Cadence(CDNS) - 2024 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides Cadence Design Systems, Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis for the period ended September 30, 2024 Item 1. Financial Statements This section presents Cadence Design Systems, Inc.'s unaudited condensed consolidated financial statements for the period ended September 30, 2024, including balance sheets, income statements, statements of comprehensive income, stockholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, revenue recognition, debt, acquisitions, and other financial details Condensed Consolidated Balance Sheets This section presents Cadence's condensed consolidated balance sheets, detailing assets, liabilities, and stockholders' equity as of September 30, 2024, and December 31, 2023 | Metric | September 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------------- | :-------------------------------- | :------------------------------- | | ASSETS | | | | Cash and cash equivalents | $2,786,040 | $1,008,152 | | Total current assets | $4,099,923 | $1,976,217 | | Goodwill | $2,493,467 | $1,535,845 | | Acquired intangibles, net | $662,343 | $336,843 | | Total assets | $9,167,031 | $5,669,491 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Total current liabilities | $1,674,994 | $1,590,867 | | Long-term debt | $2,475,232 | $299,771 | | Total liabilities and stockholders' equity | $9,167,031 | $5,669,491 | - Total assets increased significantly to $9,167,031 thousand as of September 30, 2024, from $5,669,491 thousand at December 31, 2023, driven by substantial increases in cash and cash equivalents, goodwill, and acquired intangibles[4] - Long-term debt saw a substantial increase to $2,475,232 thousand as of September 30, 2024, compared to $299,771 thousand at December 31, 2023[4] Condensed Consolidated Income Statements This section provides Cadence's condensed consolidated income statements, detailing revenue, operating income, and net income for the three and nine months ended September 30, 2024 and 2023 | Metric | Three Months Ended Sep 30, 2024 (in thousands) | Three Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Total revenue | $1,023,094 | $1,023,094 | $3,285,283 | $3,021,363 | | Income from operations | $292,906 | $292,906 | $893,888 | $914,697 | | Net income | $254,321 | $254,321 | $715,274 | $717,245 | | Net income per share – diluted | $0.93 | $0.93 | $2.61 | $2.63 | - Total revenue for the nine months ended September 30, 2024, increased by 8.7% to $3,285,283 thousand from $3,021,363 thousand in the prior year period[5] - Net income for the nine months ended September 30, 2024, slightly decreased to $715,274 thousand from $717,245 thousand in the prior year period, while diluted EPS also saw a minor decrease from $2.63 to $2.61[5] Condensed Consolidated Statements of Comprehensive Income This section presents Cadence's condensed consolidated statements of comprehensive income, including net income and other comprehensive income components for the periods ended September 30, 2024 and 2023 | Metric | Three Months Ended Sep 30, 2024 (in thousands) | Three Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | | :----------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net income | $238,111 | $254,321 | $715,274 | $717,245 | | Total other comprehensive income (loss), net of tax effects | $95,228 | $(22,551) | $80,805 | $(21,424) | | Comprehensive income | $333,339 | $231,770 | $796,079 | $695,821 | - Comprehensive income for the nine months ended September 30, 2024, increased to $796,079 thousand from $695,821 thousand in the prior year, primarily due to positive foreign currency translation adjustments and other comprehensive income[6] Condensed Consolidated Statements of Stockholders' Equity This section details changes in Cadence's stockholders' equity, including common shares outstanding, retained earnings, and treasury stock, for the periods ended September 30, 2024 and December 31, 2023 | Metric | September 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------------- | :-------------------------------- | :------------------------------- | | Total Stockholders' Equity | $4,563,338 | $3,404,271 | | Common Shares Outstanding | 274,263 | 271,706 | | Retained Earnings | $5,651,658 | $4,936,384 | | Treasury Stock, at cost | $(5,141,957) | $(4,604,323) | - Total stockholders' equity increased to $4,563,338 thousand as of September 30, 2024, from $3,404,271 thousand at December 31, 2023, driven by net income, stock-based compensation expense, and issuance of common stock[7][9] - The company repurchased $400,018 thousand of treasury stock during the nine months ended September 30, 2024[9] Condensed Consolidated Statements of Cash Flows This section outlines Cadence's cash flows from operating, investing, and financing activities, and the resulting changes in cash and cash equivalents for the nine months ended September 30, 2024 and 2023 | Metric | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | | :----------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net cash provided by operating activities | $819,192 | $1,077,085 | | Net cash used for investing activities | $(797,106) | $(313,573) | | Net cash provided by (used for) financing activities | $1,750,379 | $(665,968) | | Increase in cash and cash equivalents | $1,777,888 | $79,657 | | Cash and cash equivalents at end of period | $2,786,040 | $961,982 | - Net cash provided by operating activities decreased to $819,192 thousand for the nine months ended September 30, 2024, from $1,077,085 thousand in the prior year period[11] - Net cash used for investing activities significantly increased to $(797,106) thousand, primarily due to cash paid in business combinations[11] - Net cash provided by financing activities dramatically increased to $1,750,379 thousand, largely due to proceeds from the issuance of debt[11] Notes to Condensed Consolidated Financial Statements This section provides detailed notes explaining Cadence's significant accounting policies, revenue recognition, debt, acquisitions, and other financial details supporting the condensed consolidated financial statements NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the basis of presentation for the unaudited condensed consolidated financial statements, prepared in accordance with SEC rules and U.S. GAAP. It highlights the use of estimates, the fiscal year end, and discusses recently adopted and new accounting standards not yet adopted, specifically mentioning ASU No. 2023-07 on Segment Reporting and ASU No. 2023-09 on Income Taxes - The condensed consolidated financial statements are unaudited and prepared in accordance with SEC rules and U.S. GAAP, with certain information condensed or omitted[12] - Cadence's fiscal year ends on December 31, with fiscal quarters ending on March 31, June 30, and September 30[13] - The company is evaluating the impact of new accounting standards, ASU No. 2023-07 (Segment Reporting) and ASU No. 2023-09 (Income Taxes), which are effective for fiscal years beginning after December 15, 2023, and December 15, 2024, respectively[15] NOTE 2. REVENUE This note details Cadence's revenue recognition policies, including the breakdown by product category and the classification of revenue as recurring or up-front. It also discusses significant judgments in contract accounting, contract balances, and remaining performance obligations | Product Category | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Custom IC Design and Simulation | 19 % | 22 % | 20 % | 21 % | | Digital IC Design and Signoff | 24 % | 28 % | 27 % | 27 % | | Functional Verification | 27 % | 26 % | 26 % | 29 % | | Intellectual Property ("IP") | 14 % | 11 % | 13 % | 11 % | | System Design and Analysis | 16 % | 13 % | 14 % | 12 % | | Total | 100 % | 100 % | 100 % | 100 % | | Revenue Type | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :---------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Recurring revenue | 82 % | 85 % | 86 % | 83 % | | Up-front revenue | 18 % | 15 % | 14 % | 17 % | | Total | 100 % | 100 % | 100 % | 100 % | - Contracted but unsatisfied performance obligations were approximately $5.6 billion as of September 30, 2024, with 57% expected to be recognized as revenue over the next 12 months[25] NOTE 3. RECEIVABLES, NET This note provides a breakdown of Cadence's receivables, net, including accounts receivable, unbilled accounts receivable, and long-term receivables, and the allowance for doubtful accounts | Metric | September 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :--------------------------- | :-------------------------------- | :------------------------------- | | Accounts receivable | $322,363 | $299,814 | | Unbilled accounts receivable | $243,951 | $193,963 | | Total receivables, net | $577,227 | $499,979 | - Total receivables, net, increased to $577,227 thousand as of September 30, 2024, from $499,979 thousand at December 31, 2023[26] NOTE 4. DEBT This note details Cadence's outstanding debt, including Senior Notes and Term Loans, and the new Revolving Credit Facility. It highlights the issuance of new Senior Notes in September 2024 and the prepayment of existing Term Loans | Debt Type | September 30, 2024 Principal (in thousands) | December 31, 2023 Principal (in thousands) | | :-------------------- | :------------------------------------------ | :----------------------------------------- | | 2024 Notes | $350,000 | $350,000 | | 2025 Term Loan | — | $300,000 | | 2027 Notes | $500,000 | — | | 2029 Notes | $1,000,000 | — | | 2034 Notes | $1,000,000 | — | | Total outstanding debt | $2,850,000 | $650,000 | - Cadence issued $2.5 billion in new Senior Notes (2027, 2029, and 2034 Notes) in September 2024, significantly increasing total outstanding debt[29] - The 2025 Term Loan and 2026 Term Loan were fully prepaid in September 2024 using proceeds from the New Notes[32] - A new five-year senior unsecured revolving credit facility (2024 Credit Facility) of up to $1.25 billion (expandable to $1.75 billion) was entered into in August 2024, with no outstanding borrowings as of September 30, 2024[33] NOTE 5. ACQUISITIONS This note details Cadence's acquisitions during fiscal 2024, including BETA CAE Systems International AG and Invecas, Inc., outlining the purchase consideration, allocation of assets and liabilities, and the strategic rationale behind these acquisitions - On May 30, 2024, Cadence acquired BETA CAE for an aggregate purchase consideration of $1.14 billion (net of cash acquired), comprising $636.2 million cash and 1.74 million shares of common stock valued at $501.8 million[34] - The BETA CAE acquisition is intended to accelerate Cadence's Intelligent System Design™ strategy by expanding its multiphysics system analysis portfolio and entering the structural analysis space[34] - On January 8, 2024, Cadence acquired Invecas for $71.2 million cash (net of cash acquired), adding a skilled system design engineering team with expertise in custom solutions across chip design, product engineering, advanced packaging, and embedded software[38][90] NOTE 6. GOODWILL AND ACQUIRED INTANGIBLES This note provides a summary of changes in goodwill and acquired intangible assets, detailing the impact of acquisitions and foreign currency translation on these balances, and outlines the amortization expense for acquired intangibles | Metric | December 31, 2023 (in thousands) | September 30, 2024 (in thousands) | | :----------------------------------- | :------------------------------- | :-------------------------------- | | Goodwill | $1,535,845 | $2,493,467 | | Acquired intangibles, Net | $336,843 | $662,343 | - Goodwill increased by $898,053 thousand during the nine months ended September 30, 2024, primarily due to acquisitions[44] - Total amortization of acquired intangibles for the nine months ended September 30, 2024, was $63,673 thousand, up from $45,050 thousand in the prior year period[47] NOTE 7. STOCK-BASED COMPENSATION This note details the stock-based compensation expense recognized across various functional areas and the total unrecognized compensation expense | Expense Category | Three Months Ended Sep 30, 2024 (in thousands) | Three Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Total stock-based compensation expense | $109,013 | $88,032 | $284,711 | $238,928 | - Total unrecognized compensation expense related to stock option and restricted stock grants was $763.1 million as of September 30, 2024, expected to be recognized over a weighted average vesting period of 1.9 years[50] NOTE 8. STOCK REPURCHASE PROGRAM This note outlines Cadence's stock repurchase program, including the number of shares repurchased and the remaining authorization | Metric | Three Months Ended Sep 30, 2024 (in thousands) | Three Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | | :------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Shares repurchased | 563 | 811 | 1,411 | 2,657 | | Total cost of repurchased shares | $150,008 | $185,008 | $400,018 | $575,127 | - As of September 30, 2024, approximately $1.0 billion of Cadence's share repurchase authorization remained available[52] NOTE 9. RESTRUCTURING This note details the 2024 Restructuring Plan initiated in August 2024, outlining the charges incurred and the expected cash payments | Metric | Nine Months Ended Sep 30, 2024 (in thousands) | | :----------------------------------- | :-------------------------------------------- | | Restructuring charges | $24,785 | | Cash payments | $(11,644) | | Balance as of September 30, 2024 | $14,949 | - The 2024 Restructuring Plan, initiated in August 2024, resulted in $24,785 thousand in charges for the nine months ended September 30, 2024, primarily for severance and termination benefits[55][56] NOTE 10. OTHER INCOME, NET This note provides a breakdown of other income, net, including interest income, gains/losses on investments, and foreign exchange gains/losses | Metric | Three Months Ended Sep 30, 2024 (in thousands) | Three Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Interest income | $16,933 | $8,453 | $35,330 | $22,253 | | Gain (loss) on investments | $(16,141) | $13,289 | $64,458 | $12,735 | | Total other income, net | $7,853 | $16,106 | $111,371 | $32,363 | - Total other income, net, for the nine months ended September 30, 2024, significantly increased to $111,371 thousand from $32,363 thousand in the prior year, primarily driven by gains on investments[57] NOTE 11. NET INCOME PER SHARE This note presents the calculations for basic and diluted net income per share, including the weighted average common shares outstanding and potential common shares excluded from diluted EPS | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :----------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income per share – basic | $0.87 | $0.94 | $2.64 | $2.66 | | Net income per share – diluted | $0.87 | $0.93 | $2.61 | $2.63 | | Weighted average common shares outstanding – diluted (in thousands) | 273,958 | 272,427 | 273,679 | 272,859 | - Diluted net income per share for the nine months ended September 30, 2024, was $2.61, a slight decrease from $2.63 in the prior year period[59] NOTE 12. INVESTMENTS This note describes Cadence's investments in equity and debt securities, distinguishing between marketable and non-marketable equity investments, and available-for-sale debt securities - Marketable equity investments increased to $104.7 million as of September 30, 2024, from $80.6 million at December 31, 2023[61] - Net gains recognized on equity securities still held for the nine months ended September 30, 2024, were $44,233 thousand, a significant increase from $696 thousand in the prior year[65] | Debt Securities | September 30, 2024 Estimated Fair Value (in thousands) | December 31, 2023 Estimated Fair Value (in thousands) | | :---------------------------------- | :--------------------------------------------------- | :---------------------------------------------------- | | Mortgage-backed and asset-backed securities | $50,557 | $49,785 | | Total available-for-sale securities | $50,557 | $49,785 | NOTE 13. FAIR VALUE This note explains Cadence's fair value hierarchy (Level 1, 2, and 3 inputs) used for measuring financial assets and liabilities, and details the valuation techniques for acquired intangible assets | Asset Type | September 30, 2024 Total Fair Value (in thousands) | Level 1 (in thousands) | Level 2 (in thousands) | | :-------------------------------- | :----------------------------------- | :--------------------- | :--------------------- | | Money market funds | $1,963,013 | $1,963,013 | $— | | Marketable equity securities | $104,693 | $104,693 | $— | | Mortgage-backed and asset-backed securities | $50,557 | $— | $50,557 | | Securities held in NQDC trust | $93,984 | $93,984 | $— | | Foreign currency exchange contracts | $7,308 | $— | $7,308 | | Total Assets | $2,219,555 | $2,161,690 | $57,865 | - Acquired intangible assets of $366.0 million during the nine months ended September 30, 2024, were valued using Level 3 inputs, primarily through the relief-from-royalty method for existing technology and the multi-period excess earnings method for agreements and relationships[75] NOTE 14. INVENTORY This note provides a breakdown of Cadence's inventory balances, including raw materials, work-in-process, and finished goods | Inventory Type | September 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :----------------- | :-------------------------------- | :------------------------------- | | Raw materials | $270,934 | $162,754 | | Work-in-process | $722 | $— | | Finished goods | $21,694 | $18,907 | | Total inventories | $293,350 | $181,661 | - Total inventories increased to $293,350 thousand as of September 30, 2024, from $181,661 thousand at December 31, 2023, primarily due to an increase in raw materials[76] NOTE 15. COMMITMENTS AND CONTINGENCIES This note discusses Cadence's involvement in legal and tax proceedings, as well as other contingencies like product warranties and indemnification provisions - Cadence received a refund for a $49 million tax audit assessment from Korea taxing authorities for years 2017-2019, which was cancelled by the Tax Tribunal in August 2024[78] - The company is involved in various disputes and litigation in the ordinary course of business, including intellectual property, indemnification, and M&A related matters[77] NOTE 16. ACCUMULATED OTHER COMPREHENSIVE LOSS This note details the components of accumulated other comprehensive loss, including foreign currency translation adjustments, defined benefit plan liabilities, and unrealized gains/losses on derivatives and debt securities | Component | September 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :--------------------------------------------------- | :-------------------------------- | :------------------------------- | | Foreign currency translation loss | $(3,348) | $(90,678) | | Changes in defined benefit plan liabilities | $(4,177) | $(4,208) | | Unrealized losses on derivatives designated as hedging instruments | $(7,131) | $— | | Unrealized gains on available-for-sale debt securities | $707 | $132 | | Total accumulated other comprehensive loss | $(13,949) | $(94,754) | - Total accumulated other comprehensive loss significantly decreased to $(13,949) thousand as of September 30, 2024, from $(94,754) thousand at December 31, 2023, primarily due to a reduction in foreign currency translation loss[81] - Cadence incurred a $9.7 million loss from settling treasury lock agreements in September 2024, which will be amortized to interest expense over the term of the 2034 Notes[81] NOTE 17. SEGMENT REPORTING This note explains Cadence's segment reporting approach, which is based on a single operating segment, and provides a summary of revenue and long-lived assets by geographic region - Cadence operates as one operating segment, with the CEO reviewing consolidated results and disaggregated revenue by geographic region[82] | Geography | Three Months Ended Sep 30, 2024 (in thousands) | Three Months Ended Sep 30, 2023 (in thousands) | Nine Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2023 (in thousands) | | :----------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Total Americas | $605,402 | $437,347 | $1,587,101 | $1,289,372 | | Total Asia | $367,836 | $369,853 | $1,019,333 | $1,082,381 | | Europe, Middle East and Africa | $174,606 | $158,194 | $496,183 | $479,268 | | Japan | $67,655 | $57,700 | $182,666 | $170,342 | | Total | $1,215,499 | $1,023,094 | $3,285,283 | $3,021,363 | - Revenue in the United States increased by 38% for the three months ended September 30, 2024, compared to the prior year, while revenue in China decreased by 9% in the same period[84][107] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Cadence's financial condition and results of operations for the three and nine months ended September 30, 2024. It covers business overview, recent acquisitions, macroeconomic impacts, critical accounting estimates, and detailed analysis of revenue, costs, operating expenses, and liquidity Business Overview Cadence is a global leader in electronic system design software and IP, leveraging over 35 years of computational software expertise. The company's Intelligent System Design strategy focuses on providing computational software, hardware, IP, and services across various vertical sectors, enabling customers to develop complex semiconductor and electronic systems - Cadence is a leading pioneer in electronic system design software and intellectual property (IP), with over 35 years of computational software expertise[88] - The company's Intelligent System Design strategy delivers essential computational software, hardware, and IP to customers in sectors like automotive, AI, aerospace and defense, high-performance computing, and wireless communications[88] - Products are grouped into categories: Custom IC Design and Simulation, Digital IC Design and Signoff, Functional Verification, IP, and System Design and Analysis[88] Recent Acquisitions Cadence completed two strategic acquisitions in fiscal 2024: Invecas, Inc., to enhance design engineering and system-level solutions, and BETA CAE Systems International AG, to expand its multiphysics system analysis portfolio, aligning with its Intelligent System Design strategy - Acquired Invecas, Inc. in Q1 2024, adding a skilled engineering team for end-to-end system solutions and expertise in advanced nodes, mixed-signal, verification, embedded software, and packaging[90] - Acquired BETA CAE Systems International AG in Q2 2024, expanding its multiphysics system analysis suite and offering a comprehensive portfolio to automotive, aerospace, industrial, and healthcare customers[92] Macroeconomic and Geopolitical Environment Cadence operates globally and is subject to economic downturns, foreign currency volatility, interest rate changes, and expanded trade control laws. While the business model offers resilience, the company continuously monitors geopolitical conflicts and trade restrictions, which have had limited material impact to date - Global operations expose Cadence to economic downturns, foreign currency volatility, interest rate changes, and expanded trade control laws and regulations[93] - Expanded trade control laws, particularly concerning advanced node IC production in China, are expected to have a limited impact on the business[93] - Geopolitical conflicts (e.g., Russia-Ukraine, Middle East) have not materially impacted operations, financial condition, liquidity, or cash flows[93] Critical Accounting Estimates The preparation of financial statements requires management to make significant assumptions, judgments, and estimates that impact reported revenue, operating income, net income, and asset/liability values. These estimates are evaluated quarterly, and actual results may differ materially under different conditions - Management's assumptions, judgments, and estimates significantly impact revenue, operating income, net income, and asset/liability values[94] - Estimates are based on historical experience and other reasonable factors, but actual results could differ materially[94] New Accounting Standards Cadence has not recently adopted any material accounting standard updates and is currently evaluating the impact of new FASB ASUs on Segment Reporting and Income Taxes - No recently adopted accounting standard updates are material or potentially material to the condensed consolidated financial statements[15][95] Results of Operations Cadence's financial results for the three and nine months ended September 30, 2024, reflect revenue growth from software, services, and IP, alongside increased investments in R&D and technical sales, restructuring activities, higher interest expense, and fluctuating investment gains/losses - Financial results show growth in revenue from software, services, and IP offerings[96] - Increased investment in research and development and technical sales support, including headcount from acquisitions, contributed to higher costs[96] - Restructuring activities and increased interest expense from outstanding indebtedness also impacted financial performance[96] Revenue Cadence generates revenue primarily from licensing software and IP, selling/leasing emulation and prototyping hardware, providing maintenance, engineering services, and IP royalties. Revenue timing is influenced by product mix and recognition method (over time or at a point in time) - Revenue is primarily generated from licensing software and IP, selling/leasing emulation and prototyping hardware, providing maintenance, engineering services, and IP royalties[97] - Recurring revenue includes revenue recognized over time from software, services, royalties, maintenance, and operating leases, as well as non-cancelable commitments[98] - Up-front revenue is primarily from sales of emulation and prototyping hardware, individual IP licenses, and certain software licenses[98] Revenue by Period Total revenue increased by 19% for the three months and 9% for the nine months ended September 30, 2024, compared to the prior year. Product and maintenance revenue grew due to IP, software, and hardware, while services revenue saw significant increases, partly due to the Invecas acquisition | Revenue Type | Three Months Ended Sep 30, 2024 (in millions) | Three Months Ended Sep 30, 2023 (in millions) | Change Amount (in millions) | Percentage Change | | :---------------------- | :-------------------------------------------- | :-------------------------------------------- | :-------------------------- | :---------------- | | Product and maintenance | $1,100.4 | $965.8 | $134.6 | 14 % | | Services | $115.1 | $57.3 | $57.8 | 101 % | | Total revenue | $1,215.5 | $1,023.1 | $192.4 | 19 % | | Revenue Type | Nine Months Ended Sep 30, 2024 (in millions) | Nine Months Ended Sep 30, 2023 (in millions) | Change Amount (in millions) | Percentage Change | | :---------------------- | :------------------------------------------- | :------------------------------------------- | :-------------------------- | :---------------- | | Product and maintenance | $2,974.2 | $2,852.4 | $121.8 | 4 % | | Services | $311.1 | $169.0 | $142.1 | 84 % | | Total revenue | $3,285.3 | $3,021.4 | $263.9 | 9 % | - Services revenue increased by 101% for the three months and 84% for the nine months ended September 30, 2024, primarily due to increased design service offerings and the Invecas acquisition[101][103][104] Revenue by Product Category Revenue distribution across product categories fluctuates based on demand and resource availability. For the three months ended September 30, 2024, Functional Verification was the largest category at 27%, while Custom IC Design and Simulation and Digital IC Design and Signoff saw slight decreases compared to the prior year | Product Category | Sep 30, 2024 | Sep 30, 2023 | | :---------------------------------------------------- | :----------- | :----------- | | Custom IC Design and Simulation | 19 % | 22 % | | Digital IC Design and Signoff | 24 % | 28 % | | Functional Verification, including Emulation and Prototyping Hardware | 27 % | 26 % | | IP | 14 % | 11 % | | System Design and Analysis | 16 % | 13 % | | Total | 100 % | 100 % | - Functional Verification, including Emulation and Prototyping Hardware, increased its share to 27% of total revenue for the three months ended September 30, 2024, from 26% in the prior year[105] - IP and System Design and Analysis categories showed increased revenue percentages for the three months ended September 30, 2024, indicating growth in these areas[105] Revenue by Geography Revenue in the United States saw significant growth for both the three and nine months ended September 30, 2024, driven by hardware, IP, and software offerings. Conversely, revenue in China decreased, primarily due to lower hardware and software sales | Geography | Three Months Ended Sep 30, 2024 (in millions) | Three Months Ended Sep 30, 2023 (in millions) | Change Amount (in millions) | Percentage Change | | :----------------------------- | :-------------------------------------------- | :-------------------------------------------- | :-------------------------- | :---------------- | | United States | $580.5 | $421.6 | $158.9 | 38 % | | China | $156.7 | $172.0 | $(15.3) | (9)% | | Other Asia | $211.1 | $197.8 | $13.3 | 7 % | | Total revenue | $1,215.5 | $1,023.1 | $192.4 | 19 % | | Geography | Nine Months Ended Sep 30, 2024 (in millions) | Nine Months Ended Sep 30, 2023 (in millions) | Change Amount (in millions) | Percentage Change | | :----------------------------- | :------------------------------------------- | :------------------------------------------- | :-------------------------- | :---------------- | | United States | $1,523.2 | $1,241.5 | $281.7 | 23 % | | China | $401.7 | $523.7 | $(122.0) | (23)% | | Other Asia | $617.6 | $558.7 | $58.9 | 11 % | | Total revenue | $3,285.3 | $3,021.4 | $263.9 | 9 % | - Revenue in China decreased by 23% for the nine months ended September 30, 2024, primarily due to a decrease in hardware and software offerings[108] Cost of Revenue Cost of revenue increased for both product and maintenance and services categories for the three and nine months ended September 30, 2024. Services cost of revenue saw a substantial increase, primarily due to design service offerings and the Invecas acquisition | Cost Type | Three Months Ended Sep 30, 2024 (in millions) | Three Months Ended Sep 30, 2023 (in millions) | Change Amount (in millions) | Percentage Change | | :------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :-------------------------- | :---------------- | | Cost of product and maintenance | $109.6 | $85.8 | $23.8 | 28 % | | Cost of services | $53.5 | $23.8 | $29.7 | 125 % | | Cost Type | Nine Months Ended Sep 30, 2024 (in millions) | Nine Months Ended Sep 30, 2023 (in millions) | Change Amount (in millions) | Percentage Change | | :------------------------------ | :------------------------------------------- | :------------------------------------------- | :-------------------------- | :---------------- | | Cost of product and maintenance | $279.4 | $260.3 | $19.1 | 7 % | | Cost of services | $148.2 | $70.6 | $77.6 | 110 % | - Cost of services increased by 125% for the three months and 110% for the nine months ended September 30, 2024, primarily due to increased design service offerings and costs from the Invecas acquisition[111][118] Cost of Product and Maintenance Cost of product and maintenance increased due to higher emulation and prototyping hardware costs from increased installations in the three-month period, and increased charges for excess and obsolete inventory in the nine-month period, partially offset by decreased hardware installations | Cost Component | Three Months Ended Sep 30, 2024 (in millions) | Nine Months Ended Sep 30, 2024 (in millions) | | :------------------------------------ | :-------------------------------------------- | :------------------------------------------- | | Emulation and prototyping hardware costs | $12.8 | $3.6 | | Other items | $4.4 | $4.9 | | Total change in product and maintenance-related costs | $17.2 | $8.5 | - Emulation and prototyping hardware costs increased in the three-month period due to increased installations, but the nine-month increase was primarily from higher excess and obsolete inventory charges, despite fewer installations[114][116] - Amortization of acquired intangibles included in cost of product and maintenance increased by 60% for the three months and 33% for the nine months ended September 30, 2024[113] Cost of Services Cost of services increased significantly for both the three and nine months ended September 30, 2024, primarily driven by higher costs associated with design service offerings and the integration of service offerings from the Invecas acquisition - Cost of services increased due to higher costs for design service offerings and the service offerings from the Invecas acquisition[118] Operating Expenses Total operating expenses increased by 11% for the three months and 10% for the nine months ended September 30, 2024, primarily due to increased employee-related costs, stock-based compensation, and professional services, partly from acquisitions | Expense Category | Three Months Ended Sep 30, 2024 (in millions) | Three Months Ended Sep 30, 2023 (in millions) | Change Amount (in millions) | Percentage Change | | :------------------------- | :-------------------------------------------- | :-------------------------------------------- | :-------------------------- | :---------------- | | Marketing and sales | $189.8 | $176.2 | $13.6 | 8 % | | Research and development | $407.4 | $369.6 | $37.8 | 10 % | | General and administrative | $71.6 | $58.6 | $13.0 | 22 % | | Total operating expenses | $668.8 | $604.4 | $64.4 | 11 % | | Expense Category | Nine Months Ended Sep 30, 2024 (in millions) | Nine Months Ended Sep 30, 2023 (in millions) | Change Amount (in millions) | Percentage Change | | :------------------------- | :------------------------------------------- | :------------------------------------------- | :-------------------------- | :---------------- | | Marketing and sales | $557.1 | $510.0 | $47.1 | 9 % | | Research and development | $1,157.1 | $1,074.4 | $82.7 | 8 % | | General and administrative | $203.7 | $166.7 | $37.0 | 22 % | | Total operating expenses | $1,917.9 | $1,751.1 | $166.8 | 10 % | - Operating expenses as a percentage of total revenue decreased to 55% for the three months ended September 30, 2024, from 59% in the prior year, but remained consistent at 58% for the nine-month period[123] Marketing and Sales Marketing and sales expense increased due to higher salary, benefits, and stock-based compensation costs, reflecting continued investment in technical sales support and additional headcount from acquisitions | Cost Component | Three Months Ended Sep 30, 2024 (in millions) | Nine Months Ended Sep 30, 2024 (in millions) | | :------------------------------------------ | :-------------------------------------------- | :------------------------------------------- | | Salary, benefits and other employee-related costs | $9.6 | $32.2 | | Stock-based compensation | $3.6 | $6.7 | | Facilities and other infrastructure costs | $1.1 | $5.4 | | Total change in marketing and sales expense | $13.6 | $47.1 | - The increase in marketing and sales expense is primarily due to continued investment in attracting and retaining talent for technical sales support, including additional headcount from acquisitions[124] Research and Development Research and development expense increased due to higher employee-related costs, stock-based compensation, and facilities costs, reflecting ongoing investment in R&D activities and additional headcount from acquisitions | Cost Component | Three Months Ended Sep 30, 2024 (in millions) | Nine Months Ended Sep 30, 2024 (in millions) | | :------------------------------------------ | :-------------------------------------------- | :------------------------------------------- | | Salary, benefits and other employee-related costs | $20.6 | $36.1 | | Stock-based compensation | $14.8 | $33.8 | | Facilities and other infrastructure costs | $4.2 | $12.4 | | Total change in research and development expense | $37.8 | $82.7 | - The increase in R&D expense is primarily due to continued investment in attracting and retaining talent for research and development activities, including additional headcount from acquisitions[125] General and Administrative General and administrative expense increased due to higher professional services costs related to acquisition activities, increased employee-related costs from acquisitions, and a rise in foreign service tax | Cost Component | Three Months Ended Sep 30, 2024 (in millions) | Nine Months Ended Sep 30, 2024 (in millions) | | :------------------------------------------ | :-------------------------------------------- | :------------------------------------------- | | Professional services | $3.2 | $18.6 | | Salary, benefits and other employee-related costs | $7.8 | $10.0 | | Foreign service tax | $— | $5.0 | | Total change in general and administrative expense | $13.0 | $37.0 | - Professional services increased due to legal and consulting services associated with acquisition-related activities[126] - An increase in foreign service tax was experienced during the nine months ended September 30, 2024, as the company did not benefit from refunds as in the prior year[126] Restructuring Cadence initiated a new restructuring plan in August 2024 to better align resources with its business strategy. Restructuring charges are based on management's estimates, and future actions may be required - A new restructuring plan was initiated in August 2024 to better align resources with business strategy[127] - Restructuring charges are based on management's estimates, and anticipated benefits may not be fully realized[127] Operating Margin Operating margin remained consistent at 29% for the three months ended September 30, 2024, but decreased to 27% for the nine-month period, primarily due to product and service mix and incremental expenses from recent acquisitions exceeding incremental revenue | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | | :--------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Operating margin | 29 % | 29 % | 27 % | 30 % | - Operating margin decreased for the nine months ended September 30, 2024, primarily due to the mix of products and services sold and incremental expenses from fiscal 2023 and 2024 acquisitions exceeding incremental revenue[128] Interest Expense Interest expense significantly increased for both the three and nine months ended September 30, 2024, primarily due to increased debt during fiscal 2024, including new Senior Notes and Term Loans | Expense Type | Three Months Ended Sep 30, 2024 (in millions) | Three Months Ended Sep 30, 2023 (in millions) | Nine Months Ended Sep 30, 2024 (in millions) | Nine Months Ended Sep 30, 2023 (in millions) | | :------------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Total interest expense | $24.5 | $9.1 | $46.1 | $27.2 | - Interest expense increased primarily due to interest related to increased debt during fiscal 2024, including new Senior Notes and Term Loans[130] Income Taxes The provision for income taxes increased, and the effective tax rate rose for the three and nine months ended September 30, 2024, mainly due to a different geographic mix of earnings and lower tax benefits from stock-based compensation. The company is appealing a tax assessment from the Israel Tax Authority | Metric | Three Months Ended Sep 30, 2024 (in millions) | Three Months Ended Sep 30, 2023 (in millions) | Nine Months Ended Sep 30, 2024 (in millions) | Nine Months Ended Sep 30, 2023 (in millions) | | :------------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Provision for income taxes | $95.3 | $45.6 | $243.9 | $202.6 | | Effective tax rate | 28.6 % | 15.2 % | 25.4 % | 22.0 % | - The higher effective tax rates for the three and nine months ended September 30, 2024, were primarily due to a different geographic mix of earnings and lower tax benefits related to stock-based compensation[131] - Cadence is appealing a $24.5 million tax audit assessment from the Israel Tax Authority for tax years 2017 and 2018, primarily related to transfer pricing and withholding taxes[131] Liquidity and Capital Resources Cadence's liquidity significantly increased, with cash and cash equivalents rising to $2,786.0 million. This was driven by proceeds from debt issuance, partially offset by increased cash used for business combinations and property, plant, and equipment purchases. Operating cash flows decreased due to timing of receipts and increased disbursements | Metric | September 30, 2024 (in millions) | December 31, 2023 (in millions) | Change (in millions) | | :------------------------ | :------------------------------- | :------------------------------ | :------------------- | | Cash and cash equivalents | $2,786.0 | $1,008.2 | $1,777.8 | | Net working capital | $2,424.9 | $385.4 | $2,039.5 | - Cash and cash equivalents increased by $1,777.8 million to $2,786.0 million as of September 30, 2024, primarily from debt proceeds[134][135] - Net cash provided by operating activities decreased by $257.9 million to $819.2 million for the nine months ended September 30, 2024, due to timing of cash receipts and increased disbursements[137] - Net cash used for investing activities increased by $483.5 million to $(797.1) million, mainly due to payments for business combinations and purchases of property, plant, and equipment[139] - Net cash provided by financing activities increased by $2,416.4 million to $1,750.4 million, primarily due to increased net proceeds from debt[140] Cash and Cash Equivalents Cadence's cash and cash equivalents significantly increased to $2,786.0 million, primarily sourced from debt proceeds and operations. Approximately 26% of these balances are held by foreign subsidiaries - Principal sources of liquidity include $2,786.0 million in cash and cash equivalents as of September 30, 2024, up from $1,008.2 million at December 31, 2023[135] - Primary sources of cash during the nine months ended September 30, 2024, were debt proceeds, cash from operations, common stock issuance, and investment sales[135] - Approximately 26% of cash and cash equivalents were held by foreign subsidiaries as of September 30, 2024[135] Net Working Capital Net working capital increased substantially to $2,424.9 million as of September 30, 2024, from $385.4 million at December 31, 2023, reflecting changes in operating assets and liabilities and the timing of investing and financing activities - Net working capital increased to $2,424.9 million as of September 30, 2024, from $385.4 million at December 31, 2023[134] Cash Flows from Operating Activities Cash flows from operating activities decreased for the nine months ended September 30, 2024, primarily due to the timing of cash receipts from customers and increased disbursements for operating assets and liabilities - Cash provided by operating activities decreased to $819.2 million for the nine months ended September 30, 2024, from $1,077.1 million in the prior year[137] - The decrease was primarily due to the timing of cash receipts from customers and an increase in disbursements for operating assets and liabilities[137] Cash Flows Used for Investing Activities Cash used for investing activities increased significantly due to higher payments for business combinations and purchases of property, plant, and equipment, reflecting ongoing investment strategies - Cash used for investing activities increased to $(797.1) million for the nine months ended September 30, 2024, from $(313.6) million in the prior year[139] - The increase was primarily due to higher payments for business combinations and purchases of property, plant, and equipment[139] Cash Flows From Financing Activities Cash from financing activities saw a substantial increase, primarily driven by net proceeds from debt issuance and common stock issuance, partially offset by increased debt payments and employee tax payments on restricted stock - Cash provided by financing activities increased to $1,750.4 million for the nine months ended September 30, 2024, from $(666.0) million used in the prior year[140] - This increase was primarily due to higher net proceeds from debt and increased proceeds from common stock issuance[140] Other Factors Affecting Liquidity and Capital Resources Cadence's liquidity is significantly impacted by its debt structure, including new Senior Notes and a revolving credit facility, and its stock repurchase program. New California legislation will also limit R&D tax credit utilization, increasing cash paid for income taxes Senior Notes Cadence issued $2.5 billion in new Senior Notes in September 2024 and subsequently prepaid its 2025 and 2026 Term Loans. The 2024 Notes were settled post-period end - Issued $2.5 billion aggregate principal amount of new Senior Notes (2027, 2029, and 2034 Notes) in September 2024[141] - Used proceeds from New Notes to fully prepay the 2025 Term Loan and 2026 Term Loan[141] - Settled the outstanding principal of $350.0 million on the 2024 Notes on October 15, 2024, subsequent to the balance sheet date[141] Revolving Credit Facility Cadence terminated its existing revolving credit facility and entered into a new five-year, $1.25 billion (expandable to $1.75 billion) senior unsecured revolving credit facility in August 2024, with no outstanding borrowings as of September 30, 2024 - Entered into a new five-year senior unsecured revolving credit facility (2024 Credit Facility) in August 2024, providing for borrowings up to $1.25 billion, with an option to increase to $1.75 billion[142] - No borrowings were outstanding under the 2024 Credit Facility as of September 30, 2024[142] Stock Repurchase Program Cadence has an authorized stock repurchase program, most recently increased in August 2023, with approximately $1.0 billion remaining available as of September 30, 2024 - Approximately $1.0 billion of the share repurchase authorization remained available as of September 30, 2024[143] California Legislation New California legislation, effective fiscal 2024, will limit Cadence's utilization of California R&D tax credits to $5 million annually for three years, expected to increase cash paid for income taxes by approximately $36.4 million for fiscal 2024 - California legislation enacted in June 2024 will limit R&D tax credit utilization to $5 million annually for three years, starting fiscal 2024[144] - This change is expected to increase cash paid for income taxes by approximately $36.4 million for fiscal 2024[144] Other Liquidity Requirements There were no material changes to Cadence's other liquidity requirements during the nine months ended September 30, 2024, as previously reported in its Annual Report - No material changes to other liquidity requirements during the nine months ended September 30, 2024[145] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses Cadence's exposure to market risks, primarily foreign currency risk and interest rate risk. It details the use of foreign currency forward exchange contracts to hedge against currency fluctuations and analyzes the impact of interest rate changes on debt and investments Foreign Currency Risk Cadence is exposed to foreign currency risk due to global operations, using forward exchange contracts to hedge against fluctuations. A hypothetical 10% decrease in the U.S. dollar's value would decrease the fair value of these contracts by $11.8 million as of September 30, 2024 - A material portion of revenue, expenses, and business activities are transacted in U.S. dollars, exposing the company to foreign currency exchange rate volatility[146] - Cadence uses foreign currency forward exchange contracts to hedge against currency exchange risks, with most contracts maturing within 90 days[146] - A hypothetical 10% decrease in the U.S. dollar's value would result in an $11.8 million decrease in the fair value of foreign currency forward exchange contracts as of September 30, 2024[148] Interest Rate Risk Cadence's interest rate risk primarily relates to its cash, cash equivalents, debt securities, and the variable rates on its 2024 Credit Facility. A 1% increase in market interest rates would decrease the fair value of marketable debt securities by approximately $1.8 million - Exposure to market risk for interest rate changes relates primarily to cash, cash equivalents, investments in debt securities, and the 2024 Credit Facility[149] - A 1% increase in market interest rates would result in an approximate $1.8 million decrease in the fair values of marketable debt securities as of September 30, 2024[149] - Assuming the 2024 Credit Facility was fully drawn and capacity fully exercised, each quarter point change in interest rates would result in a $4.4 million change in annual interest expense[149] Equity Price Risk Cadence holds a portfolio of equity investments, including marketable and non-marketable securities, primarily through its strategic investment program, which exposes it to equity price risk - Cadence has a portfolio of equity investments, including marketable and non-marketable securities, primarily made through its strategic investment program[150] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that Cadence's disclosure controls and procedures were effective as of September 30, 2024, providing reasonable assurance for timely and accurate financial reporting. No material changes to internal control over financial reporting occurred during the quarter Evaluation of Disclosure Controls and Procedures Cadence's management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of September 30, 2024, and concluded they were effective in providing reasonable assurance for timely and accurate reporting - CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2024[151] - Controls provide reasonable assurance that required information is recorded, processed, summarized, and reported within SEC time periods[151] Changes in Internal Control Over Financial Reporting There were no changes in Cadence's internal control over financial reporting during the fiscal quarter ended September 30, 2024, that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting - No material changes in internal control over financial reporting during the fiscal quarter ended September 30, 2024[152] Inherent Limitations on Effectiveness of Controls Management acknowledges that disclosure controls and internal control over financial reporting can only provide reasonable, not absolute, assurance against errors and fraud due to inherent limitations and resource constraints - Management does not expect disclosure controls or internal control over financial reporting to prevent or detect all errors and fraud[153] - Internal controls provide reasonable, not absolute, assurance due to inherent limitations and resource constraints[153] PART II. OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity security sales, defaults, and other disclosures for Cadence Design Systems, Inc Item 1. Legal Proceedings This section refers to Note 15 in the financial statements for information regarding pending legal proceedings, related matters, and associated risks - Information on pending legal proceedings and associated risks is detailed in Note 15 to the condensed consolidated financial statements[155] Item 1A. Risk Factors Cadence's operations are subject to various risks, including those related to significant debt obligations, potential repurchase requirements for notes, restrictive covenants in debt agreements, and exposure to variable interest rates. These factors could adversely affect its business, financial condition, and access to capital - Significant outstanding indebtedness and the ability to incur additional borrowings expose Cadence to risks, including difficulty in servicing debt, limited access to future financing, and increased vulnerability to adverse economic conditions[156] - The company may be required to repurchase notes prior to maturity upon certain corporate events, which could significantly impact cash and liquidity[157] - Restrictive covenants in debt agreements limit Cadence's operational flexibility, and a breach could lead to accelerated debt repayment[158] - Variable rate indebtedness subjects Cadence to interest rate risk, potentially increasing debt service obligations and reducing net income and cash flows[159] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details Cadence's publicly announced stock repurchase program, including shares repurchased during the quarter and the remaining authorization. It also clarifies that shares surrendered by employees for tax obligations are not part of the publicly announced program - Cadence has a publicly announced stock repurchase program, most recently increased in August 2023, with no expiration date[160] | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :------------------------------------- | :------------------------------- | :--------------------------- | | July 1, 2024 - July 31, 2024 | 44,114 | $264.67 | | August 1, 2024 - August