scholes pricing model for option grants is based on
implied volatility calculated using the volatility of publicly
traded options for our common stock. We use this approach to
determine volatility because:
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Options for our common stock are actively traded;
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The market prices of both the traded options and underlying
shares are measured at a similar point in time to each other and
on a date reasonably close to the grant date of the employee
stock options;
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The traded options have exercise prices that are both
near-the-money and close to the exercise price of the employee
stock options; and
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The remaining maturities of the traded options on which the
estimate is based are at least one year.
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When establishing the expected life assumption, we review annual
historical employee exercise behavior with respect to option
grants having similar vesting periods. In addition, judgment is
required in estimating the amount of stock-based awards that we
expect to be forfeited. We calculate a separate expected
forfeiture rate for both stock options and restricted stock
issuances based on historical trends. The valuation of all
options and the expected forfeiture rates for options and
restricted stock are calculated based on one employee pool as
there is no significant difference in exercise behavior between
classes of employees. Of the $101.4 million of stock-based
compensation expense recorded during 2007, we used the current
year valuation assumptions described above for
$17.8 million of our 2007 stock-based compensation expense
for options granted during 2007, and we used prior year
valuation assumptions for $31.2 million of our 2007
stock-based compensation expense for options granted prior to
2007. In addition, we expensed $42.8 million in 2007
related to restricted stock and $9.6 million related to the
performance-based bonus plan described below.
Judgment is also required to estimate the attainment of certain
predetermined performance goals for a performance-based bonus
plan under which payments may be made in our common stock. Each
period, we estimate the most likely outcome of such performance
goals and recognize 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.
If actual results differ significantly from these estimates,
stock-based compensation expense and our results of operations
could be materially affected.
Results
of Operations
We primarily generate revenue from licensing our EDA software,
selling or leasing our hardware technology, providing
maintenance for our software and hardware and providing design
and methodology services. We
33
principally utilize three license types: subscription, term and
perpetual. The different license types provide a customer with
different terms of use for our products, such as:
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The right to access new technology;
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The duration of the license; and
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Payment terms.
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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 term 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 groups, 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 above for an additional description of license
types and timing of revenue recognition.
Although 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, the length of our
sales cycle, and the size, duration, terms, type and timing of
our:
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Contract renewals with existing customers;
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Additional sales to existing customers; and
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Sales to new customers.
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A substantial portion of our total revenue is recognized over
multiple periods. However, a significant portion of our product
revenue is recognized upon delivery of licensed software, which
generally occurs upon the later of the effective date of the
arrangement or delivery of the software product.
The value and duration of contracts, and consequently product
revenue recognized, is affected by the competitiveness of our
products. 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).
Revenue
and Revenue Mix
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 into
platforms, which are included in the various product
groups described below.
Our product groups are:
Functional Verification: Products in this group,
which include 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, which
include 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 in chip manufacture.
Custom IC Design: Our custom design products, which
include 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 in chip manufacture.
System Interconnect Design: This product group
consists of our 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.
34
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 integrated circuit has been constructed
correctly and can be manufactured successfully.
Revenue
by Year
The following table shows our revenue for the fiscal years 2007,
2006 and 2005 and the percentage change in revenue between years:
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% Change
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2007
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2006
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2005
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2007 vs. 2006
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2006 vs. 2005
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(In millions)
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Product
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$
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1,104.0
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$
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982.7
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$
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851.5
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12%
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15%
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Services
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125.8
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134.9
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126.2
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(7)%
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7%
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Maintenance
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385.2
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366.3
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351.5
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5%
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4%
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|
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|
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|
|
|
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Total revenue
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$
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1,615.0
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$
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1,483.9
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$
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1,329.2
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9%
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12%
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2007
compared to 2006
Product revenue was higher in 2007, as compared to 2006,
primarily because of increased revenue from licenses for Digital
IC Design, Functional Verification and Custom IC Design
products, partially offset by a small decrease in revenue from
licenses for DFM products. Digital IC Design was the fastest
growing platform in 2007.
2006
compared to 2005
Product revenue was higher in 2006, as compared to 2005,
primarily because of increased revenue from licenses for
Functional Verification and Custom IC Design products, partially
offset by a small decrease in revenue from licenses for DFM
products. Functional verification was the fastest growing
platform in 2006.
Revenue
by Product Group
The following table shows the percentage of product and related
maintenance revenue contributed by each of our five product
groups, and Services and other in fiscal 2007, 2006 and 2005:
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2007
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2006
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2005
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Functional Verification
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24%
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24%
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21%
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Digital IC Design
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27%
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24%
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28%
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Custom IC Design
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27%
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27%
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25%
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System Interconnect Design
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8%
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9%
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8%
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Design for Manufacturing
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6%
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7%
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9%
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Services and other
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8%
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9%
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9%
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Total
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100%
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100%
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100%
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As described under the heading Critical Accounting
Estimates above, 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 had
the customer individually licensed each specific software
solution at the onset of the arrangement.
35
Revenue
by Geography
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% Change
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2007
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2006
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2005
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2007 vs. 2006
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2006 vs. 2005
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(In millions)
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United States
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$
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741.9
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$
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765.1
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$
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613.2
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(3)%
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25%
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Other Americas
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34.8
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31.3
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20.3
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11%
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54%
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Europe, Middle East and Africa
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296.9
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284.4
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245.0
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4%
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16%
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Japan
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342.6
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247.9
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333.2
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38%
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(26)%
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Asia
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198.8
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155.2
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117.5
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28%
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32%
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Total revenue
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$
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1,615.0
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$
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1,483.9
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$
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1,329.2
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9%
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12%
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Revenue
by Geography as a Percentage of Total Revenue
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2007
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2006
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2005
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United States
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46%
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52%
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46%
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Other Americas
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2%
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2%
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2%
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Europe, Middle East and Africa
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19%
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19%
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18%
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Japan
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21%
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17%
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25%
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Asia
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12%
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10%
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9%
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The rate of revenue change varies geographically primarily due
to differences in the timing and size of term licenses in those
regions. No single customer accounted for 10% or more of total
revenue in 2007, 2006 or 2005.
Changes in foreign currency exchange rates caused our revenue to
increase by $2.9 million in 2007 compared to 2006,
primarily due to a decrease in the valuation of the United
States dollar when compared to the European Union euro and the
British pound, partially offset by an increase in the valuation
of the United States dollar when compared to the Japanese yen.
Changes in foreign currency exchange rates caused our revenue to
decrease $12.0 million in 2006 as compared to 2005
primarily due to an increase in the valuation of the United
States dollar when compared to the Japanese yen. Additional
information about revenue and other financial information by
geography can be found in Note 22 to our Consolidated
Financial Statements.
Stock-based
Compensation Expense Summary
Stock-based compensation expense is reflected throughout our
costs and expenses in fiscal 2007, 2006 and 2005 as follows:
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2007
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2006
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2005
|
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(In millions)
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Cost of product
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$
|
0.2
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$
|
0.2
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$
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----
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Cost of services
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3.9
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|
|
4.0
|
|
|
|
0.6
|
|
Cost of maintenance
|
|
|
2.5
|
|
|
|
2.5
|
|
|
|
0.4
|
|
Marketing and sales
|
|
|
22.2
|
|
|
|
23.9
|
|
|
|
9.1
|
|
Research and development
|
|
|
46.3
|
|
|
|
50.9
|
|
|
|
19.3
|
|
General and administrative
|
|
|
26.3
|
|
|
|
22.5
|
|
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
101.4
|
|
|
$
|
104.0
|
|
|
$
|
39.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Cost
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007 vs. 2006
|
|
|
2006 vs. 2005
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
60.1
|
|
|
$
|
66.8
|
|
|
$
|
79.7
|
|
|
|
(10)%
|
|
|
|
(16)%
|
|
Services
|
|
|
93.4
|
|
|
|
96.5
|
|
|
|
91.9
|
|
|
|
(3)%
|
|
|
|
5%
|
|
Maintenance
|
|
|
61.1
|
|
|
|
63.8
|
|
|
|
59.8
|
|
|
|
(4)%
|
|
|
|
7%
|
|
Cost
of Revenue as a Percentage of Related Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Product
|
|
|
5%
|
|
|
|
7%
|
|
|
|
9%
|
|
Services
|
|
|
74%
|
|
|
|
72%
|
|
|
|
73%
|
|
Maintenance
|
|
|
16%
|
|
|
|
17%
|
|
|
|
17%
|
|
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 Cadence 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 in fiscal 2007, 2006 and 2005 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Product related costs
|
|
$
|
37.8
|
|
|
$
|
33.6
|
|
|
$
|
32.7
|
|
Amortization of acquired intangibles
|
|
|
22.3
|
|
|
|
33.2
|
|
|
|
47.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of product
|
|
$
|
60.1
|
|
|
$
|
66.8
|
|
|
$
|
79.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
compared to 2006
Cost of product decreased $6.7 million in 2007 as compared
to 2006, primarily due to:
|
|
|
|
|
A decrease of $10.9 million in amortization of acquired
intangible assets because certain acquired intangible assets
became fully amortized during the period; partially offset by
|
|
|
An increase of $5.0 million in hardware costs attributable
to increased hardware sales.
|
2006
compared to 2005
Cost of product decreased $12.9 million in 2006 as compared
to 2005, primarily due to:
|
|
|
|
|
A decrease of $13.8 million in amortization of acquired
intangible assets because certain acquired intangible assets
became fully amortized during the period; partially offset by
|
|
|
An increase of $5.3 million in hardware costs attributable
to increased hardware sales.
|
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 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. There were no material
fluctuations in these components of Cost of services during
2007, as compared to 2006, or during 2006, as compared to 2005.
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. There were no
37
material fluctuations in these components of Cost of maintenance
during 2007, as compared to 2006, or during 2006, as compared to
2005.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007 vs. 2006
|
|
|
2006 vs. 2005
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
$
|
407.1
|
|
|
$
|
405.6
|
|
|
$
|
366.2
|
|
|
|
0%
|
|
|
|
11%
|
|
Research and development
|
|
|
494.0
|
|
|
|
460.1
|
|
|
|
390.7
|
|
|
|
7%
|
|
|
|
18%
|
|
General and administrative
|
|
|
169.0
|
|
|
|
143.3
|
|
|
|
129.6
|
|
|
|
18%
|
|
|
|
11%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
1,070.1
|
|
|
$
|
1,009.0
|
|
|
$
|
886.5
|
|
|
|
6%
|
|
|
|
14%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses as a Percentage of Total Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Marketing and sales
|
|
|
25%
|
|
|
|
27%
|
|
|
|
28%
|
|
Research and development
|
|
|
31%
|
|
|
|
31%
|
|
|
|
29%
|
|
General and administrative
|
|
|
10%
|
|
|
|
10%
|
|
|
|
10%
|
|
Operating
Expense Summary
2007
compared to 2006
Operating expenses increased $61.1 million in 2007, as
compared to 2006, primarily due to:
|
|
|
|
|
An increase of $55.1 million in salary, benefits and other
employee-related costs, primarily due to an increased number of
employees and increases in salary costs; and
|
|
|
An increase of $18.4 million in litigation (see discussion
under the heading Item 3 Legal
Proceedings above), legal and other professional services
costs; partially offset by
|
|
|
A decrease of $10.9 million due to the portion of the gain
on the sale of land and buildings that relates to our operating
expenses.
|
Fluctuations in foreign currency exchange rates, primarily due
to the decrease in the valuation of the United States dollar
when compared to the European Union euro, the British pound and
the Indian rupee, partially offset by the increase in the
valuation of the United States dollar when compared to the
Japanese yen, increased operating expenses by $12.6 million
in 2007, as compared to 2006.
2006
compared to 2005
Overall operating expenses increased $122.5 million in
2006, as compared to 2005, primarily due to:
|
|
|
|
|
An increase of $58.4 million in stock-based compensation
expense due to our adoption of SFAS No. 123R; and
|
|
|
An increase of $49.2 million in salary, benefits and other
employee-related costs, primarily due to an increased number of
employees and increases in bonus and commission costs, in part
due to our acquisition of Verisity Ltd., or Verisity, in the
second quarter of 2005.
|
Marketing
and Sales
2007
compared to 2006
Marketing and sales expense increased $1.5 million in 2007,
as compared to 2006, primarily due to:
|
|
|
|
|
An increase of $8.8 million in salary, benefits and other
employee-related costs, primarily due to an increased number of
employees and increases in salary costs; partially offset by
|
|
|
A decrease of $1.8 million in stock-based compensation;
|
|
|
A decrease of $2.3 million in professional services
costs; and
|
38
|
|
|
|
|
A decrease of $3.8 million due to the portion of the gain
on the sale of land and buildings that relates to Marketing and
sales expense.
|
2006
compared to 2005
Marketing and sales expense increased $39.4 million in
2006, as compared to 2005, primarily due to:
|
|
|
|
|
An increase of $14.8 million in stock-based compensation
expense due to our adoption of SFAS No. 123R;
|
|
|
An increase of $18.2 million in employee salary,
commissions, benefits and other employee-related costs due to
increased hiring of sales and technical personnel, and higher
commissions earned resulting from an increase in 2006 sales
performance; and
|
|
|
An increase of $7.8 million in marketing programs and
customer-focused conferences due to our new marketing
initiatives and increased travel to visit our customers.
|
Research
and Development
2007
compared to 2006
Research and development expense increased $33.9 million in
2007, as compared to 2006, primarily due to:
|
|
|
|
|
An increase of $38.1 million in salary, benefits and other
employee-related costs, primarily due to an increased number of
employees to support product development, our acquisitions of
Clear Shape Technologies, Inc. and Invarium, Inc., and increases
in salary costs;
|
|
|
An increase of $4.1 million in third-party development
costs; and
|
|
|
An increase of $2.9 million in computer equipment lease
costs and maintenance costs associated with third-party
software; partially offset by
|
|
|
A decrease of $4.6 million in stock-based
compensation; and
|
|
|
A decrease of $6.5 million due to the portion of the gain
on the sale of land and buildings that relates to Research and
development expense.
|
2006
compared to 2005
Research and development expense increased $69.4 million in
2006, as compared to 2005, primarily due to:
|
|
|
|
|
An increase of $31.6 million in stock-based compensation
expense due to our adoption of SFAS No. 123R;
|
|
|
An increase of $28.3 million in employee salary, benefits
and other employee-related costs due to increased staffing to
support product development and higher employee salaries;
|
|
|
An increase of $3.9 million in third-party development
costs; and
|
|
|
An increase of $3.3 million in computer equipment lease
costs and maintenance costs associated with third-party software.
|
General
and Administrative
2007
compared to 2006
General and administrative expense increased $25.7 million
in 2007, as compared to 2006, primarily due to:
|
|
|
|
|
An increase of $18.4 million in litigation (see discussion
under the heading Item 3 Legal
Proceedings above), legal and other professional services
costs;
|
|
|
An increase of $8.2 million in employee salary, benefits
and other employee-related costs;
|
|
|
An increase of $3.9 million in stock-based compensation
expense; and
|
|
|
An increase of $3.8 million in bad debt expense, reflecting
a lower amount of bad debt recoveries; partially offset by
|
|
|
A decrease of $6.5 million in losses on the sale of
installment contract receivables.
|
2006
compared to 2005
General and administrative expense increased $13.7 million
in 2006, as compared to 2005, primarily due to:
|
|
|
|
|
An increase of $12.0 million in stock-based compensation
expense due to our adoption of SFAS No. 123R; and
|
39
|
|
|
|
|
An increase of $9.6 million in losses on the sale of
installment contract receivables due to higher discount rates;
partially offset by
|
|
|
A decrease of $7.1 million in costs related to the
retirement of our Executive Chairman and former President and
Chief Executive Officer in 2005; and
|
|
|
A decrease of $3.6 million in bad debt expense.
|
Amortization
of Acquired Intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In millions)
|
|
Amortization of acquired intangibles
|
|
$
|
19.4
|
|
|
$
|
23.1
|
|
|
$
|
47.8
|
|
2007
compared to 2006
Amortization of acquired intangibles decreased $3.7 million
in 2007, as compared to 2006, primarily due to a decrease
of $8.7 million resulting from the full amortization of
certain acquired intangibles, which was partially offset by
$5.0 million resulting from intangibles acquired during
2006 and 2007.
2006
compared to 2005
Amortization of acquired intangibles decreased
$24.7 million in 2006, as compared to 2005, primarily
due to a decrease of $27.5 million resulting from the full
amortization of certain acquired intangibles, which was
partially offset by $2.8 million resulting from intangibles
acquired during 2005 and 2006.
Restructuring
and Other Charges
We initiated a separate plan of restructuring in each year from
2001 through 2005 in an effort to operate more efficiently. A
summary of Restructuring and other charges in fiscal years 2007,
2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Asset-
|
|
|
Excess
|
|
|
|
|
|
|
Benefits
|
|
|
Related
|
|
|
Facilities
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
2007
|
|
$
|
----
|
|
|
$
|
----
|
|
|
$
|
(9.7
|
)
|
|
$
|
(9.7
|
)
|
2006
|
|
|
(0.1
|
)
|
|
|
----
|
|
|
|
(0.7
|
)
|
|
|
(0.8
|
)
|
2005
|
|
|
20.4
|
|
|
|
2.4
|
|
|
|
12.5
|
|
|
|
35.3
|
|
On October 5, 2007, we completed a lease termination
agreement for a facility included in the 2001 restructuring
plan, whereby we paid $8.2 million and were released from
all future obligations related to the facility. We recorded a
credit to Restructuring and other charges of $7.1 million
during the year ended December 29, 2007, representing the
lease loss accrual related to this facility in excess of the
amount paid.
During 2005, we recorded Restructuring and other charges of
$35.3 million, which included $20.4 million of
workforce reduction costs associated primarily with our 2005
restructuring plan, and excess facility costs of
$12.5 million, which consisted primarily of changes in
lease loss estimates for facilities included in our 2001, 2002
and 2003 restructuring plans.
Each reporting period, we evaluate the adequacy of the lease
loss accrual. We adjust the lease loss accrual for changes in
real estate markets or other factors that may affect estimated
costs or sublease income. We also consider executed sublease
agreements and adjust the lease loss accrual if sublease income
under the agreement differs from initial estimates. The credits
recorded during 2007 and 2006 primarily relate to changes in
lease loss estimates.
As of December 29, 2007, our total amount accrued for
restructuring and other charges of $10.2 million consisted
solely of estimated lease losses related to the restructuring
activities initiated since 2001. This amount may be adjusted in
the future based upon changes in the assumptions used to
estimate the lease loss.
Because the restructuring charges and related benefits are
derived from managements estimates made during the
formulation of the restructurings, based on then-currently
available information, our restructuring activities may not
achieve the benefits anticipated on the timetable or at the
level contemplated. Demand for our products and
40
services and, ultimately, our future financial performance, is
difficult to predict with any degree of certainty. Accordingly,
additional actions, including further restructuring of our
operations, may be required in the future.
Write-off
of Acquired In-Process Research and Development
Upon consummation of an acquisition, we immediately charge to
expense any acquired in-process research and development that
has not yet reached technological feasibility and has no
alternative future use. The value assigned to acquired
in-process research and development is determined by identifying
research projects in areas for which technological feasibility
has not been established. The values are determined by
estimating costs to develop the acquired in-process research and
development into commercially viable products, estimating the
resulting net cash flows from such projects and discounting the
net cash flows back to their present value. The discount rates
utilized include a factor that reflects the uncertainty
surrounding successful development of the acquired in-process
research and development.
The following table summarizes our write-offs of acquired
in-process research and development charges in fiscal 2007, 2006
and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Verisity Ltd.
|
|
$
|
----
|
|
|
$
|
----
|
|
|
$
|
9.4
|
|
2006 acquisition
|
|
|
----
|
|
|
|
0.9
|
|
|
|
----
|
|
2007 acquisitions
|
|
|
2.7
|
|
|
|
----
|
|
|
|
----
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total in-process research and development
|
|
$
|
2.7
|
|
|
$
|
0.9
|
|
|
$
|
9.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes, as of December 29, 2007,
the status of in-process research and development acquired in
fiscal 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
Expenditures
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
Incurred to
|
|
|
Expenditures
|
|
|
|
|
|
|
|
|
Complete In-
|
|
|
to Complete
|
|
|
|
|
|
Expected
|
|
|
Process
|
|
|
In-Process
|
|
|
|
Discount
|
|
Commercial
|
|
|
Research and
|
|
|
Research and
|
|
|
|
Rates
|
|
Feasibility
|
|
|
Development
|
|
|
Development
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Verisity Ltd.
|
|
19% to 32%
|
|
|
December 2006
|
|
|
$
|
4.3
|
|
|
$
|
----
|
|
2006 acquisition
|
|
33%
|
|
|
January 2007
|
|
|
|
0.3
|
|
|
|
----
|
|
2007 acquisitions
|
|
19% to 21%
|
|
|
December 2008
|
|
|
|
0.7
|
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenditures
|
|
|
|
|
|
|
|
$
|
5.3
|
|
|
$
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on Extinguishment of Debt
We recorded a Loss on extinguishment of debt of
$40.8 million during the year ended December 30, 2006,
which includes a premium paid to repurchase a portion of the
2023 Notes of $38.9 million and a write-off of the related
portion of unamortized deferred costs of issuing the 2023 Notes
of $1.9 million.
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Interest expense
|
|
$
|
12.4
|
|
|
$
|
12.3
|
|
|
$
|
5.4
|
|
41
2007
compared to 2006
During 2007, the primary component of Interest expense was the
Convertible Senior Notes, which were issued in December 2006.
During 2006, the primary component of interest expense was our
Term Loan, the repayment of which was completed in March 2007.
2006
compared to 2005
Interest expense increased $6.9 million in 2006, as
compared to 2005, primarily due to the increased interest of
$6.4 million related to our Term Loan, which was entered
into on December 19, 2005 and the repayment of which was
completed in March 2007.
Other
Income, net
Other income, net, for fiscal 2007, 2006 and 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Interest income
|
|
$
|
48.1
|
|
|
$
|
39.3
|
|
|
$
|
15.6
|
|
Gains on sale of non-marketable securities
|
|
|
6.0
|
|
|
|
19.9
|
|
|
|
2.5
|
|
Gains on available-for-sale securities
|
|
|
4.4
|
|
|
|
6.7
|
|
|
|
9.2
|
|
Gains on securities in Cadences non-qualified deferred
compensation trust
|
|
|
7.6
|
|
|
|
6.4
|
|
|
|
6.6
|
|
Gains (losses) on foreign exchange
|
|
|
(2.4
|
)
|
|
|
1.9
|
|
|
|
4.5
|
|
Telos termination costs
|
|
|
----
|
|
|
|
----
|
|
|
|
(2.6
|
)
|
Telos management fees
|
|
|
----
|
|
|
|
(0.9
|
)
|
|
|
(2.4
|
)
|
Equity loss from investments
|
|
|
(3.0
|
)
|
|
|
(1.2
|
)
|
|
|
(6.5
|
)
|
Write-down of investments
|
|
|
(2.6
|
)
|
|
|
(2.5
|
)
|
|
|
(10.9
|
)
|
Other income (expense)
|
|
|
0.4
|
|
|
|
0.8
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
$
|
58.5
|
|
|
$
|
70.4
|
|
|
$
|
15.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increases in interest income in 2007, as compared to 2006,
and in 2006, as compared to 2005, were due to increases in our
Cash and cash equivalents balances as well as higher interest
rates applicable to those balances.
In January 2006, KhiMetrics, Inc., a cost method investment held
by Telos Venture Partners, a limited partnership in which we and
our 1996 Deferred Compensation Venture Investment Plan Trust are
the sole limited partners, was sold for consideration of $6.53
per share of common stock. In connection with this sale, we
received approximately $20.2 million in cash and recorded a
gain of approximately $17.1 million during the year ended
December 30, 2006. In addition, our 1996 Deferred
Compensation Venture Investment Plan Trust received
$2.9 million in cash and recorded a gain of
$2.5 million during the year ended December 30, 2006.
Under the purchase agreement, an additional 10% of the
consideration was held in escrow, which was released to us and
to the trust in January 2007. Upon receipt of these additional
proceeds, we recorded a gain of $2.6 million and our 1996
Deferred Compensation Venture Investment Plan Trust recorded a
gain of $0.4 million in the year ended December 29,
2007.
Provision
for Income Taxes
The provision for income taxes and the effective tax rates in
fiscal 2007, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions, except percentages)
|
|
|
Provision for income taxes
|
|
$
|
67.8
|
|
|
$
|
99.7
|
|
|
$
|
79.1
|
|
Effective tax rate
|
|
|
19%
|
|
|
|
41%
|
|
|
|
62%
|
|
42
2007
compared to 2006
Our effective tax rate decreased in 2007, as compared to 2006,
primarily due to the decrease in net unrecognized tax benefit of
$27.8 million as a result of the effective settlement of
certain tax matters with the IRS in December 2007 and an
increase in benefit from foreign income, which is taxed at a
lower rate than the United States federal statutory income tax
rate, of $30.6 million, resulting from the conclusion of
certain transfer pricing arrangements with a foreign subsidiary
in 2006.
We currently expect the effective tax rate for 2008 to be
approximately 33%. The increase in the expected 2008 effective
tax rate, as compared to 2007, is primarily due to the 2007
effective settlement of certain tax positions with the IRS and
the expiration of the federal research tax credits after
December 31, 2007, neither of which is expected to provide
tax benefits in 2008.
2006
compared to 2005
Our effective tax rate decreased in 2006, as compared to 2005,
primarily due to the $30.1 million of federal, state and
foreign income taxes incurred upon our 2005 repatriation of
$500.0 million of certain foreign earnings under the
American Jobs Creation Act, which increased the 2005 annual
effective tax rate by approximately 23 percentage points.
Deferred
Tax Assets and IRS Examinations
As of December 29, 2007, we had total net deferred tax
assets of approximately $250.6 million. Realization of the
deferred tax assets will depend on generating sufficient taxable
income of the appropriate character prior to the expiration of
certain net operating loss, capital loss and tax credit
carryforwards. Although realization is not assured, we believe
it is more likely than not that the net deferred tax assets will
be realized. The amount of the net deferred tax assets, however,
could be reduced or increased in the near term if actual facts,
including the estimate of future taxable income, differ from
those estimated.
The Internal Revenue Service, or IRS, and other tax authorities
regularly examine our income tax returns. In November 2003, the
IRS completed its field examination of our federal income tax
returns for the tax years 1997 through 1999 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 $143.0 million. The most significant of the
disputed adjustments for the tax years 1997 through 1999 related
to transfer pricing arrangements that we had with a foreign
subsidiary. In December 2007, the Joint Committee on Taxation of
the U.S. Congress, or the Joint Committee, approved and the
Appeals Office executed settlement agreements resulting in an
effective settlement of the transfer pricing dispute for
purposes of FIN No. 48. As a result of this effective
settlement, we recognized a tax benefit of $27.8 million in
our Consolidated Income Statement.
We did not reach a settlement with the Appeals Office of the IRS
on separate tax refund claims that would increase our tax
deductions for foreign trade income for the tax years 1997
through 1999. We continue to believe that our position is well
supported and we are currently considering our options for
further pursuing this matter.
In July 2006, the IRS completed its field examination of our
federal income tax returns for the tax years 2000 through 2002
and issued an 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 be 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 that we had with foreign
subsidiaries and to our deductions for foreign trade income. The
IRS may make similar claims against our transfer pricing
arrangements and deductions for foreign trade income in future
examinations. We have filed a timely protest with the IRS and
will seek resolution of the issues with 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 RAR is not a final Statutory Notice of
Deficiency but the IRS imposes interest on the proposed
deficiencies until the matters are resolved. Interest is
compounded daily at rates published
43
by the IRS, which rates are adjusted quarterly and have been
between 4% and 10% since 2001. The IRS is currently examining
our federal income tax returns for the tax years 2003 through
2005.
Significant judgment is required in applying the principles of
FIN No. 48 and SFAS No. 109. The calculation
of our provision for income taxes 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 than that which 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 and for the years ended
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions, except percentages)
|
|
Cash, cash equivalents and Short-term investments
|
|
$
|
1,078.1
|
|
|
$
|
958.4
|
|
|
$
|
894.6
|
|
Net working capital
|
|
|
744.1
|
|
|
|
763.9
|
|
|
|
670.5
|
|
Cash provided by operating activities
|
|
|
402.4
|
|
|
|
421.2
|
|
|
|
426.3
|
|
Cash used for investing activities
|
|
|
(108.4
|
)
|
|
|
(111.8
|
)
|
|
|
(222.7
|
)
|
Cash provided by (used for) financing activities
|
|
|
(170.1
|
)
|
|
|
(233.9
|
)
|
|
|
205.3
|
|
Cash,
cash equivalents and short-term investments
As of December 29, 2007, our principal sources of liquidity
consisted of $1,078.1 million of Cash and cash equivalents
and Short-term investments, as compared to $958.4 million
as of December 30, 2006 and $894.6 million as of
December 31, 2005. The primary sources of our cash in 2007
and 2006 were:
|
|
|
|
|
Customer payments under software licenses and from the sale or
lease of our hardware products;
|
|
|
Customer payments for design and methodology services;
|
|
|
Proceeds from the sale of receivables;
|
|
|
Proceeds from the sale of land and buildings on our
San Jose campus in 2007;
|
|
|
Proceeds from the issuance of the Convertible Senior Notes in
2006;
|
|
|
Proceeds from the separate warrant sale transactions entered
into in connection with the issuance of the Convertible Senior
Notes in 2006;
|
|
|
Proceeds from the termination of a portion of the hedge
transactions originally entered into in connection with the
issuance of our 2023 Notes in 2006;
|
|
|
Proceeds from the exercise of stock options; and
|
|
|
Common stock purchases under our employee stock purchase plans.
|
Our primary uses of cash in 2007 and 2006 consisted of:
|
|
|
|
|
Payments relating to payroll, product, services and other
operating expenses;
|
|
|
Payments of taxes;
|
|
|
Purchases of property, plant and equipment, including payments
associated with our construction of a new building on our
headquarters campus in San Jose;
|
|
|
Payments of long-term debt and repurchases of a portion of the
2023 Notes;
|
|
|
Payments made to purchase hedges in connection with our issuance
of the Convertible Senior Notes in 2006;
|
|
|
Payments made to terminate a portion of the warrant transactions
originally entered in connection with the issuance of our 2023
Notes in 2006;
|
|
|
Purchases of treasury stock; and
|
44
|
|
|
|
|
Payments related to business acquisitions, asset acquisitions
and intangible acquisitions.
|
Cash
flows from operating activities
Cash flows from operating activities are provided by net income,
adjusted for certain non-cash charges such as depreciation,
amortization and stock-based compensation, as well as changes in
the balance of certain assets and liabilities. Our cash flows
from operating activities are significantly influenced by the
payment terms set forth in our license agreements and by sales
of our receivables.
We have entered into agreements whereby we may transfer accounts
receivable to certain financing institutions on a non-recourse
or limited-recourse basis. These transfers are recorded as sales
and accounted for in accordance with SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. During 2007, we
transferred accounts receivable, net of the losses on the sale
of the receivables, totaling $215.4 million, which
approximated fair value, to financing institutions on a
non-recourse basis, as compared to $180.6 million in 2006
and $192.1 million in 2005. As a result of the credit
losses recorded by banks in the second half of 2007, a number of
banks have become less willing to purchase assets because of
capital constraints and concerns about over-exposure to the
technology sector, and we expect a reduced level of Proceeds
from the sale of receivables in 2008.
Net cash provided by operating activities of $402.4 million
for the year ended December 29, 2007 was primarily
comprised of:
|
|
|
|
|
Net income, net of non-cash related expenses, of
$533.0 million;
|
|
|
An increase in cash received for deferred revenue of
$44.8 million; and
|
|
|
An increase in Accounts payable and other accrued liabilities of
$20.4 million, primarily due to accrued severance and legal
settlement costs, net of non-cash investing activities of
$12.5 million for the purchase of acquired intangibles;
partially offset by
|
|
|
An increase in Receivables, net and Installment contract
receivables of $162.5 million, net of sales of receivables,
due to the payment terms set forth in our license
agreements; and
|
|
|
A decrease in Other long-term liabilities for the income tax
benefit of a settlement with the IRS of $27.8 million.
|
Net cash provided by operating activities of $421.2 million
for the year ended December 30, 2006 was primarily
comprised of:
|
|
|
|
|
Net income, net of non-cash related expenses, of
$427.1 million;
|
|
|
An increase in cash received for deferred revenue of
$24.4 million; and
|
|
|
A decrease in Receivables, net and Installment contract
receivables of $11.6 million, net of sales of receivables,
due to the payment terms set forth in our license agreements;
partially offset by
|
|
|
A decrease in Accounts payable and other accrued liabilities of
$51.5 million, primarily due to payments of income taxes.
|
Net cash provided by operating activities of $426.3 million
for the year ended December 31, 2005 was primarily
comprised of:
|
|
|
|
|
Net income, net of non-cash related expenses, of
$283.6 million; and
|
|
|
A decrease in Receivables, net and Installment contract
receivables of $91.4 million, net of sales of receivables,
due to the payment terms set forth in our license
agreements; and
|
|
|
An increase in cash received for deferred revenue of
$32.6 million.
|
Cash
flows from investing activities
Our primary investing activities consisted of:
|
|
|
|
|
Purchases and proceeds from the sale of property, plant and
equipment;
|
|
|
Acquisitions of businesses, assets and intangibles; and
|
|
|
Proceeds from the sale of long-term investments.
|
In January 2006, KhiMetrics, Inc., a cost method investment held
by Telos Venture Partners, a limited partnership in which we and
our 1996 Deferred Compensation Venture Investment Plan Trust are
the sole limited partners, was sold for consideration of $6.53
per share of common stock. In connection with this sale, we
received
45
approximately $20.2 million in cash and recorded a gain of
approximately $17.5 million during the year ended
December 30, 2006. In addition, our 1996 Deferred
Compensation Venture Investment Plan Trust received
$2.9 million in cash and recorded a gain of
$2.5 million during the year ended December 30, 2006.
Under the purchase agreement, an additional 10% of the
consideration was held in escrow, which was released to us and
to the trust in January 2007. Upon receipt of these additional
proceeds, we recorded a gain of $2.6 million and our 1996
Deferred Compensation Venture Investment Plan Trust recorded a
gain of $0.4 million in the year ended December 29,
2007.
2007
compared to 2006
Net cash used for investing activities decreased by
$3.3 million in 2007, as compared to 2006. The decrease was
primarily due to:
|
|
|
|
|
An increase of $46.2 million in Proceeds from the sale of
property, plant and equipment; partially offset by
|
|
|
A decrease of $19.7 million in Proceeds from the sale of
Long-term investments;
|
|
|
An increase of $14.9 million in cash paid in business
combinations and asset acquisitions, net of cash acquired, and
acquisition of intangibles; and
|
|
|
An increase of $14.2 million in Purchases of property,
plant and equipment, including payments associated with our
construction of a new building on our San Jose campus.
|
In January 2007, we completed the sale of certain land and
buildings in San Jose, California for a sales price of
$46.5 million in cash. Concurrently with the sale, we
leased back from the purchaser all available space in the
buildings. During the lease term, we are constructing an
additional building located on our San Jose, California
campus to replace the buildings we sold in this transaction. We
used $21.0 million in cash during 2007 for construction of
this new building.
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.
2006
compared to 2005
Net cash used for investing activities decreased by
$110.9 million in 2006, as compared to 2005. The decrease
was primarily due to:
|
|
|
|
|
A decrease of $180.8 million in Purchases of short-term
investments; and
|
|
|
A decrease of $231.4 million in Cash paid in business
combinations, net of cash acquired and acquisition of
intangibles; partially offset by
|
|
|
A decrease of $289.2 million in Proceeds from the sale of
short-term investments; and
|
|
|
A decrease of $33.3 million in Proceeds from the sale of
property, plant and equipment.
|
Cash
flows from financing activities
Financing cash flows during 2007 consisted primarily of the
issuance of common stock under certain employee plans and
purchases of treasury stock.
2007
compared to 2006
Net cash used for financing activities was $170.1 million
in 2007, as compared to net cash provided by financing
activities of $233.9 million in 2006. The change was
primarily due to:
|
|
|
|
|
A net decrease of $224.8 million in cash received upon
issuance of the Convertible Senior Notes, net of cash paid to
retire a portion of the 2023 Notes and the hedge and warrant
transactions described below; partially offset by
|
|
|
An increase of $98.8 million in Proceeds from the issuance
of common stock due to an increased number of stock options
exercised during 2007;
|
|
|
A decrease of $104.0 million in Principal payments on the
Term Loan; and
|
|
|
A decrease of $75.5 million in Purchases of treasury stock.
|
46
2006 compared
to 2005
Net cash used for financing activities was $233.9 million
in 2006, as compared to net cash provided by financing
activities of $205.3 million in 2005. The change was
primarily due to:
|
|
|
|
|
A net increase of $224.8 million in cash received upon
issuance of the Convertible Senior Notes, net of cash paid to
retire a portion of the 2023 Notes and the hedge and warrant
transactions described below; partially offset by
|
|
|
An increase of $131.9 million in Principal payments on the
Term Loan; and
|
|
|
An increase of $393.0 million in Purchases of treasury
stock.
|
Other
Factors Affecting Liquidity and Capital Resources
Income
Taxes
We provide for United States income taxes on the earnings of our
foreign subsidiaries unless the earnings are considered
indefinitely invested outside of the United States. As of
December 29, 2007, the cumulative amount of earnings upon
which United States income taxes have not been provided was
approximately $424.2 million. As of December 29, 2007,
the unrecognized deferred tax liability for these earnings was
approximately $139.8 million. As of December 29, 2007,
we intend to indefinitely reinvest our undistributed foreign
earnings outside of the United States.
We adopted the provisions of FIN No. 48 on
December 31, 2006, which was the first day of our 2007
fiscal year. We recognized a $59.4 million decrease in the
net liabilities for unrecognized tax benefits, which was
accounted for as an increase to the December 31, 2006
balance of retained earnings. We also recognized a
$42.6 million decrease in the net liabilities for
unrecognized tax benefits, which was accounted for as a
$35.3 million increase in the December 31, 2006
balance of Common stock and capital in excess of par value and a
$7.3 million decrease in the December 31, 2006 balance
of Goodwill.
Upon adoption of FIN No. 48, we also recognized
additional long-term income tax assets of $115.0 million
and additional long-term income tax liabilities of
$115.0 million to present the unrecognized tax benefits as
gross amounts on the Consolidated Balance Sheet. We also
decreased current income tax liabilities by $26.2 million
and increased long-term income tax liabilities by the same
amount based on our anticipation of the amount of cash payments
to be made within one year.
As of December 29, 2007, we had current income tax
liabilities related to unrecognized tax benefits of
$7.0 million. As of December 29, 2007, we had
long-term income tax liabilities related to unrecognized tax
benefits of $259.8 million. For additional information on
the income tax liabilities related to unrecognized tax benefits,
see the discussion under the heading Contractual
Obligations and Off Balance Sheet Arrangements below.
The IRS and other tax authorities regularly examine our income
tax returns. In November 2003, the IRS completed its field
examination of our federal income tax returns for the tax years
1997 through 1999 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
$143.0 million. The most significant of the disputed
adjustments for the tax years 1997 through 1999 related to
transfer pricing arrangements that we had with a foreign
subsidiary. In December 2007, the Joint Committee on Taxation of
the U.S. Congress, or the Joint Committee, approved and the
Appeals Office executed settlement agreements resulting in an
effective settlement of the transfer pricing dispute for
purposes of FIN No. 48. We expect to receive a refund
of tax and interest of approximately $3.7 million during
the first half of 2008.
In July 2006, the IRS completed its field examination of our
federal income tax returns for the tax years 2000 through 2002
and in November 2006, the IRS issued an amended RAR in which the
IRS proposed to assess an aggregate tax deficiency for the
three-year period of approximately $318.0 million. For an
additional description of the IRS tax examinations, see the
discussion under the heading Results of
Operations Income Taxes above.
We believe that the proposed IRS adjustments are inconsistent
with applicable tax laws and we are vigorously challenging these
proposed adjustments. The RAR is not a final Statutory Notice of
Deficiency but the IRS imposes interest on the proposed
deficiencies until the matters are resolved. Interest is
compounded daily at rates published by the IRS, which rates are
adjusted quarterly and have been between 4% and 10% since 2001.
47
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, the
Convertible Senior Notes, to three initial purchasers in a
private placement pursuant to Section 4(2) of the
Securities Act for resale to qualified institutional buyers
pursuant to SEC Rule 144A. We received net proceeds of
approximately $487.0 million after transaction fees of
approximately $13.0 million, including $12.0 million
of underwriting discounts. A portion of the net proceeds
totaling $228.5 million was used to purchase
$189.6 million principal amount of our Zero Coupon Zero
Yield Senior Convertible Notes Due 2023, or the 2023 Notes.
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 a
certain threshold.
|
On and after November 2, 2011, in the case of the 2011
Notes, and November 1, 2013, in the case of 2013 Notes,
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. 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,
we will, in certain cases, increase the conversion rate by an
additional amount 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 connection with which more
than 50% of our common stock is exchanged for, converted into,
acquired for or constitutes solely the right to receive,
consideration which is not at least 90% shares of common stock,
or depositary receipts representing such shares, that are:
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Listed on, or immediately after the transaction or event will be
listed on, a United States national securities exchange; or
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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.
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As of December 29, 2007, none of the conditions allowing
the holders of the Convertible Senior Notes to convert had been
met.
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 in accordance with EITF
No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a
48
Companys Own Stock. The estimated fair value of the
hedges acquired in connection with the issuance of the
Convertible Senior Notes was $98.1 million as of
December 29, 2007. Subsequent changes in the fair value of
these hedges will not be recognized 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.
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 a reduction to Stockholders equity in
accordance with EITF
No. 00-19.
The estimated fair value of the warrants sold in connection with
the issuance of the Convertible Senior Notes was
$35.7 million as of December 29, 2007. Subsequent
changes in the fair value of these warrants will not be
recognized as long as the instruments remain classified as
equity. The warrants will be included in diluted earnings per
share, or EPS, to the extent the impact is not considered
anti-dilutive.
Zero Coupon Zero Yield Senior Convertible Notes Due 2023
In August 2003, we issued $420.0 million principal amount
of our 2023 Notes to two initial purchasers in a private
placement pursuant to Section 4(2) of the Securities Act
for resale to qualified institutional buyers pursuant to SEC
Rule 144A. We received net proceeds of $406.4 million
after transaction fees of $13.6 million that were recorded
in Other long-term assets and are being amortized to interest
expense using the straight-line method over five years, which is
the duration of the first redemption period. The 2023 Notes were
issued by us at par and bear no interest. The 2023 Notes are
convertible into our common stock initially at a conversion
price of $15.65 per share, which would result in an aggregate of
26.8 million shares issued upon conversion, subject to
adjustment upon the occurrence of specified events. In
connection with the issuance of the Convertible Senior Notes in
December 2006, we repurchased $189.6 million principal
amount of the 2023 Notes, reducing the aggregate number of
shares to be issued upon conversion to 14.7 million.
We may redeem for cash all or any part of the 2023 Notes on or
after August 15, 2008 for 100.00% of the principal amount.
The holders of the 2023 Notes may require us to repurchase for
cash all or any portion of their 2023 Notes on August 15,
2008 for 100.25% of the principal amount, on August 15,
2013 for 100.00% of the principal amount or on August 15,
2018 for 100.00% of the principal amount, by providing to the
paying agent a written repurchase notice. The repurchase notice
must be delivered during the period commencing 30 business days
prior to the relevant repurchase date and ending on the close of
business on the business day prior to the relevant repurchase
date. In addition, we may redeem for cash all or any part of the
2023 Notes on or after August 15, 2008 for 100.00% of the
principal amount, except for those 2023 Notes that holders have
required us to repurchase on August 15, 2008 or on other
repurchase dates, as described above. Because the 2023 Notes can
be redeemed by the holders on August 15, 2008, the 2023
Notes are classified as a Current liability in our Consolidated
Balance Sheet as of December 29, 2007.
Each $1,000 of principal of the 2023 Notes will initially be
convertible into 63.8790 shares of our common stock,
subject to adjustment upon the occurrence of specified events.
Holders of the 2023 Notes may convert their 2023 Notes prior to
maturity only if:
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The price of our common stock reaches $22.69 during certain
periods of time specified in the 2023 Notes;
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Specified corporate transactions occur;
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The 2023 Notes have been called for redemption; or
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The trading price of the 2023 Notes falls below a certain
threshold.
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In the event of a fundamental change in our corporate ownership
or structure, the holders may require us to repurchase all or
any portion of their 2023 Notes for 100.00% of the principal
amount. Upon a fundamental change in our corporate ownership or
structure, in certain circumstances we may choose to pay the
repurchase price in cash, shares of our common stock or a
combination of cash and shares of our common stock. As of
December 29, 2007, none of the conditions allowing the
holders of the 2023 Notes to convert had been met.
In connection with the issuance of the Convertible Senior Notes
in December 2006, a portion of the proceeds were used to
purchase in the open market 2023 Notes with a principal balance
of $189.6 million for a total purchase price of
$228.5 million. In connection with this purchase, we
incurred expenses of $40.8 million for the early
49
extinguishment of debt. The loss on early extinguishment of debt
included the call premium on the purchased 2023 Notes and the
write-off of a portion of the unamortized deferred debt issuance
costs.
Concurrently with the issuance of the 2023 Notes, we entered
into hedge transactions with a financial institution whereby we
originally acquired options to purchase up to 26.8 million
shares of our common stock at a price of $15.65 per share. These
options expire on August 15, 2008 and must be settled in
net shares. The cost of the hedge transactions to us was
$134.6 million. In connection with the purchase of a
portion of the 2023 Notes in December 2006, we also sold
12.1 million of the hedges that were originally purchased
in connection with the 2023 Notes and received proceeds of
$55.9 million.
In addition, we sold warrants for our common stock to a
financial institution for the purchase of up to
26.8 million shares of our common stock at a price of
$23.08 per share. The warrants expire on various dates from
February 2008 through May 2008 and must be settled in net
shares. We received $56.4 million in cash proceeds from the
sale of these warrants. In connection with the purchase of a
portion of the 2023 Notes in December 2006, we also purchased
12.1 million of the warrants for our common stock that were
originally issued in connection with the 2023 Notes at a cost of
$10.2 million. The remaining outstanding warrants will be
included in diluted EPS to the extent the impact is not
considered anti-dilutive.
As of December 29, 2007, the estimated fair value of the
remaining hedges acquired in connection with the issuance of the
2023 Notes was $39.0 million and the estimated fair value
of the remaining warrants sold in connection with the issuance
of the 2023 Notes was $0.2 million. Subsequent changes in
the fair value of these hedge and warrant transactions will not
be recognized as long as the instruments remain classified as
equity.
Contractual
Obligations and Off Balance Sheet Arrangements
A summary of our contractual obligations as of December 29,
2007 is as follows:
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Payments Due by Period
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Less
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More
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Total
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Than 1 Year
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1-3 Years
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3-5 Years
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Than 5 Years
|
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(In millions)
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Operating lease obligations
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$
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134.5
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$
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42.2
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$
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44.7
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$
|
20.5
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$
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27.1
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Purchase obligations
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31.4
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26.8
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4.6
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----
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----
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2023 Notes *
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231.0
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231.0
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----
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----
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----
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Convertible Senior Notes
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500.0
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----
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----
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250.0
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250.0
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Contractual interest payments
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36.3
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7.2
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14.4
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10.9
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3.8
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Current income tax payable and Unrecognized tax benefits
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15.3
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15.3
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----
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----
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----
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Other long-term contractual obligations
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226.4
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----
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219.7
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3.5
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3.2
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|
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Total
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$
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1,174.9
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$
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322.5
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$
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283.4
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$
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284.9
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|
$
|
284.1
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|
|
|
|
|
|
|
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*
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The 2023 Notes are due in August 2023. However, the holders of
the 2023 Notes can require us to repurchase for cash all or a
portion of the 2023 Notes on August 15, 2008 for 100.25% of
the principal amount. Therefore, we have included
$230.4 million of principal of the 2023 Notes and
$0.6 million of premium on the potential repurchase of the
2023 Notes in the Less Than 1 Year column in
the above table.
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u
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Included in other long-term contractual obligations are
long-term income tax liabilities related to unrecognized tax
benefits of $259.8 million, and of that amount we estimate
that $193.1 million will be paid within 1 to 3 years.
We did not include the remaining long-term income tax
liabilities of $66.7 million in the table above, because we
estimated that this liability can be offset by available net
operating loss and tax credit carryforwards, and that future
cash payments will not be required to settle this liability.
However, the total amounts of income tax payable and the timing
of such tax payments may depend upon the resolution of current
and future tax examinations which cannot be estimated with
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50
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certainty. The remaining portion of other long-term contractual
obligations is primarily acquisition-related liabilities.
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With respect to purchase obligations that are cancelable by us,
the table includes the amount that would have been payable if we
had canceled the obligation as of December 29, 2007 or the
earliest cancellation date.
In connection with our acquisitions completed prior to
December 29, 2007, we may be obligated to pay up to an
aggregate of $45.0 million in cash during the next
53 months if certain predefined performance goals are
achieved in full.
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.
As of December 29, 2007, we did not have any significant
off-balance sheet arrangements, as defined in
Item 303(a)(4)(ii) of SEC
Regulation S-K.
New
Accounting Standards
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations and SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of Accounting Research
Bulletin No. 51. SFAS No. 141R will
change how business acquisitions are accounted for and will
impact financial statements both on the acquisition date and in
subsequent periods. SFAS No. 160 will change the
accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a
component of equity. SFAS No. 141R and
SFAS No. 160 are effective for fiscal years beginning
after December 15, 2008. Early adoption is not permitted.
We are currently evaluating the impact that
SFAS No. 141R and SFAS No. 160 will have on
our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities. Under SFAS No. 159, companies may
elect to measure certain financial instruments and certain other
items at fair value. The standard requires that unrealized gains
and losses on items for which the fair value option has been
elected be reported in earnings. SFAS No. 159 is
effective for fiscal years beginning after November 15,
2007. We are currently evaluating the impact that
SFAS No. 159 will have on our consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, which defines fair value,
establishes guidelines for measuring fair value and expands
disclosures regarding fair value measurements.
SFAS No. 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance
found in various prior accounting pronouncements.
SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007. However, on February 12,
2008, the FASB issued FSP
FAS No. 157-2,
which delays the effective date of SFAS No. 157 for
all non-financial assets and non-financial liabilities, except
those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually),
to fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years for items within the
scope of FSP
FAS No. 157-2.
Effective for fiscal 2008, we will adopt SFAS No. 157
except as it applies to those non-financial assets and
non-financial liabilities as described in FSP
FAS No. 157-2.
We are currently evaluating the impact that
SFAS No. 157 will have on our consolidated financial
statements.
Item 7A. Quantitative
and Qualitative Disclosures About Market Risk
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
51
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
December 29, 2007. 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 Consolidated Balance Sheet as
of December 29, 2007.
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Carrying
|
|
Average
|
|
|
Value
|
|
Interest Rate
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(In millions)
|
|
|
|
Interest-Bearing Instruments:
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|
|
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|
Cash variable rate
|
|
$
|
62.6
|
|
|
2.96%
|
Cash equivalents variable rate
|
|
|
864.2
|
|
|
4.91%
|
Cash equivalents fixed rate
|
|
|
112.1
|
|
|
0.64%
|
|
|
|
|
|
|
|
Total interest-bearing instruments
|
|
$
|
1,038.9
|
|
|
4.33%
|
|
|
|
|
|
|
|
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 under SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, 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
December 29, 2007, 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
52
convention for quoting a particular currency. All of these
forward contracts matured prior to or during February 2008.
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|
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Weighted
|
|
|
|
|
Average
|
|
|
Notional
|
|
Contract
|
|
|
Principal
|
|
Rate
|
|
|
(In millions)
|
|
|
|
Forward Contracts:
|
|
|
|
|
|
|
Japanese yen
|
|
$
|
44.8
|
|
|
110.60
|
British pound sterling
|
|
|
37.1
|
|
|
0.49
|
Indian rupee
|
|
|
11.6
|
|
|
39.38
|
Israeli shekel
|
|
|
8.0
|
|
|
3.93
|
Canadian dollar
|
|
|
6.5
|
|
|
1.01
|
European Union euro
|
|
|
6.1
|
|
|
0.68
|
Other
|
|
|
14.2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
128.3
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value
|
|
$
|
1.6
|
|
|
|
|
|
|
|
|
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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.
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, the
Convertible Senior Notes, to three initial purchasers in a
private placement pursuant to Section 4(2) of the
Securities Act for resale to qualified institutional buyers
pursuant to SEC Rule 144A. Concurrently with the issuance
of the Convertible Senior Notes, we entered into hedge
transactions with various parties and in separate transactions,
sold warrants 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 an additional description of the
Convertible Senior Notes, including the hedge and warrants
transactions, see the discussion under the heading
Item 7 Liquidity and Capital
Resources Factors Affecting Liquidity and Capital
Resources above.
Zero Coupon Zero Yield Senior Convertible Notes Due 2023
In August 2003, we issued $420.0 million principal amount
of our 2023 Notes to two initial purchasers in a private
placement pursuant to Section 4(2) of the Securities Act
for resale to qualified institutional buyers pursuant to SEC
Rule 144A. Concurrently with the issuance of the 2023
Notes, we entered into hedge transactions with one of the
initial purchasers and in a separate transaction, sold warrants
to one of the initial purchasers to reduce the potential
dilution from the conversion of the 2023 Notes and to mitigate
any negative effect such conversion may have on the price of our
common stock. For an additional description of the 2023 Notes,
including the hedge and warrants transactions, see the
discussion under the heading Item 7
Liquidity and Capital Resources 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. Under our
strategic investment program, from time to time we make cash
investments in companies with technologies that are potentially
strategically important to us.
53
The fair value of our portfolio of available-for-sale marketable
equity securities, which are included in Short-term investments
on the accompanying Consolidated Balance Sheets, was
$14.9 million as of December 29, 2007 and
$23.7 million as of December 30, 2006. 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, although the impact cannot be directly quantified. Such
a change, or any negative change in the financial performance or
prospects of the companies whose 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 $26.2 million as of December 29,
2007 and $31.4 million as of December 30, 2006. 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 Consolidated Income Statements.
Item 8. Financial
Statements and Supplementary Data
The financial statements required by Item 8 are submitted
as a separate section of this Annual Report on
Form 10-K.
See Item 15, Exhibits and Financial Statement
Schedules.
Summary
Quarterly Data Unaudited
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
4th
|
|
|
3rd
|
|
|
2nd
|
|
|
1st
|
|
|
4th
|
|
|
3rd
|
|
|
2nd
|
|
|
1st
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenue
|
|
$
|
457,943
|
|
|
$
|
400,924
|
|
|
$
|
390,961
|
|
|
$
|
365,185
|
|
|
$
|
431,020
|
|
|
$
|
366,148
|
|
|
$
|
358,513
|
|
|
$
|
328,214
|
|
Cost of revenue
|
|
|
56,150
|
|
|
|
52,404
|
|
|
|
51,564
|
|
|
|
54,390
|
|
|
|
53,921
|
|
|
|
52,735
|
|
|
|
59,846
|
|
|
|
60,597
|
|
Net income *
u
|
|
|
119,503
|
|
|
|
72,732
|
|
|
|
59,596
|
|
|
|
44,421
|
|
|
|
48,365
|
|
|
|
42,060
|
|
|
|
30,388
|
|
|
|
21,779
|
|
Net income per share basic *
u
|
|
|
0.44
|
|
|
|
0.27
|
|
|
|
0.22
|
|
|
|
0.16
|
|
|
|
0.18
|
|
|
|
0.15
|
|
|
|
0.11
|
|
|
|
0.08
|
|
Net income per share diluted *
u
|
|
|
0.41
|
|
|
|
0.24
|
|
|
|
0.20
|
|
|
|
0.15
|
|
|
|
0.16
|
|
|
|
0.14
|
|
|
|
0.10
|
|
|
|
0.07
|
|
|
|
|
* |
|
During the quarter ended December 29, 2007, we recorded an
income tax benefit of $27.8 million related to the
settlement of a tax dispute with the IRS and litigation costs of
$8.1 million. For an additional description of the tax
benefit, see the discussion under the heading
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of
Operations Results of Operations
Provision for Income Taxes above. For an additional
description of the legal costs, see the discussion under the
heading Item 3 Legal Proceedings
above. |
|
u
|
|
We recorded a Loss on extinguishment of debt of
$40.8 million during the quarter ended December 30,
2006, which includes a premium paid to repurchase a portion of
the 2023 Notes of $38.9 million and a write-off of the
related portion of unamortized deferred costs of issuing the
2023 Notes of $1.9 million. |
Item 9. Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 9A. 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 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of December 29, 2007.
54
The evaluation of our disclosure controls and procedures
included a review of our processes and implementation and the
effect on the information generated for use in this Annual
Report on
Form 10-K.
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 December 29, 2007, 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 (i) is recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms and (ii) is
accumulated and communicated to our management, including the
CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure.
Changes
in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting during the year ended December 29, 2007 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. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. 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.
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rule 13a-15(f)
under the Exchange Act). Our management assessed the
effectiveness of our internal control over financial reporting
as of December 29, 2007. In making this assessment, our
management used the criteria established in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Our
management has concluded that, as of December 29, 2007, our
internal control over financial reporting is effective based on
these criteria. Our independent registered public accounting
firm, KPMG LLP, has issued an attestation report on our internal
control over financial reporting, which is included herein.
Item 9B. Other
Information
None.
55
PART III.
Item 10. Directors,
Executive Officers and Corporate Governance
The information required by Item 10 as to directors is
incorporated herein by reference from the sections entitled
Proposal 1 Election of Directors
and Other Matters Section 16(a)
Beneficial Ownership Reporting Compliance in
Cadences definitive proxy statement for its 2008 Annual
Meeting of Stockholders.
The executive officers of Cadence are listed at the end of
Part I of this Annual Report on
Form 10-K.
The information required by Item 10 as to Cadences
code of ethics is incorporated herein by reference from the
section entitled Corporate Governance Code of
Business Conduct in Cadences definitive proxy
statement for its 2008 Annual Meeting of Stockholders.
The information required by Item 10 as to the director
nomination process and Cadences Audit Committee is
incorporated by reference from the section entitled
Cadences Board of Directors Committees
of the Board of Directors in Cadences definitive
proxy statement for its 2008 Annual Meeting of Stockholders.
Item 11. Executive
Compensation
The information required by Item 11 is incorporated herein
by reference from the sections entitled Cadences
Board of Directors Compensation of Directors,
Compensation Committee Report, Compensation
Committee Interlocks and Insider Participation,
Compensation of Executive Officers and
Potential Payments Upon Termination or
Change-in-Control
and Employment Contracts in Cadences definitive
proxy statement for its 2008 Annual Meeting of Stockholders.
Item 12. Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by Item 12 is incorporated herein
by reference from the sections entitled Security Ownership
of Certain Beneficial Owners and Management and
Equity Compensation Plan Information in
Cadences definitive proxy statement for its 2008 Annual
Meeting of Stockholders.
Item 13. Certain
Relationships and Related Transactions and Director
Independence
The information required by Item 13 is incorporated herein
by reference from the sections entitled Certain
Transactions and Cadences Board of
Directors Director Independence in
Cadences definitive proxy statement for its 2008 Annual
Meeting of Stockholders.
Item 14. Principal
Accountant Fees and Services
The information required by Item 14 is incorporated herein
by reference from the section entitled Fees Billed to
Cadence by KPMG LLP During Fiscal 2007 and 2006 in
Cadences definitive proxy statement for its 2008 Annual
Meeting of Stockholders.
56
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Cadence Design Systems, Inc.:
We have audited the accompanying consolidated balance sheets of
Cadence Design Systems, Inc. and subsidiaries (the Company) as
of December 29, 2007 and December 30, 2006, and the
related consolidated statements of income, stockholders
equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 29, 2007. In
connection with our audits of the consolidated financial
statements, we also have audited the financial statement
schedule, as set forth under Item 15(a)(2). These
consolidated financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Cadence Design Systems, Inc. and subsidiaries as of
December 29, 2007 and December 30, 2006, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 29, 2007, in
conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in note 2 to the consolidated financial
statements, effective December 31, 2006, the Company
adopted the provisions of Financial Accounting Standards Board
Interpretation (FIN) No. 48, Accounting for Uncertainty
in Income Taxes an interpretation of FASB
Statement No. 109. Also, as discussed in note 2 to
the consolidated financial statements, effective January 1,
2006, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 123(R), Share-Based
Payment.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 29, 2007, based on criteria established in
Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated
February 25, 2008 expressed an unqualified opinion on the
effectiveness of the Companys internal control over
financial reporting.
/s/ KPMG LLP
Mountain View, California
February 25, 2008
58
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Cadence Design Systems, Inc.:
We have audited Cadence Design Systems, Inc. and
subsidiaries (the Company) internal control over financial
reporting as of December 29, 2007, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Managements Report on Internal Control over Financial
Reporting included in Item 9A. Our responsibility is to
express an opinion on the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Cadence Design Systems, Inc. and subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of December 29, 2007, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Cadence Design Systems, Inc. and
subsidiaries as of December 29, 2007 and December 30,
2006, and the related consolidated statements of income,
stockholders equity and comprehensive income, and cash
flows for each of the years in the three-year period ended
December 29, 2007. In connection with our audits of the
consolidated financial statements, we also have audited the
financial statement schedule as of and for each of the years in
the three-year period ended December 29, 2007. Our report
dated February 25, 2008 expressed an unqualified opinion on
those consolidated financial statements and accompanying
financial statement schedule.
/s/ KPMG LLP
Mountain View, California
February 25, 2008
59
CADENCE
DESIGN SYSTEMS, INC
CONSOLIDATED BALANCE SHEETS
December 29,
2007 and December 30, 2006
(In thousands, except per share amounts)
ASSETS
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,062,920
|
|
|
$
|
934,342
|
|
Short-term investments
|
|
|
15,193
|
|
|
|
24,089
|
|
Receivables, net of allowances of $2,895 and $3,804, respectively
|
|
|
326,211
|
|
|
|
238,438
|
|
Inventories
|
|
|
31,003
|
|
|
|
37,179
|
|
Prepaid expenses and other
|
|
|
94,236
|
|
|
|
77,957
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,529,563
|
|
|
|
1,312,005
|
|
Property, plant and equipment, net
|
|
|
339,463
|
|
|
|
354,575
|
|
Goodwill
|
|
|
1,310,211
|
|
|
|
1,267,579
|
|
Acquired intangibles, net
|
|
|
127,072
|
|
|
|
112,738
|
|
Installment contract receivables
|
|
|
238,010
|
|
|
|
149,584
|
|
Other assets
|
|
|
326,831
|
|
|
|
246,341
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
3,871,150
|
|
|
$
|
3,442,822
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
$
|
230,385
|
|
|
$
|
----
|
|
Current portion of long-term debt
|
|
|
----
|
|
|
|
28,000
|
|
Accounts payable and accrued liabilities
|
|
|
289,934
|
|
|
|
259,790
|
|
Current portion of deferred revenue
|
|
|
265,168
|
|
|
|
260,275
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
785,487
|
|
|
|
548,065
|
|
|
|
|
|
|
|
|
|
|
Long-Term Liabilities:
|
|
|
|
|
|
|
|
|
Long-term portion of deferred revenue
|
|
|
136,655
|
|
|
|
95,018
|
|
Convertible notes
|
|
|
500,000
|
|
|
|
730,385
|
|
Other long-term liabilities
|
|
|
368,942
|
|
|
|
370,063
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
1,005,597
|
|
|
|
1,195,466
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Preferred stock $0.01 par value; authorized
400 shares, none issued or outstanding
|
|
|
----
|
|
|
|
----
|
|
Common stock $0.01 par value; authorized
600,000 shares; issued and outstanding shares: 274,686 as
of December 29, 2007; 274,912 as of December 30, 2006
|
|
|
1,516,493
|
|
|
|
1,398,899
|
|
Treasury stock, at cost; 31,355 shares as of
December 29, 2007; 31,006 shares as of
December 30, 2006
|
|
|
(619,125
|
)
|
|
|
(544,855
|
)
|
Retained earnings
|
|
|
1,162,441
|
|
|
|
832,763
|
|
Accumulated other comprehensive income
|
|
|
20,257
|
|
|
|
12,484
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
2,080,066
|
|
|
|
1,699,291
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
3,871,150
|
|
|
$
|
3,442,822
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
60
CADENCE
DESIGN SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
For the
three fiscal years ended December 29, 2007
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
1,103,970
|
|
|
$
|
982,673
|
|
|
$
|
851,496
|
|
Services
|
|
|
125,838
|
|
|
|
134,895
|
|
|
|
126,169
|
|
Maintenance
|
|
|
385,205
|
|
|
|
366,327
|
|
|
|
351,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,615,013
|
|
|
|
1,483,895
|
|
|
|
1,329,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
|
|
60,069
|
|
|
|
66,769
|
|
|
|
79,721
|
|
Cost of services
|
|
|
93,360
|
|
|
|
96,497
|
|
|
|
91,893
|
|
Cost of maintenance
|
|
|
61,079
|
|
|
|
63,833
|
|
|
|
59,794
|
|
Marketing and sales
|
|
|
407,148
|
|
|
|
405,579
|
|
|
|
366,164
|
|
Research and development
|
|
|
494,032
|
|
|
|
460,064
|
|
|
|
390,740
|
|
General and administrative
|
|
|
168,997
|
|
|
|
143,317
|
|
|
|
129,552
|
|
Amortization of acquired intangibles
|
|
|
19,421
|
|
|
|
23,141
|
|
|
|
47,762
|
|
Restructuring and other charges (credits)
|
|
|
(9,686
|
)
|
|
|
(797
|
)
|
|
|
35,334
|
|
Write-off of acquired in-process technology
|
|
|
2,678
|
|
|
|
900
|
|
|
|
9,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
1,297,098
|
|
|
|
1,259,303
|
|
|
|
1,210,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
317,915
|
|
|
|
224,592
|
|
|
|
118,832
|
|
Loss on extinguishment of debt
|
|
|
----
|
|
|
|
(40,768
|
)
|
|
|
----
|
|
Interest expense
|
|
|
(12,374
|
)
|
|
|
(12,348
|
)
|
|
|
(5,446
|
)
|
Other income, net
|
|
|
58,530
|
|
|
|
70,402
|
|
|
|
15,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes and cumulative effect
of change in accounting principle
|
|
|
364,071
|
|
|
|
241,878
|
|
|
|
128,483
|
|
Provision for income taxes
|
|
|
67,819
|
|
|
|
99,704
|
|
|
|
79,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative effect of change in accounting
principle
|
|
|
296,252
|
|
|
|
142,174
|
|
|
|
49,343
|
|
Cumulative effect of change in accounting principle, net of tax
|
|
|
----
|
|
|
|
418
|
|
|
|
----
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
296,252
|
|
|
$
|
142,592
|
|
|
$
|
49,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share before cumulative effect of change in
accounting principle:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.09
|
|
|
$
|
0.51
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.01
|
|
|
$
|
0.46
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share after cumulative effect of change in
accounting principle:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.09
|
|
|
$
|
0.51
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.01
|
|
|
$
|
0.46
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
271,455
|
|
|
|
279,354
|
|
|
|
278,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
295,591
|
|
|
|
312,457
|
|
|
|
314,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
61
CADENCE
DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME
For the three fiscal years ended December 29, 2007
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par Value
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
and Capital
|
|
|
|
|
|
Deferred
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
in Excess
|
|
|
Treasury
|
|
|
Stock
|
|
|
Retained
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
of Par
|
|
|
Stock
|
|
|
Compensation
|
|
|
Earnings
|
|
Income
|
|
|
Total
|
|
|
BALANCE, JANUARY 1, 2005
|
|
|
276,505
|
|
|
$
|
1,146,493
|
|
|
$
|
(55,277
|
)
|
|
$
|
(63,477
|
)
|
|
$
|
640,828
|
|
$
|
31,403
|
|
|
$
|
1,699,970
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
49,343
|
|
|
----
|
|
|
|
49,343
|
|
Other comprehensive loss, net of taxes (Note 17)
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
(7,530
|
)
|
|
|
(7,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
(6,150
|
)
|
|
|
----
|
|
|
|
(101,070
|
)
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
(101,070
|
)
|
Issuance of common stock and re-issuance of treasury stock under
equity incentive plans, net of forfeitures
|
|
|
17,647
|
|
|
|
61,454
|
|
|
|
87,981
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
149,435
|
|
Stock received for payment of employee taxes on vesting of
restricted stock
|
|
|
(651
|
)
|
|
|
----
|
|
|
|
(10,698
|
)
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
(10,698
|
)
|
Tax benefits from employee stock transactions
|
|
|
----
|
|
|
|
11,715
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
11,715
|
|
Tax benefit from call options
|
|
|
----
|
|
|
|
6,167
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
6,167
|
|
Stock issued in connection with acquisitions
|
|
|
283
|
|
|
|
11,883
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
11,883
|
|
Deferred stock compensation, net of forfeitures
|
|
|
----
|
|
|
|
62,793
|
|
|
|
----
|
|
|
|
(62,793
|
)
|
|
|
----
|
|
|
----
|
|
|
|
----
|
|
Amortization of deferred stock compensation
|
|
|
----
|
|
|
|
(705
|
)
|
|
|
----
|
|
|
|
36,194
|
|
|
|
----
|
|
|
----
|
|
|
|
35,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2005
|
|
|
287,634
|
|
|
|
1,299,800
|
|
|
|
(79,064
|
)
|
|
|
(90,076
|
)
|
|
|
690,171
|
|
|
23,873
|
|
|
|
1,844,704
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
142,592
|
|
|
----
|
|
|
|
142,592
|
|
Other comprehensive loss, net of taxes (Note 17)
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
(11,389
|
)
|
|
|
(11,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
(27,917
|
)
|
|
|
----
|
|
|
|
(494,088
|
)
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
(494,088
|
)
|
Issuance of common stock and re-issuance of treasury stock under
equity incentive plans, net of forfeitures
|
|
|
16,006
|
|
|
|
119,479
|
|
|
|
41,791
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
161,270
|
|
Stock received for payment of employee taxes on vesting of
restricted stock
|
|
|
(821
|
)
|
|
|
----
|
|
|
|
(13,494
|
)
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
(13,494
|
)
|
Purchase of call options in connection with convertible notes
due 2011 and 2013 (Note 6)
|
|
|
----
|
|
|
|
(119,750
|
)
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
(119,750
|
)
|
Proceeds from sale of call options in connection with
convertible notes due 2023 (Note 6)
|
|
|
----
|
|
|
|
55,864
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
55,864
|
|
Proceeds from sale of common stock warrants in connection with
convertible notes due 2011 and 2013 (Note 6)
|
|
|
----
|
|
|
|
39,400
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
39,400
|
|
Purchase of common stock warrants in connection with convertible
notes due 2023 (Note 6)
|
|
|
----
|
|
|
|
(10,201
|
)
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
(10,201
|
)
|
Tax benefit from employee stock transactions
|
|
|
----
|
|
|
|
14,741
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
14,741
|
|
Tax expense from call options
|
|
|
----
|
|
|
|
(6,159
|
)
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
(6,159
|
)
|
Stock issued in connection with acquisitions
|
|
|
10
|
|
|
|
2,594
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
2,594
|
|
Stock-based compensation expense
|
|
|
----
|
|
|
|
93,207
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
93,207
|
|
Elimination of unamortized deferred stock compensation
|
|
|
----
|
|
|
|
(90,076
|
)
|
|
|
----
|
|
|
|
90,076
|
|
|
|
----
|
|
|
----
|
|
|
|
----
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 30, 2006
|
|
|
274,912
|
|
|
$
|
1,398,899
|
|
|
$
|
(544,855
|
)
|
|
$
|
----
|
|
|
$
|
832,763
|
|
$
|
12,484
|
|
|
$
|
1,699,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
62
CADENCE
DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME
For the three fiscal years ended December 29, 2007
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par Value
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
and Capital
|
|
|
|
|
|
Deferred
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
in Excess
|
|
|
Treasury
|
|
|
Stock
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
Shares
|
|
|
of Par
|
|
|
Stock
|
|
|
Compensation
|
|
Earnings
|
|
|
Income
|
|
Total
|
|
|
BALANCE, DECEMBER 30, 2006
|
|
|
274,912
|
|
|
$
|
1,398,899
|
|
|
$
|
(544,855
|
)
|
|
$
|
----
|
|
$
|
832,763
|
|
|
$
|
12,484
|
|
$
|
1,699,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
296,252
|
|
|
|
----
|
|
|
296,252
|
|
Other comprehensive income, net of taxes (Note 17)
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
7,773
|
|
|
7,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income, net of taxes
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
----
|
|
|
304,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
(19,400
|
)
|
|
|
----
|
|
|
|
(399,490
|
)
|
|
|
----
|
|
|
----
|
|
|
|
----
|
|
|
(399,490
|
)
|
Issuance of common stock and re-issuance of treasury stock under
equity incentive plans, net of forfeitures
|
|
|
20,268
|
|
|
|
(54,901
|
)
|
|
|
344,348
|
|
|
|
----
|
|
|
(24,384
|
)
|
|
|
----
|
|
|
265,063
|
|
Stock received for payment of employee taxes on vesting of
restricted stock
|
|
|
(1,094
|
)
|
|
|
----
|
|
|
|
(19,128
|
)
|
|
|
----
|
|
|
----
|
|
|
|
----
|
|
|
(19,128
|
)
|
Tax benefit from employee stock transactions
|
|
|
----
|
|
|
|
25,982
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
----
|
|
|
25,982
|
|
Tax benefit from call options
|
|
|
----
|
|
|
|
11,346
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
----
|
|
|
11,346
|
|
Stock options assumed in acquisitions
|
|
|
----
|
|
|
|
1,841
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
----
|
|
|
1,841
|
|
Stock-based compensation expense
|
|
|
----
|
|
|
|
91,850
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
----
|
|
|
91,850
|
|
Step acquisition adjustment (Note 9)
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
(1,556
|
)
|
|
|
----
|
|
|
(1,556
|
)
|
FIN No. 48 initial adoption adjustment (Note 8)
|
|
|
----
|
|
|
|
35,251
|
|
|
|
----
|
|
|
|
----
|
|
|
59,366
|
|
|
|
----
|
|
|
94,617
|
|
FIN No. 48 adjustment related to effective settlement
with IRS (Note 8)
|
|
|
----
|
|
|
|
6,225
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
----
|
|
|
6,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 29, 2007
|
|
|
274,686
|
|
|
$
|
1,516,493
|
|
|
$
|
(619,125
|
)
|
|
$
|
----
|
|
$
|
1,162,441
|
|
|
$
|
20,257
|
|
$
|
2,080,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
63
CADENCE
DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three fiscal years ended December 29, 2007
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash and Cash Equivalents at Beginning of Year
|
|
$
|
934,342
|
|
|
$
|
861,315
|
|
|
$
|
448,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
296,252
|
|
|
|
142,592
|
|
|
|
49,343
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in accounting principle
|
|
|
----
|
|
|
|
(418
|
)
|
|
|
----
|
|
Depreciation and amortization
|
|
|
130,649
|
|
|
|
147,117
|
|
|
|
184,717
|
|
Loss on extinguishment of debt
|
|
|
----
|
|
|
|
40,768
|
|
|
|
----
|
|
Stock-based compensation
|
|
|
101,415
|
|
|
|
103,986
|
|
|
|
39,902
|
|
Equity in loss from investments, net
|
|
|
3,027
|
|
|
|
1,200
|
|
|
|
6,492
|
|
Gain on investments, net
|
|
|
(18,090
|
)
|
|
|
(32,903
|
)
|
|
|
(18,297
|
)
|
Gain on sale and leaseback of land and buildings
|
|
|
(13,141
|
)
|
|
|
----
|
|
|
|
----
|
|
Write-down of investment securities
|
|
|
2,550
|
|
|
|
2,467
|
|
|
|
10,934
|
|
Write-off of acquired in-process technology
|
|
|
2,678
|
|
|
|
900
|
|
|
|
9,400
|
|
Non-cash restructuring and other charges (credits)
|
|
|
(7,106
|
)
|
|
|
194
|
|
|
|
2,352
|
|
Tax benefit from employee stock transactions
|
|
|
----
|
|
|
|
----
|
|
|
|
11,715
|
|
Tax benefit (expense) from call options
|
|
|
11,346
|
|
|
|
(6,159
|
)
|
|
|
6,167
|
|
Deferred income taxes
|
|
|
12,811
|
|
|
|
29,535
|
|
|
|
(22,968
|
)
|
Proceeds from the sale of receivables, net
|
|
|
215,444
|
|
|
|
180,580
|
|
|
|
192,079
|
|
Recoveries for gains on trade accounts receivable and sales
returns
|
|
|
(586
|
)
|
|
|
(6,777
|
)
|
|
|
(1,755
|
)
|
Other non-cash items
|
|
|
11,219
|
|
|
|
4,630
|
|
|
|
5,569
|
|
Changes in operating assets and liabilities, net of effect of
acquired businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
15,762
|
|
|
|
92,977
|
|
|
|
54,928
|
|
Installment contract receivables
|
|
|
(393,658
|
)
|
|
|
(261,983
|
)
|
|
|
(155,648
|
)
|
Inventories
|
|
|
6,197
|
|
|
|
(10,872
|
)
|
|
|
(7,588
|
)
|
Prepaid expenses and other
|
|
|
(603
|
)
|
|
|
6,128
|
|
|
|
(8,094
|
)
|
Other assets
|
|
|
(628
|
)
|
|
|
749
|
|
|
|
1,640
|
|
Accounts payable and accrued liabilities
|
|
|
20,352
|
|
|
|
(51,462
|
)
|
|
|
20,330
|
|
Deferred revenue
|
|
|
44,775
|
|
|
|
24,444
|
|
|
|
32,616
|
|
Other long-term liabilities
|
|
|
(38,227
|
)
|
|
|
13,523
|
|
|
|
12,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
402,438
|
|
|
|
421,216
|
|
|
|
426,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of available-for-sale securities
|
|
|
6,271
|
|
|
|
7,637
|
|
|
|
14,921
|
|
Proceeds from sale of short-term investments
|
|
|
197
|
|
|
|
----
|
|
|
|
289,225
|
|
Purchases of short-term investments
|
|
|
----
|
|
|
|
(147
|
)
|
|
|
(180,975
|
)
|
Proceeds from the sale of long-term investments
|
|
|
6,323
|
|
|
|
26,054
|
|
|
|
6,075
|
|
Proceeds from the sale of property, plant and equipment
|
|
|
46,500
|
|
|
|
317
|
|
|
|
33,625
|
|
Purchases of property, plant and equipment
|
|
|
(81,795
|
)
|
|
|
(67,636
|
)
|
|
|
(71,656
|
)
|
Purchases of software licenses
|
|
|
(2,000
|
)
|
|
|
(8,409
|
)
|
|
|
(2,600
|
)
|
Investment in venture capital partnerships and equity investments
|
|
|
(3,214
|
)
|
|
|
(3,800
|
)
|
|
|
(14,184
|
)
|
Cash paid in business combinations and asset acquisitions, net
of cash acquired, and acquisitions of intangibles
|
|
|
(80,725
|
)
|
|
|
(65,778
|
)
|
|
|
(297,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(108,443
|
)
|
|
|
(111,762
|
)
|
|
|
(222,697
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from term loan
|
|
|
----
|
|
|
|
----
|
|
|
|
160,000
|
|
Principal payments on term loan and long-term debt
|
|
|
(28,000
|
)
|
|
|
(132,000
|
)
|
|
|
(62
|
)
|
Proceeds from issuance of convertible notes due 2011 and 2013
|
|
|
----
|
|
|
|
500,000
|
|
|
|
----
|
|
Payment of convertible notes due 2023
|
|
|
----
|
|
|
|
(228,480
|
)
|
|
|
----
|
|
Payment of convertible notes issuance costs
|
|
|
----
|
|
|
|
(12,032
|
)
|
|
|
----
|
|
Purchase of call options in connection with convertible notes
due 2011 and 2013
|
|
|
----
|
|
|
|
(119,750
|
)
|
|
|
----
|
|
Proceeds from sale of call options in connection with
convertible notes due 2023
|
|
|
----
|
|
|
|
55,864
|
|
|
|
----
|
|
Proceeds from sale of common stock warrants in connection with
convertible notes due 2011 and 2013
|
|
|
----
|
|
|
|
39,400
|
|
|
|
----
|
|
Purchase of common stock warrants in connection with convertible
notes due 2023
|
|
|
----
|
|
|
|
(10,201
|
)
|
|
|
----
|
|
Tax benefit from employee stock transactions
|
|
|
21,090
|
|
|
|
10,712
|
|
|
|
----
|
|
Proceeds from issuance of common stock
|
|
|
255,462
|
|
|
|
156,648
|
|
|
|
146,481
|
|
Purchases of treasury stock
|
|
|
(418,618
|
)
|
|
|
(494,088
|
)
|
|
|
(101,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
(170,066
|
)
|
|
|
(233,927
|
)
|
|
|
205,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
4,649
|
|
|
|
(2,500
|
)
|
|
|
3,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in Cash and cash equivalents
|
|
|
128,578
|
|
|
|
73,027
|
|
|
|
412,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
1,062,920
|
|
|
$
|
934,342
|
|
|
$
|
861,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
64
CADENCE
DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 29, 2007
Cadence Design Systems, Inc., or Cadence, licenses electronic
design automation, or EDA, software, sells or leases hardware
technology and intellectual property and provides design and
methodology and education services throughout the world to help
manage and accelerate electronic product development processes.
Cadences broad range of products and services are used by
electronics companies to design and develop complex integrated
circuits, or ICs, and electronic systems.
|
|
NOTE 2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles
of Consolidation and Basis of Presentation
Cadences fiscal year end is the Saturday closest to
December 31. Fiscal 2007, 2006 and 2005 were 52-week years.
Fiscal 2008 will be a 53-week year ending on January 3,
2009. The consolidated financial statements include the accounts
of Cadence and its subsidiaries after elimination of
intercompany accounts and transactions. All consolidated
subsidiaries are wholly-owned by Cadence.
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash,
Cash Equivalents and Short-Term Investments
Cadence considers all highly liquid debt instruments, which
could include commercial paper, European Union euro time
deposits, repurchase agreements and certificates of deposit,
with remaining maturities of three months or less at the time of
purchase to be cash equivalents. Investments with maturities
greater than three months and less than one year are classified
as short-term investments.
Foreign
Currency Translation
Cadence transacts business in various foreign currencies. In
general, the functional currency of a foreign operation is the
local countrys currency except for Cadences
principal Irish, Israeli, Hungarian and Dutch subsidiaries,
whose functional currency is the United States dollar.
Non-functional currency monetary balances are re-measured into
the functional currency of the subsidiary with any related gain
or loss recorded in Other income, net, in the accompanying
Consolidated Income Statements. Assets and liabilities of
operations outside the United States, for which the functional
currency is the local currency, are translated into United
States dollars using fiscal year-end exchange rates. Revenue and
expenses are translated at the average exchange rates in effect
during each fiscal month during the year. The effects of foreign
currency translation adjustments are included in
Stockholders Equity as a component of Accumulated other
comprehensive income in the accompanying Consolidated Balance
Sheets.
Derivative
Financial Instruments
Cadence accounts for its foreign currency exchange contracts in
accordance with Statement of Financial Accounting Standards, or
SFAS, No. 133, Accounting for Derivative Instruments
and Hedging Activities. Cadence enters 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. The forward contracts are not designated
as accounting hedges under SFAS No. 133 and,
therefore, the unrealized gains and losses are recognized in
Other income, net, in advance
65
of the actual foreign currency cash flows with the fair value of
these forward contracts being recorded as accrued liabilities or
other current assets.
Cadence does not use forward contracts for trading purposes.
Cadences forward contracts generally have maturities of
90 days or less. Recognized gains or losses with respect to
our current hedging activities will ultimately depend on how
accurately Cadence is able to match the amount of currency
forward exchange contracts with underlying asset and liability
exposures.
Allowance
for Doubtful Accounts
Cadence makes judgments as to its ability to collect outstanding
receivables and provide allowances for the portion of
receivables when collection becomes doubtful. Provisions are
made based upon a specific review of all significant outstanding
invoices and are recorded in operating expenses. For those
invoices not specifically reviewed, provisions are made based on
Cadences historical bad debt experience. In determining
these percentages, Cadence analyzes its historical collection
experience and current economic trends. If the historical data
Cadence uses to calculate the allowance provided for doubtful
accounts does not reflect the future ability to collect
outstanding receivables, additional provisions may be needed
which could cause future results of operations to be materially
affected.
Allowance
for Sales Returns
Provisions for sales returns primarily relate to service
arrangements and are recorded as a reduction to revenue. These
provisions are made based on historical experience.
Inventories are stated at the lower of cost or market value.
Cadences inventories include high technology parts and
components for complex computer systems that emulate the
performance and operation of computer IC and electronic systems.
These parts and components may be specialized in nature or
subject to rapid technological obsolescence. While Cadence has
programs to minimize the required inventories on hand and
considers technological obsolescence when estimating required
reserves to reduce recorded amounts to market values, it is
reasonably possible that such estimates could change in the near
term. Cadences practice is to reserve for inventory in
excess of
12-month
demand.
Property,
Plant and Equipment
Property, plant and equipment is stated at historical cost.
Depreciation and amortization are generally provided over the
estimated useful lives, using the straight-line method, as
follows:
|
|
|
Computer equipment and related software
|
|
2-7 years
|
Buildings
|
|
10-32 years
|
Leasehold and building improvements
|
|
Shorter of the lease term or the estimated useful life
|
Furniture and fixtures
|
|
3-5 years
|
Equipment
|
|
3-5 years
|
Cadence capitalizes the costs of software developed for internal
use in compliance with Statement of Position, or SOP,
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use and with Emerging Issues Task
Force, or EITF,
No. 00-2,
Accounting for Web Site Development Costs.
Capitalization of software developed for internal use and web
site development costs begins at the application development
phase of the project. Capitalization of software developed for
internal use and web site development costs ends, and
amortization begins, when the computer software is substantially
complete and ready for its intended use. Amortization is
recorded on a straight-line basis over the estimated useful life
of the software. Cadence capitalized $24.1 million in 2007,
$24.3 million in 2006 and $32.6 million in 2005 for
costs of software developed for internal use.
Cadence recorded depreciation and amortization expense in the
amount of $73.7 million in 2007, $72.0 million in 2006
and $68.8 million in 2005 for property, plant and equipment.
In January 2007, Cadence completed the sale of certain land and
buildings in San Jose, California for a sales price of
$46.5 million in cash. Concurrently with the sale, Cadence
leased back from the purchaser approximately
66
262,500 square feet of office space, which represents all
available space in the buildings. The lease agreement includes
an initial term of two years, with two options to extend the
lease for six months each. Cadence is obligated to make lease
payments related to this lease of $2.4 million in 2008 and
$0.2 million in 2009. A substantial portion of the gain
upon sale offset Cadences costs and expenses during the
year ended December 29, 2007, and the remaining gain will
be amortized over the remaining initial lease term.
Software
Development Costs
Cadence accounts for software development costs in accordance
with SFAS No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise
Marketed. Software development costs are capitalized
beginning when a products technological feasibility has
been established by completion of a working model of the product
and amortization begins when a product is available for general
release to customers. The period between the achievement of
technological feasibility and the general release of
Cadences products has typically been of short duration and
costs incurred during this period have not been material.
Cadence did not capitalize any third party SFAS No. 86
costs, or purchased software, during 2007. Cadence capitalized
$7.3 million of purchased software during 2006 and
$0.5 million of purchased software during 2005. Cadence has
deemed the purchased software to have an alternative future use
in accordance with SFAS No. 86. Therefore, Cadence
begins amortization of purchased software when the technology is
available for general release to customers. Amortization expense
for purchased software was $5.1 million in 2007,
$4.2 million in 2006 and $4.4 million in 2005.
Acquired
Intangibles, including Goodwill
Acquired intangibles, which include purchased technology and
other intangible assets, are stated at cost less accumulated
amortization and are reviewed for impairment whenever events or
circumstances indicate that an impairment may exist. In
accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, goodwill and purchased intangibles with
indefinite useful lives are not amortized but are reviewed for
impairment at least annually or when events or changes in
circumstances indicate that Cadence will not be able to recover
the assets carrying amount. Acquired intangibles with
definite lives are amortized on a straight-line basis over the
remaining estimated economic life of the underlying products and
technologies (original lives assigned are one to ten years).
During the third quarters of 2007, 2006 and 2005, Cadence
completed its annual impairment analysis of goodwill. Based on
the results of these impairment reviews, Cadence has determined
that no indicators of impairment existed for its one reporting
unit and, accordingly, no impairment charge was recognized
during 2007, 2006 or 2005.
Cadences long-lived assets consist of property, plant and
equipment and other acquired intangibles, excluding goodwill.
Cadence reviews its long-lived assets for impairment in
accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. For assets to
be held and used, Cadence initiates its review whenever events
or changes in circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable. Recoverability of an
asset is measured by comparison of its carrying amount to the
expected future undiscounted cash flows that the asset is
expected to generate. If it is determined that an asset is not
recoverable, an impairment loss is recorded in the amount by
which the carrying amount of the asset exceeds its fair value.
During 2007 and 2006, there were no significant impairments of
long-lived assets. During 2005, Cadence abandoned certain assets
and recorded a charge of $2.4 million, which is included in
Restructuring and other charges in the accompanying Consolidated
Income Statements.
Marketable
and Non-Marketable Securities
Management considers all of its investments in marketable
securities as available-for-sale. Available-for-sale securities
are stated at fair value, with the unrealized gains and losses
presented net of tax and reported as a separate component of
Stockholders equity. Realized gains and losses are
determined using the specific identification method. Gains are
recognized when realized and are recorded in the Consolidated
Income Statements as Other
67
income, net. Losses are recognized as realized or when Cadence
has determined that an other-than-temporary decline in fair
value has occurred.
It is Cadences policy to review the fair value of these
marketable 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.
Non-Marketable
Securities
Cadences non-marketable securities include investments in
privately-held companies and companies that are publicly-traded
but as to which there are trading restrictions on the shares
Cadence owns. To determine the fair value of publicly-traded
securities with trading restrictions, Cadence considers the
current market price of the security and the specific
characteristics of the restrictions. To determine the fair value
of privately-held investments, Cadence uses the most recent
round of financing or estimates of current fair value using
traditional valuation techniques. It is Cadences policy to
review the fair value of these investments on a regular basis to
determine whether the 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. In
the case of privately-held companies, this evaluation is based
on information that Cadence requests from these companies. This
information is not subject to the same disclosure regulations as
United States publicly-traded companies, and as such, the basis
for these evaluations is subject to the timing and the accuracy
of the data received from these companies. If Cadence believes
the carrying value of an investment is in excess of fair value,
and this difference is other-than-temporary, it is
Cadences policy to write down the investment to fair value.
Equity
Method Investments
Cadence applies the guidance in Accounting Principles Board
Opinion, or APB, No. 18, The Equity Method of
Accounting for Investments in Common Stock, as amended,
and EITF
No. 02-14,
Whether an Investor Should Apply the Equity Method of
Accounting to Investments Other Than Common Stock, to
classify investments as equity method investments. These
investments are held in the form of voting preferred stock or
convertible debt of privately-held companies. If Cadence
determines that it has the ability to exercise significant
influence over the investee and the investment is in the form of
in-substance common stock, the investment is accounted for under
the equity method.
In applying the equity method of accounting, Cadence applies
approach (a) of EITF
No. 99-10,
Percentage Used to Determine the Amount of Equity Method
Losses. Accordingly, the portion of equity method income
or loss recorded by Cadence is based on its percentage ownership
of each investees preferred stock or convertible debt
available to absorb losses or with contractual rights to income.
Its level of participation in future financings of its equity
method investees may impact Cadences proportional share in
future income or losses. Cadence records its interest in equity
method gains and losses in the quarter following incurrence
because it is not practicable to obtain investee financial
statements prior to the issuance of Cadences Consolidated
Financial Statements.
Investments accounted for by Cadence under the cost method of
accounting are carried at historical cost and Cadence
periodically evaluates the fair value of each investment to
determine if an other-than-temporary decline in value has
occurred.
Nonqualified
Deferred Compensation Trust
Executive Officers, senior management and Directors may elect to
defer compensation payable to them under Cadences 1994
Nonqualified Deferred Compensation Plan, or the NQDC. Deferred
compensation payments are held in accounts with values indexed
to the performance of selected mutual funds or money market
accounts. In accordance with EITF
No. 97-14,
Accounting for Deferred Compensation Arrangements Where
Amounts Earned
68
Are Held in a Rabbi Trust and Invested, Cadence
consolidates the NQDC trust accounts in its Consolidated
Financial Statements.
The selected mutual funds or money market accounts held in the
NQDC trust are classified as trading securities in accordance
with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Trading
securities are stated at fair value, with the unrealized gains
and losses recognized in the Consolidated Income Statements as
Other income, net. These trading securities are classified as
Other assets on the Consolidated Balance Sheets because the
securities are not available for Cadences use in its
operations.
Cadences obligation with respect to the NQDC trust is
recorded in Other long-term liabilities on its Consolidated
Balance Sheets. Increases and decreases in the NQDC liability
are recorded as compensation expense in the Consolidated Income
Statements.
Deferred revenue arises when customers pay for products
and/or
services in advance of revenue recognition. Cadences
deferred revenue consists primarily of unearned revenue on
maintenance and product licenses for which revenue is recognized
in installments over the duration of the license. Maintenance on
perpetual licenses is generally renewed annually, billed in full
in advance, and the corresponding revenue is recognized over the
ensuing
12-month
maintenance term. The fees under product licenses for which
revenue is not recognized immediately and for maintenance in
connection with term and subscription licenses are generally
billed quarterly in advance and the related revenue is
recognized over multiple periods over the ensuing license period.
Comprehensive
Income (Loss)
Other comprehensive income (loss) includes foreign currency
translation gains and losses and unrealized gains and losses on
marketable securities that are available-for-sale that have been
excluded from Net income and reflected instead in
Stockholders equity. Cadence has reported comprehensive
income (loss) in its Consolidated Statements of
Stockholders Equity. Cadence reclassified
$4.4 million in 2007, net of $1.8 million of tax,
$6.7 million in 2006, net of $2.7 million of tax,
$9.2 million in 2005, net of $3.7 million of tax, from
unrealized holding gains and losses on marketable securities to
realized gains included in Other income, net, in the
accompanying Consolidated Income Statements. The tax benefit for
gross unrealized holding losses in marketable equity securities
was $2.5 million in 2007, $4.4 million in 2006 and
$1.2 million in 2005.
Cadence applies the provisions of
SOP 97-2,
Software Revenue Recognition, as amended by
SOP 98-9,
Modification of
SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions, to all software licensing transactions and
to all product revenue transactions where the software is not
incidental. Cadence also applies the provisions of
SFAS No. 13, Accounting for Leases, to all
hardware lease transactions. Cadence recognizes revenue when
persuasive evidence of an arrangement exists, the product has
been delivered, the fee is fixed or determinable, collection of
the resulting receivable is probable, and vendor-specific
objective evidence of fair value, or VSOE, exists.
Cadence licenses software using three different license types:
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Subscription licenses;
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Term licenses; and
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Perpetual licenses.
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For many of Cadences term and subscription license
arrangements, Cadence uses its proprietary internet-based
delivery mechanism,
eDA-on-tap,
to facilitate the delivery of its software products. To maximize
the efficiency of this delivery mechanism, Cadence created what
it refers to as eDA Cards, of which there are two
types. Subscription license customers may purchase what Cadence
refers to as an eDA Platinum Card, which provides
the customer access to and use of all software products
delivered at the outset of the arrangement and the ability to
use additional unspecified software products that may become
commercially available during the term of the arrangement. Term
license customers may purchase what Cadence refers to as an
eDA Gold Card, which provides the customer access to
and use of all software products delivered at the outset of the
arrangement. Overall,
69
the eDA Cards provide greater flexibility for Cadences
customers in how and when they deploy and use Cadences
software products.
Subscription licenses Cadences
subscription license arrangements offer customers the right to:
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Access and use all software products delivered at the outset of
an arrangement throughout the entire term of the arrangement,
generally two to four years, with no rights to return;
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Use unspecified additional software products that become
commercially available during the term of the
arrangement; and
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Remix among the software products delivered at the outset of the
arrangement, as well as the right to remix into other
unspecified additional software products that may become
available during the term of the arrangement, so long as the
cumulative value of all products in use does not exceed the
total license fee determined at the outset of the arrangement.
These remix rights may be exercisable multiple times during the
term of the arrangement. The right to remix all software
products delivered pursuant to the license agreement is not
considered an exchange or return of software because all
software products have been delivered and the customer has the
continuing right to use them.
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Customers that purchase an eDA Platinum Card have the ability
during the term of the arrangement to use software products
delivered at the outset of the arrangement, and to use other
unspecified additional software products that may become
commercially available during the term of the arrangement, until
the fees have been depleted.
In general, revenue associated with subscription licenses is
recognized ratably over the term of the license commencing upon
the later of the effective date of the arrangement or delivery
of the software product. Subscription license revenue is
allocated to product and maintenance revenue. The allocation to
maintenance revenue is based on vendor specific objective
evidence, or VSOE, of fair value of the undelivered maintenance
that was established in connection with the sale of our term
licenses.
In the event that a subscription license arrangement is
terminated by mutual agreement and a new term license
arrangement is entered into either concurrently with or
subsequent to the termination of the subscription license
arrangement, the revenue associated with the new term license
arrangement is recognized upon the later of the effective date
of the arrangement or delivery of the software product, assuming
all other criteria in
SOP 97-2
have been met.
Term licenses Cadences term license
arrangements offer customers the right to:
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Access and use all software products delivered at the outset of
an arrangement throughout the entire term of the arrangement,
generally two to four years, with no rights to return; and
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Remix among the software products delivered at the outset of the
arrangement, so long as the cumulative value of all products in
use does not exceed the total license fee determined at the
outset of the arrangement. These remix rights may be exercisable
multiple times during the term of the arrangement. The right to
remix all software products delivered pursuant to the license
agreement is not considered an exchange or return of software
because all software products have been delivered and the
customer has the continuing right to use them.
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Customers that purchase an eDA Gold Card have the ability during
the term of the arrangement to use software products delivered
at the outset of the arrangement until the fees relating to the
arrangement have been depleted.
In general, revenue associated with term licenses is recognized
upon the later of the effective date of the arrangement or
delivery of the software product.
Perpetual licenses Cadences perpetual
licenses consist of software licensed on a perpetual basis with
no right to return or exchange the licensed software. In
general, revenue associated with perpetual licenses is
recognized upon the later of the effective date of the license
or delivery of the licensed product.
Persuasive evidence of an arrangement
Generally, Cadence uses a contract signed by the customer as
evidence of an arrangement for subscription and term licenses
and hardware leases. If a contract signed by the customer does
not exist, Cadence has historically used a purchase order as
evidence of an arrangement for perpetual licenses, hardware
sales, maintenance renewals and small fixed-price service
projects, such as training classes and small methodology service
engagements of approximately $10,000 or less. For all other
service engagements,
70
Cadence uses a signed professional services agreement and a
statement of work to evidence an arrangement. In cases where
both a signed contract and a purchase order exist, Cadence
considers the signed contract to be the most persuasive evidence
of the arrangement. Sales through Cadences distributors
are evidenced by a master agreement governing the relationship,
together with binding purchase orders from the distributor on a
transaction-by-transaction
basis.
Product delivery Software and the
corresponding access keys are generally delivered to customers
electronically. Electronic delivery occurs when Cadence provides
the customer access to the software. Occasionally, Cadence will
deliver the software on a compact disc with standard transfer
terms of
free-on-board,
or F.O.B., shipping point. Cadences software license
agreements generally do not contain conditions for acceptance.
With respect to hardware, delivery of an entire system is deemed
to occur upon its successful installation. For certain hardware
products, installation is the responsibility of the customer, as
the system is fully functional at the time of shipment. For
these products, delivery is deemed to be complete when the
products are shipped with freight terms of F.O.B. shipping point.
For customers who purchase eDA Gold or eDA Platinum Cards,
delivery occurs when the customer has been provided with access
codes that allow the customer to download the software pursuant
to the terms of the software license agreement.
Fee is fixed or determinable Cadence assesses
whether a fee is fixed or determinable at the outset of the
arrangement, primarily based on the payment terms associated
with the transaction. Cadence has established a history of
collecting under the original contract without providing
concessions on payments, products or services. For installment
contracts that do not include a substantial up front payment,
Cadence only considers that a fee is fixed or determinable if
the arrangement has payment periods that are equal to or less
than the term of the licenses and the payments are collected in
equal or nearly equal installments, when evaluated over the
entire term of the arrangement. Cadence has a history of
collecting receivables under installment contracts of up to five
years.
Significant judgment is involved in assessing whether a fee is
fixed or determinable. Cadence must also make these judgments
when assessing whether a contract amendment to a term
arrangement (primarily in the context of a license extension or
renewal) constitutes a concession. Cadences experience has
been that it is able to determine whether a fee is fixed or
determinable for term licenses. While Cadence does not expect
that experience to change, if Cadence no longer were to have a
history of collecting under the original contract without
providing concessions on term licenses, revenue from term
licenses would be required to be recognized when payments under
the installment contract become due and payable. Such a change
could have a material impact on Cadences results of
operations.
Collection is probable Cadence assesses the
probability of collecting from each customer at the outset of
the arrangement based on a number of factors, including the
customers payment history and its current
creditworthiness. Cadence has concluded that collection is not
probable for license arrangements executed with customers in
certain countries. If in Cadences judgment collection of a
fee is not probable, Cadence defers the revenue until the
uncertainty is removed, which generally means revenue is
recognized upon receipt of cash payment. Cadences
experience has been that it is able to estimate whether
collection is probable. While Cadence does not expect that
experience to change, if Cadence were to determine that
collection is not probable for any license arrangement,
particularly those with installment payment terms, revenue from
such license would be recognized generally upon receipt of cash
payment. Such a change could have a material impact on
Cadences results of operations.
Vendor-specific objective evidence of fair
value Cadences VSOE for certain product
elements of an arrangement is based upon the pricing in
comparable transactions when the element is sold separately.
VSOE for maintenance is generally based upon the customers
stated annual renewal rates. VSOE for services is generally
based on the price charged when the services are sold
separately. For multiple element arrangements, VSOE must exist
to allocate the total fee among all delivered and undelivered
elements of a term or perpetual license arrangement. If VSOE
does not exist for all elements to support the allocation of the
total fee among all delivered and undelivered elements of the
arrangement, revenue is deferred until such evidence does exist
for the undelivered elements, or until all elements are
delivered, whichever is earlier. If VSOE of all undelivered
elements exists but VSOE does not exist for one or more
delivered elements, revenue is recognized using the residual
method. Under the residual method, the VSOE of the undelivered
elements is deferred, and the remaining portion of the
71
arrangement fee is recognized as revenue as the elements are
delivered. Cadences experience has been that it is able to
determine VSOE for maintenance and time-based services, but not
for product.
Finance fee revenue Finance fees result from
discounting to present value the product revenue derived from
installment contracts in which the payment terms extend beyond
one year from the effective date of the contract. Finance fees
are recognized using a method that approximates the effective
interest method over the relevant license term and are
classified as product revenue. Finance fee revenue represented
approximately 2% of total revenue for each of the years ended
December 29, 2007, December 30, 2006 and
December 31, 2005. Upon the sale of an installment
contract, Cadence recognizes the remaining finance fee revenue
associated with the installment contract.
Services revenue Services revenue consists
primarily of revenue received for performing design and
methodology services. These services are not related to the
functionality of the products licensed. Revenue from service
contracts is recognized either on the time and materials method,
as work is performed, or on the percentage-of-completion method.
For contracts with fixed or not-to-exceed fees, Cadence
estimates on a monthly basis the percentage-of-completion, which
is based on the completion of milestones relating to the
arrangement. Cadence has a history of accurately estimating
project status and the costs necessary to complete projects. A
number of internal and external factors can affect these
estimates, including labor rates, utilization and efficiency
variances and specification and testing requirement changes. If
different conditions were to prevail such that accurate
estimates could not be made, then the use of the completed
contract method would be required and the recognition of all
revenue and costs would be deferred until the project was
completed. Such a change could have a material impact on
Cadences results of operations.
In accordance with EITF
No. 06-03,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation),
Cadence applies the net basis presentation for taxes collected
from customers and remitted to governmental authorities.
Accounting
for Income Taxes
Cadence provides for the effect of income taxes in its
Consolidated Financial Statements in accordance with
SFAS No. 109, Accounting for Income Taxes
and Financial Accounting Standards Board, or FASB,
Interpretation, or FIN, No. 48, Accounting for
Uncertainty in Income Taxes An Interpretation of
FASB Statement No. 109. Cadence must make significant
judgments to apply the principles of SFAS No. 109 and
FIN No. 48.
In accordance with SFAS No. 109, Cadence is required
to estimate its income taxes in each of the jurisdictions in
which it operates. This process involves estimating actual
current tax liabilities together with assessing temporary
differences resulting from differing treatment of items, such as
deferred revenue, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which
are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
Cadence then assesses the likelihood that deferred tax assets
will be recovered from future taxable income, and to the extent
it believes that recovery is not likely, Cadence must establish
a valuation allowance. To the extent Cadence establishes a
valuation allowance for deferred tax assets or increases this
allowance, Cadence may need to include an expense within the tax
provision of its Consolidated Income Statement. The valuation
allowance is based on estimates of taxable income for each
jurisdiction in which Cadence operates for the period over which
deferred tax assets will be recoverable. In the event that
actual results differ from these estimates or Cadence adjusts
these estimates in future periods, Cadence may need to establish
an additional valuation allowance, which could materially affect
its consolidated financial position or results of operations.
Cadence adopted FIN No. 48 on December 31, 2006, which
was the first day of Cadences 2007 fiscal year.
FIN No. 48 requires Cadence to take 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 that the tax position will be
sustained on 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. Cadence re-evaluates
its income tax positions on a quarterly
72
basis to consider factors such as changes in facts or
circumstances, changes in or interpretations of tax law,
effectively settled issues under audit, and new audit activity.
Such a change in recognition or measurement would result in
recognition of a tax benefit or an additional charge to the tax
provision. Upon adoption of FIN No. 48, Cadence
adopted an accounting policy to classify interest and penalties
on unrecognized tax benefits as income tax expense. For years
prior to the adoption of FIN No. 48, Cadence also
reported interest and penalties on unrecognized tax benefits as
income tax expense.
Cadence accounts for restructuring charges in accordance with
SEC Staff Accounting Bulletin No. 100,
Restructuring and Impairment Charges, as amended.
From fiscal 2001 through fiscal 2005, Cadence undertook
significant restructuring initiatives. The individual components
of the restructuring activities initiated prior to fiscal 2003
were accounted for in accordance with EITF
No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring), and EITF
No. 88-10,
Costs Associated with Lease Modifications or
Terminations.
For restructuring activities initiated after fiscal 2002,
Cadence accounted for the leased facilities in accordance with
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. For all periods
presented, Cadence accounted for the asset-related portions of
these restructurings in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. In addition, for all periods presented, the
severance and benefits charges were accounted for in accordance
with SFAS No. 112, Employers Accounting
for Postemployment Benefits An Amendment of FASB
Statements No. 5 and 43.
In connection with these restructuring initiatives, Cadence has
made a number of estimates and assumptions related to losses on
excess facilities vacated or consolidated, particularly the
timing of subleases and sublease terms. Closure and space
reduction costs included in the restructuring charges include
payments required under leases less any applicable estimated
sublease income after the facilities are abandoned, lease buyout
costs and certain contractual costs to maintain facilities
during the period after abandonment.
In addition, Cadence has recorded estimated provisions for
termination benefits and outplacement costs, long-term asset
impairments, and other restructuring costs. Cadence regularly
evaluates the adequacy of its restructuring accrual, and adjusts
the balance based on changes in estimates and assumptions.
Cadence may incur future charges for new restructuring
activities as well as for changes in estimates to amounts
previously recorded.
Cadence adopted SFAS No. 123R Share-Based
Payment, on January 1, 2006 using the modified
prospective transition method. SFAS No. 123R requires
companies to recognize the cost of employee services received in
exchange for awards of equity instruments based upon the fair
value of those awards on the grant date. Using the modified
prospective transition method of adopting
SFAS No. 123R, Cadence began recognizing compensation
expense for equity-based awards granted on or after
January 1, 2006 and unvested awards granted prior to
January 1, 2006. Prior period stock-based compensation
expense was recognized under APB No. 25 Accounting
for Stock Issued to Employees.
Under SFAS No. 123R, stock-based compensation expense
is measured at the grant date based on the value of the option
or restricted stock and is recognized as expense, less expected
forfeitures, over the requisite service period, which is
generally the vesting period. The fair value of each option
grant and each purchase right granted under Cadences
Employee Stock Purchase Program, or ESPP, is estimated on the
date of grant using the Black-Scholes option pricing model. The
fair value of each restricted stock issuance is determined using
the fair value of Cadences common stock on the grant date.
Cadence recognizes stock-based compensation expense on the
straight-line method for options and restricted stock that only
contain a service condition and on the graded-vesting method for
options and restricted stock that contain both a service and
performance condition. Determining the fair value of stock-based
awards at the grant date requires judgment, including estimating
the following:
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Expected volatility of our stock;
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Expected term of stock options;
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Risk-free interest rate for the period;
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Expected dividends, if any; and
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The computation of the expected volatility assumption used in
the Black-Scholes pricing model for option grants is based on
implied volatility calculated using the volatility of publicly
traded options for Cadence common stock. Cadence uses this
approach to determine volatility because:
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Options for Cadences common stock are actively traded;
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The market prices of both the traded options and underlying
shares are measured at a similar point in time to each other and
on a date reasonably close to the grant date of the employee
stock options;
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The traded options have exercise prices that are both
near-the-money and close to the exercise price of the employee
stock options; and
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The remaining maturities of the traded options on which the
estimate is based are at least one year.
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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, thus the expected dividends used in the calculation
are zero.
Judgment is required in estimating the amount of stock-based
awards that Cadence expects to be forfeited. Cadence calculates
a separate expected forfeiture rate for both stock options and
restricted stock issuances based on historical trends. Judgment
is also required to estimate the attainment of certain
predetermined performance goals for a performance-based bonus
plan, under which payments may be made in Cadence common stock,
and performance-based restricted stock grants. Each period, we
estimate the most likely outcome of such performance goals and
recognize 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 valuation of all options, including the expected life of
stock options, and the expected forfeiture rates for options and
restricted stock, are calculated based on one employee pool
because there is no significant difference in exercise behavior
between classes of employees.
Upon adoption of SFAS No. 123R, Cadence made the
election to calculate the tax effects of stock-based
compensation expense using the alternative transition method
pursuant to Financial Statement Position, or FSP,
No. 123R-3
and computed the beginning balance of the APIC tax benefit pool
by applying the simplified method, which resulted in an APIC tax
benefit pool windfall position. Accordingly, upon adoption of
SFAS No. 123R, Cadence had cumulative excess tax
benefits from stock-based compensation available in APIC that
could be used to offset an equal amount of future tax shortfalls
(i.e., when the amount of the tax deductible stock-based
compensation is less than the related stock-based compensation
cost).
Cadence records a gain or loss on re-issuance of treasury stock
based on the total proceeds received in the transaction. Gains
on the re-issuance of treasury stock are recorded as a component
of Capital in excess of par in the Consolidated Statements of
Stockholders Equity. Losses on the re-issuance of treasury
stock are recorded as a component of Capital in excess of par to
the extent that there are gains to offset the losses. If there
are no treasury stock gains in Capital in excess of par, the
losses upon re-issuance of treasury stock are recorded as a
component of Retained earnings in the Consolidated Statements of
Stockholders Equity. During 2007, Cadence recorded losses
on the re-issuance of treasury stock of $24.4 million as a
component of Retained earnings.
Concentrations
of Credit Risk
Financial instruments, including derivative financial
instruments, that may potentially subject Cadence to
concentrations of credit risk, consist principally of cash and
cash equivalents, short-term investments, long-term investments,
accounts receivable and forward contracts. Concentration of
credit risk related to accounts receivable is limited, due to
the varied customers comprising Cadences customer base and
their dispersion across geographical locations. Credit exposure
related to the forward contracts is limited to the realized and
unrealized gains on these contracts. Cadence issued options and
warrants to hedge potential dilution of its convertible notes,
as described more fully in Note 6. Changes in the fair
value of these hedge and warrant
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transactions are not marked to market and are not recognized in
Cadences Consolidated Income Statement as long as the
instruments remain classified as equity. All financial
instruments are executed with financial institutions having
strong credit ratings, which minimizes risk of loss due to
nonpayment.
Fair
Value of Financial Instruments
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, term loan 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. As of December 29, 2007, the total fair market
value of Cadences Convertible Senior Notes was
$515.6 million and the total fair market value of
Cadences 2023 Notes was $266.3 million. See
Note 6 for the fair value of Cadences convertible
note hedges and warrants.
Cadence uses operating leases in its operations. For leases that
contain rent escalations or rent concessions, Cadence records
the total rent payable during the lease term on a straight-line
basis over the term of the lease. Cadence records the difference
between the rents paid and the straight-line rent as a deferred
rent liability in the accompanying Consolidated Balance Sheets.
Cadence expenses the costs of advertising as incurred.
Advertising expense was approximately $8.8 million in 2007,
$10.5 million in 2006 and $9.0 million in 2005, and is
included in Marketing and sales in the accompanying Consolidated
Income Statements.
NOTE 3. STOCK
COMPENSATION PLANS
Cadences 2000 Nonstatutory Equity Incentive Plan, or the
2000 Plan, 1997 Nonstatutory Stock Incentive Plan, or 1997 Plan,
and 1993 Nonstatutory Stock Incentive Plan, or 1993 Plan (the
2000 Plan, the 1997 Plan and the 1993 Plan are referred to
collectively as the Nonstatutory Stock Incentive Plans), provide
for the issuance of non-qualified options, incentive stock,
restricted stock units, stock bonuses and rights to acquire
restricted stock to Cadence employees and consultants who are
not executive officers, directors or beneficial owners of 10% or
more of Cadence common stock. The number of shares available for
issuance under the 2000 Plan is 50,000,000, under the 1997 Plan
is 30,000,000 and under the 1993 Plan is 24,750,000. Options
granted under the Nonstatutory Stock Incentive Plans have an
exercise price not less than the fair market value of the stock
on the date of grant. Options granted to new employees become
exercisable over a period of up to four years, generally with
one-fourth of the shares vesting one year from the vesting
commencement date, and the remaining shares vesting in 36 equal
monthly installments thereafter. Options granted to current
employees become exercisable over a period of up to four years,
generally vesting in 48 equal monthly installments. Options
granted under the Nonstatutory Stock Incentive Plans prior to
October 1, 2006 generally expire ten years from the date of
grant. Options granted under the Nonstatutory Stock Incentive
Plans after October 1, 2006 generally expire seven years
from the date of grant. Awards of incentive stock and restricted
stock units granted under the Nonstatutory Stock Incentive Plans
vest at times and in installments approved by the Board of
Directors or its Compensation Committee, on the basis of
continued employment, passage of time
and/or
performance criteria.
Cadences 1987 Stock Incentive Plan, or the 1987 Plan,
provides for the issuance of either incentive or non-qualified
options and incentive stock. The number of shares available for
issuance under the 1987 Plan is 75,370,100 shares, of which
only 5,000,000 shares may be issued pursuant to incentive
stock awards. Options granted under the 1987 Plan have an
exercise price not less than fair market value of the stock on
the date of grant and become exercisable over periods of up to
five years. Options granted under the 1987 Plan prior to
October 1, 2006 generally expire ten years from the date of
grant. Options granted under the 1987 Plan after October 1,
2006 generally expire seven years from the date of grant. Awards
of incentive stock granted under the 1987 Plan vest at
75
times and in installments set forth in the 1987 Plan and
approved by the Board of Directors or its Compensation
Committee, on the basis of continued employment, passage of time
and/or
performance criteria.
Under the 1995 Directors Stock Option Plan, or the
Directors Plan, Cadence may grant non-qualified options to
its non-employee directors for up to 3,050,000 shares of
common stock at an exercise price equal to the average of the
closing price for 20 trading days prior to the grant date.
Options granted under the Directors Plan prior to
October 1, 2006 have terms of ten years and vest one year
from the date of grant. Options granted under the
Directors Plan after October 1, 2006 expire seven
years from the date of grant and vest one year from the grant
date.
Cadence has assumed certain options granted to employees of
acquired companies, or Acquired Options. The Acquired Options
were assumed by Cadence outside of its stock option plans, and
each option is administered under the terms of the respective
original plans of the acquired companies. All of the Acquired
Options have been adjusted to effectuate the price conversion
under the terms of the acquisition agreement between Cadence and
the relevant acquired company. The Acquired Options generally
become exercisable over a four or five year period and generally
expire between five and ten years from the date of grant. No
additional options will be granted under any of the acquired
companies plans.
Employee
Stock Purchase Plan (ESPP)
In November 1998, the Board of Directors adopted, and the
Cadence stockholders subsequently approved, Cadences
Amended and Restated Employee Stock Purchase Plan, which amended
and restated the 1990 Employee Stock Purchase Plan, or the ESPP.
Subsequent amendments approved by the Board of Directors and
Cadence stockholders increased the number of shares of common
stock authorized for issuance under the ESPP to
46,500,000 shares.
Under the ESPP, substantially all employees may purchase
Cadences common stock 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 each applicable purchase
period, in an amount up to 12% of their annual base earnings
plus bonuses and commissions, subject to a limit in any calendar
year of $25,000 worth of common stock. The offering periods
under the ESPP that began prior to August 1, 2006 were
concurrent
24-month
offering periods. Each offering period was divided into four
consecutive six-month purchase periods. All offering periods
that started before August 1, 2006 continued until they
were completed or until they were terminated as provided in the
documents governing the ESPP. Participants in the ESPP remained
in the
24-month
offering periods until these offering periods were completed or
until such participant withdrew from the ESPP, whichever was
earlier. Effective August 1, 2006, offering periods under
the ESPP are six months with a corresponding six month purchase
period. New offerings begin on each February 1st and
August 1st, and those offerings run consecutively rather
than concurrently. Participants were converted to the six-month
offering periods starting with the next offering period in which
the participants enroll on or after August 1, 2006.
Beginning with the August 1, 2007 offering period, all
participants have been participating in a six-month offering
period and all
24-month
offering periods have been completed. The purchase dates under
the ESPP are January 31st and July 31st of each
year.
|
|
NOTE 4.
|
STOCK-BASED
COMPENSATION
|
Stock-based compensation expense and the related income tax
benefit recognized under SFAS No. 123R in the
Consolidated Income Statements in connection with stock options,
restricted stock and the ESPP in fiscal 2007 and 2006 were as
follows:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
|
Stock options
|
|
$
|
37,769
|
|
$
|
48,288
|
Restricted stock and stock bonuses
|
|
|
52,459
|
|
|
46,488
|
ESPP
|
|
|
11,187
|
|
|
9,210
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
101,415
|
|
$
|
103,986
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
32,442
|
|
$
|
31,895
|
|
|
|
|
|
|
|
76
The exercise price of each stock option granted under
Cadences employee equity incentive plans is equal to or
greater than the market price of Cadences common stock on
the date of grant. 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
model for fiscal years 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Dividend yield
|
|
|
None
|
|
|
None
|
Expected volatility
|
|
|
23.4%
|
|
|
24.2%
|
Risk-free interest rate
|
|
|
4.66%
|
|
|
4.80%
|
Expected life (in years)
|
|
|
4.4
|
|
|
5.1
|
Weighted average fair value of options granted
|
|
$
|
5.16
|
|
$
|
5.58
|
The decrease in Cadences expected life assumption from
5.1 years in 2006 to 4.4 years in 2007 is primarily
due to the decrease in the contractual life from 10 to
7 years of options granted after October 1, 2006.
A summary of the changes in stock options outstanding under
Cadences equity incentive plans during the year ended
December 29, 2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted
|
|
Remaining
|
|
|
|
|
|
|
|
Average
|
|
Contractual
|
|
Aggregate
|
|
|
|
|
|
Exercise
|
|
Terms
|
|
Intrinsic
|
|
|
Shares
|
|
|
Price
|
|
(Years)
|
|
Value
|
|
|
(Dollars and shares in thousands)
|
|
Options outstanding as of December 30, 2006
|
|
|
55,254
|
|
|
$
|
15.49
|
|
5.8
|
|
$
|
186,089
|
Acquired options
|
|
|
183
|
|
|
$
|
1.15
|
|
|
|
|
|
Granted
|
|
|
2,778
|
|
|
$
|
21.57
|
|
|
|
|
|
Exercised
|
|
|
(15,243
|
)
|
|
$
|
13.95
|
|
|
|
|
|
Canceled and forfeited
|
|
|
(1,797
|
)
|
|
$
|
18.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 29, 2007
|
|
|
41,175
|
|
|
$
|
16.26
|
|
5.1
|
|
$
|
98,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested as of December 29, 2007
|
|
|
32,334
|
|
|
$
|
16.32
|
|
4.6
|
|
$
|
81,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested as of December 29, 2007 and options expected
to vest after December 29, 2007
|
|
|
40,082
|
|
|
$
|
16.24
|
|
5.1
|
|
$
|
97,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cadence had total unrecognized compensation expense, net of
estimated forfeitures, related to stock option grants of
$35.3 million as of December 29, 2007, which will be
recognized over the remaining weighted average vesting period of
2.0 years. The total intrinsic value of options exercised
was $113.7 million during 2007 and $55.9 million
during 2006. Cash received from stock option exercises was
$211.5 million during 2007 and $114.9 million during
2006.
Restricted
Stock and Stock Bonuses
Generally, restricted stock awards vest over four years and are
subject to the employees continuing service to C