UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________ 

FORM 10-Q

_____________________________________  

(Mark One)

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

For the quarterly period ended July 2, 2022

OR

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

For the transition period from             to             

Commission file number 000-15867

_____________________________________ 

CADENCE DESIGN SYSTEMS, INC.

(Exact Name of Registrant as Specified in Its Charter)

_____________________________________ 

Delaware			00-0000000
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification No.)
2655 Seely Avenue, Building 5,	San Jose,	California	95134
(Address of Principal Executive Offices)			(Zip Code)

(408) 943-1234

Registrant’s Telephone Number, including Area Code

_____________________________________ 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	CDNS	Nasdaq Global Select Market

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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	☒	Accelerated Filer	☐	Smaller Reporting Company	☐
Non-accelerated Filer	☐			Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

On July 2, 2022, approximately 273,870,000 shares of the registrant’s common stock, $0.01 par value, were outstanding.

CADENCE DESIGN SYSTEMS, INC.

INDEX

 

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of July 2, 2022 and January 1, 2022	1
	Condensed Consolidated Income Statements for the three and six months ended July 2, 2022 and July 3, 2021	2
	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 2, 2022 and July 3, 2021	3
	Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended July 2, 2022 and July 3, 2021	4
	Condensed Consolidated Statements of Cash Flows for the three and six months ended July 2, 2022 and July 3, 2021	6
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	31
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other Information	33
Item 6.	Exhibits	34
	Signatures	35

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

	As of
	July 2, 2022		January 1, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	1,029,544	$	1,088,940
Receivables, net	391,738		337,596
Inventories	106,372		115,721
Prepaid expenses and other	129,966		173,512
Total current assets	1,657,620		1,715,769
Property, plant and equipment, net	316,741		305,911
Goodwill	924,460		928,358
Acquired intangibles, net	215,781		233,265
Deferred taxes	802,886		763,770
Other assets	443,786		439,226
Total assets	$	4,361,274	$	4,386,299
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	437,195	$	417,283
Current portion of deferred revenue	605,296		553,942
Total current liabilities	1,042,491		971,225
Long-term liabilities:
Long-term portion of deferred revenue	114,573		101,148
Long-term debt	347,999		347,588
Other long-term liabilities	230,982		225,663
Total long-term liabilities	693,554		674,399
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock and capital in excess of par value	2,590,893		2,467,701
Treasury stock, at cost	(3,352,827)		(2,740,003)
Retained earnings	3,468,543		3,046,288
Accumulated other comprehensive loss	(81,380)		(33,311)
Total stockholders’ equity	2,625,229		2,740,675
Total liabilities and stockholders’ equity	$	4,361,274	$	4,386,299

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

 

	Three Months Ended				Six Months Ended
	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Revenue:
Product and maintenance	$	802,285	$	687,884	$	1,648,529	$	1,386,938
Services	55,236		40,401		110,758		77,375
Total revenue	857,521		728,285		1,759,287		1,464,313
Costs and expenses:
Cost of product and maintenance	68,717		55,842		141,512		120,748
Cost of services	23,948		20,917		48,996		39,978
Marketing and sales	139,296		135,967		279,482		268,793
Research and development	286,597		285,227		577,492		556,219
General and administrative	51,426		40,333		100,363		80,285
Amortization of acquired intangibles	4,633		5,030		9,597		9,661
Restructuring	16		(469)		28		(746)
Total costs and expenses	574,633		542,847		1,157,470		1,074,938
Income from operations	282,888		185,438		601,817		389,375
Interest expense	(4,281)		(4,316)		(8,389)		(8,533)
Other income (expenses), net	(5,962)		2,143		(10,862)		4,844
Income before provision for income taxes	272,645		183,265		582,566		385,686
Provision for income taxes	85,725		27,365		160,311		42,617
Net income	$	186,920	$	155,900	$	422,255	$	343,069
Net income per share – basic	$	0.69	$	0.57	$	1.55	$	1.25
Net income per share – diluted	$	0.68	$	0.56	$	1.53	$	1.23
Weighted average common shares outstanding – basic	271,520		273,565		272,028		273,843
Weighted average common shares outstanding – diluted	275,172		278,558		276,097		279,399

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

	Three Months Ended				Six Months Ended
	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Net income	$	186,920	$	155,900	$	422,255	$	343,069
Other comprehensive income (loss), net of tax effects:
Foreign currency translation adjustments	(35,222)		5,788		(49,996)		(4,136)
Changes in defined benefit plan liabilities	1,761		(543)		1,927		(231)
Total other comprehensive income (loss), net of tax effects	(33,461)		5,245		(48,069)		(4,367)
Comprehensive income	$	153,459	$	161,145	$	374,186	$	338,702

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

	Three Months Ended July 2, 2022
	Common Stock
		Par Value						Accumulated
		and Capital						Other
		in Excess		Treasury		Retained		Comprehensive
	Shares	of Par		Stock		Earnings		Loss		Total
Balance, April 2, 2022	275,759	$	2,552,207	$	(3,025,728)	$	3,281,623	$	(47,919)	$	2,760,183
Net income	—	—		—		186,920		—		$	186,920
Other comprehensive loss, net of taxes	—	—		—		—		(33,461)		$	(33,461)
Purchase of treasury stock	(2,138)	—		(320,033)		—		—		$	(320,033)
Equity forward contract	—	(30,000)		—		—		—		$	(30,000)
Issuance of common stock and reissuance of treasury stock under equity incentive plans, net of forfeitures	288	5,829		(1,278)		—		—		$	4,551
Stock received for payment of employee taxes on vesting of restricted stock	(39)	(1,413)		(5,788)		—		—		$	(7,201)
Stock-based compensation expense	—	64,270		—		—		—		$	64,270
Balance, July 2, 2022	273,870	$	2,590,893	$	(3,352,827)	$	3,468,543	$	(81,380)	$	2,625,229
	Three Months Ended July 3, 2021
	Common Stock
		Par Value						Accumulated
		and Capital						Other
		in Excess		Treasury		Retained		Comprehensive
	Shares	of Par		Stock		Earnings		Loss		Total
Balance, April 3, 2021	278,265	$	2,307,965	$	(2,275,998)	$	2,537,502	$	(27,037)	$	2,542,432
Net income	—	—		—		155,900		—		$	155,900
Other comprehensive income, net of taxes	—	—		—		—		5,245		$	5,245
Purchase of treasury stock	(1,720)	—		(220,023)		—		—		$	(220,023)
Issuance of common stock and reissuance of treasury stock under equity incentive plans, net of forfeitures	367	791		3,548		—		—		$	4,339
Stock received for payment of employee taxes on vesting of restricted stock	(132)	(4,473)		(17,195)		—		—		$	(21,668)
Stock-based compensation expense	—	50,518		—		—		—		$	50,518
Balance, July 3, 2021	276,780	$	2,354,801	$	(2,509,668)	$	2,693,402	$	(21,792)	$	2,516,743

	Six Months Ended July 2, 2022
	Common Stock
		Par Value						Accumulated
		and Capital						Other
		in Excess		Treasury		Retained		Comprehensive
	Shares	of Par		Stock		Earnings		Loss		Total
Balance, January 1, 2022	276,796	$	2,467,701	$	(2,740,003)	$	3,046,288	$	(33,311)	$	2,740,675
Net income	—	—		—		422,255		—		$	422,255
Other comprehensive loss, net of taxes	—	—		—		—		(48,069)		$	(48,069)
Purchase of treasury stock	(3,704)	—		(570,049)		—		—		$	(570,049)
Equity forward contract	—	(30,000)		—		—		—		$	(30,000)
Issuance of common stock and reissuance of treasury stock under equity incentive plans, net of forfeitures	1,163	37,232		12,990		—		—		$	50,222
Stock received for payment of employee taxes on vesting of restricted stock	(385)	(7,779)		(55,765)		—		—		$	(63,544)
Stock-based compensation expense	—	123,739		—		—		—		$	123,739
Balance, July 2, 2022	273,870	$	2,590,893	$	(3,352,827)	$	3,468,543	$	(81,380)	$	2,625,229
	Six Months Ended July 3, 2021
	Common Stock
		Par Value						Accumulated
		and Capital						Other
		in Excess		Treasury		Retained		Comprehensive
	Shares	of Par		Stock		Earnings		Loss		Total
Balance, January 2, 2021	278,941	$	2,217,939	$	(2,057,829)	$	2,350,333	$	(17,425)	$	2,493,018
Net income	—	—		—		343,069		—		$	343,069
Other comprehensive loss, net of taxes	—	—		—		—		(4,367)		$	(4,367)
Purchase of treasury stock	(3,043)	—		(392,290)		—		—		$	(392,290)
Issuance of common stock and reissuance of treasury stock under equity incentive plans, net of forfeitures	1,391	42,917		9,335		—		—		$	52,252
Stock received for payment of employee taxes on vesting of restricted stock	(509)	(9,169)		(68,884)		—		—		$	(78,053)
Stock-based compensation expense	—	103,114		—		—		—		$	103,114
Balance, July 3, 2021	276,780	$	2,354,801	$	(2,509,668)	$	2,693,402	$	(21,792)	$	2,516,743

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended
	July 2, 2022		July 3, 2021
Cash and cash equivalents at beginning of period	$	1,088,940	$	928,432
Cash flows from operating activities:
Net income	422,255		343,069
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	67,690		71,799
Amortization of debt discount and fees	539		687
Stock-based compensation	123,739		103,114
(Gain) loss on investments, net	3,124		(795)
Deferred income taxes	(41,597)		1,710
Provisions for losses on receivables	133		242
ROU asset amortization and change in operating lease liabilities	1,742		(2,483)
Other non-cash items	88		183
Changes in operating assets and liabilities, net of effect of acquired businesses:
Receivables	(64,036)		(48,016)
Inventories	367		(14,527)
Prepaid expenses and other	40,571		7,690
Other assets	14,476		6,991
Accounts payable and accrued liabilities	17,470		(14,771)
Deferred revenue	80,460		127,286
Other long-term liabilities	(5,872)		6,639
Net cash provided by operating activities	661,149		588,818
Cash flows from investing activities:
Purchases of non-marketable investments	(1,000)		—
Purchases of property, plant and equipment	(42,202)		(31,139)
Purchases of intangible assets	(750)		—
Cash paid in business combinations, net of cash acquired	(25,000)		(220,660)
Net cash used for investing activities	(68,952)		(251,799)
Cash flows from financing activities:
Payment of debt issuance costs	—		(1,285)
Proceeds from issuance of common stock	50,224		52,252
Stock received for payment of employee taxes on vesting of restricted stock	(63,544)		(78,053)
Payments for repurchases of common stock	(600,049)		(392,290)
Net cash used for financing activities	(613,369)		(419,376)
Effect of exchange rate changes on cash and cash equivalents	(38,224)		1,085
Decrease in cash and cash equivalents	(59,396)		(81,272)
Cash and cash equivalents at end of period	$	1,029,544	$	847,160
Supplemental cash flow information:
Cash paid for interest	$	7,973	$	7,920
Cash paid for taxes, net	79,277		28,619

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared by Cadence Design Systems, Inc. (“Cadence”) without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. However, Cadence believes that the disclosures contained in this Quarterly Report on Form 10-Q comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These condensed consolidated financial statements are meant to be, and should be, read in conjunction with the consolidated financial statements and the Notes thereto included in Cadence’s Annual Report on Form 10-K for the fiscal year ended January 1, 2022.

The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q reflect all adjustments (which include only normal, recurring adjustments and those items discussed in these Notes) that are, in the opinion of management, necessary to state fairly the results of operations, cash flows and financial position for the periods and dates presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year. Certain prior period balances have been reclassified to conform to the current period presentation. Management has evaluated subsequent events through the issuance date of the unaudited condensed consolidated financial statements.

Use of Estimates

Preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.

Due to the ongoing COVID-19 pandemic and rising tensions in the geopolitical climate, there continues to be uncertainty and disruption in the global economy and financial markets. Cadence is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of July 25, 2022, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

Recently Adopted Accounting Standards

Lessors - Certain Leases with Variable Lease Payments

In July 2021, the Financial Accounting Standards Board (“FASB”), issued ASU 2021-05, “Lessors - Certain Leases with Variable Lease Payments,” which allows lessors to classify and account for a lease with variable payments that do not depend on a reference index or a rate as an operating lease if both of the following criteria are met: (1) the lease would have been classified as a sales-type lease or a direct financing lease in accordance with the classification criteria as defined in ASC Topic 842 and (2) the lessor would have otherwise recognized a day-one loss on the lease arrangement. This standard better aligns the accounting with the underlying economics of these arrangements as lessors are not permitted to include most variable payments which do not depend on a reference index or a rate in the lease receivable while assets are derecognized at lease commencement. This standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Cadence adopted this standard on January 2, 2022, the first day of fiscal 2022, on a prospective basis. The adoption of this standard did not have a material impact on Cadence’s condensed consolidated financial statements and related disclosures.

Business Combinations

In October 2021, the FASB issued ASU 2021-08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with “Revenue from Contracts with Customers (Topic 606)” as if the acquiring entity had originated the contracts. This approach differs from the previous requirement to measure contract assets and contract liabilities acquired in a business combination at fair value. The standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and early adoption is permitted. Cadence adopted this standard on January 2, 2022, the first day of fiscal 2022. The impact of the standard on Cadence’s condensed consolidated financial statements is dependent on the size and frequency of future acquisitions and does not affect contract assets or contract liabilities related to acquisitions completed prior to the adoption date.

6

NOTE 2. REVENUE

Cadence groups its products and services into five categories related to major design activities. The following table shows the percentage of revenue contributed by each of Cadence’s five product categories for the three and six months ended July 2, 2022 and July 3, 2021:

	Three Months Ended				Six Months Ended
	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Custom Integrated Circuit (“IC”) Design and Simulation	23	%	23	%	22	%	23	%
Digital IC Design and Signoff	27	%	28	%	27	%	28	%
Functional Verification, including Emulation and Prototyping Hardware*	24	%	25	%	26	%	26	%
Intellectual Property (“IP”)	14	%	13	%	14	%	13	%
System Design and Analysis	12	%	11	%	11	%	10	%
Total	100	%	100	%	100	%	100	%

_____________

* Includes immaterial amount of revenue accounted for under leasing arrangements.

Cadence generates revenue from contracts with customers and applies judgment in identifying and evaluating any terms and conditions in contracts which may impact revenue recognition. Certain of Cadence’s licensing arrangements allow customers the ability to remix among software products. Cadence also has arrangements with customers that include a combination of products, with the actual product selection and number of licensed users to be determined at a later date. For these arrangements, Cadence estimates the allocation of the revenue to product categories based upon the expected usage of products. Revenue by product category fluctuates from period to period based on demand for products and services, and Cadence’s available resources to deliver them. No one customer accounted for 10% or more of total revenue during the three and six months ended July 2, 2022 or the three and six months ended July 3, 2021.

Generally, between 85% and 90% of Cadence’s annual revenue is characterized as recurring revenue. Recurring revenue includes revenue recognized over time from our software arrangements, services, royalties, maintenance on IP licenses and hardware, and operating leases of hardware. Recurring revenue also includes revenue recognized at varying points in time over the term of other arrangements with non-cancelable commitments, whereby the customer commits to a fixed dollar amount over a specified period of time that can be used to purchase from a list of products or services. These arrangements do not meet the definition of a revenue contract until the customer executes a separate selection form to identify the products and services that they are purchasing. Each separate selection form under the arrangement is treated as an individual contract and accounted for based on the respective performance obligations.

The remainder of Cadence’s revenue is recognized at a point in time and is characterized as up-front revenue. Up-front revenue is primarily generated by sales of emulation and prototyping hardware and individual IP licenses. The percentage of Cadence’s recurring and up-front revenue may be impacted by delivery of hardware and IP products to its customers in any single fiscal period. The following table shows the percentage of Cadence’s revenue that is classified as recurring or up-front for the three and six months ended July 2, 2022 and July 3, 2021:

	Three Months Ended				Six Months Ended
	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
Revenue recognized over time	84	%	84	%	82	%	83	%
Revenue from arrangements with non-cancelable commitments	2	%	3	%	2	%	3	%
Recurring revenue	86	%	87	%	84	%	86	%
Up-front revenue	14	%	13	%	16	%	14	%
Total	100	%	100	%	100	%	100	%

7

Significant Judgments

Cadence’s contracts with customers often include promises to transfer to a customer multiple software and/or IP licenses and services, including professional services, technical support services, and rights to unspecified updates. Determining whether licenses and services are distinct performance obligations that should be accounted for separately, or not distinct and thus accounted for together, requires significant judgment. In some arrangements, such as most of Cadence’s IP license arrangements, Cadence has concluded that the licenses and associated services are distinct from each other. In others, like Cadence’s time-based software arrangements, the licenses and certain services are not distinct from each other. Cadence’s time-based software arrangements include multiple software licenses and updates to the licensed software products, as well as technical support, and Cadence has concluded that these promised goods and services are a single, combined performance obligation.

The accounting for contracts with multiple performance obligations requires the contract’s transaction price to be allocated to each distinct performance obligation based on relative standalone selling price (“SSP”). Judgment is required to determine the SSP for each distinct performance obligation because Cadence rarely licenses or sells products on a standalone basis. In instances where the SSP is not directly observable because Cadence does not sell the license, product or service separately, Cadence determines the SSP using information that maximizes the use of observable inputs and may include market conditions. Cadence typically has more than one SSP for individual performance obligations due to the stratification of those items by classes of customers and circumstances. In these instances, Cadence may use information such as the size of the customer and geographic region of the customer in determining the SSP.

Revenue is recognized over time for Cadence’s combined performance obligations that include software licenses, updates, technical support and maintenance that are separate performance obligations with the same term. For Cadence’s professional services, revenue is recognized over time, generally using costs incurred or hours expended to measure progress. Judgment is required in 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. For Cadence’s other performance obligations recognized over time, revenue is generally recognized using a time-based measure of progress reflecting generally consistent efforts to satisfy those performance obligations throughout the arrangement term.

If a group of agreements are so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be one arrangement for revenue recognition purposes. Cadence exercises significant judgment to evaluate the relevant facts and circumstances in determining whether the separate agreements should be accounted for separately or as, in substance, a single arrangement. Cadence’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.

Cadence is required to estimate the total consideration expected to be received from contracts with customers. In limited circumstances, the consideration expected to be received is variable based on the specific terms of the contract or based on Cadence’s expectations of the term of the contract. Generally, Cadence has not experienced significant returns or refunds to customers. These estimates require significant judgment and a change in these estimates could have an effect on its results of operations during the periods involved.

Contract Balances

The timing of revenue recognition may differ from the timing of invoicing to customers, and these timing differences result in receivables, contract assets, or contract liabilities (deferred revenue) on Cadence’s condensed consolidated balance sheets. For certain software, hardware and IP agreements with payment plans, Cadence records an unbilled receivable related to revenue recognized upon transfer of control because it has an unconditional right to invoice and receive payment in the future related to those transferred products or services. Cadence records a contract asset when revenue is recognized prior to invoicing and Cadence does not have the unconditional right to invoice or retains performance risk with respect to that performance obligation. Cadence records deferred revenue when revenue is recognized subsequent to invoicing. For Cadence’s time-based software agreements, customers are generally invoiced in equal, quarterly amounts, although some customers prefer to be invoiced in single or annual amounts.

The contract assets indicated below are included in prepaid expenses and other in the condensed consolidated balance sheets and primarily relate to Cadence’s rights to consideration for work completed but not billed as of the balance sheet date on services and customized IP contracts. The contract assets are transferred to receivables when the rights become unconditional, usually upon completion of a milestone.

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Cadence’s contract balances as of July 2, 2022 and January 1, 2022 were as follows:

	As of
	July 2, 2022		January 1, 2022
	(In thousands)
Contract assets	$	23,273	$	6,811
Deferred revenue	719,869		655,090

Cadence recognized revenue of $143.4 million and $425.0 million during the three and six months ended July 2, 2022, and $103.4 million and $330.0 million during the three and six months ended July 3, 2021, that was included in the deferred revenue balance at the beginning of each respective fiscal year. All other activity in deferred revenue is due to the timing of invoices in relation to the timing of revenue as described above.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, Cadence has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing Cadence’s products and services, and not to facilitate financing arrangements.

Remaining Performance Obligations

Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Cadence has elected to exclude the potential future royalty receipts from the remaining performance obligations. Contracted but unsatisfied performance obligations were approximately $5.6 billion as of July 2, 2022, which included $171.3 million of non-cancelable commitments from customers where actual product selection and quantities of specific products or services are to be determined by customers at a later date. As of July 2, 2022, Cadence expected to recognize 51% of the contracted but unsatisfied performance obligations, excluding non-cancelable commitments, as revenue over the next 12 months and the remainder thereafter.

Cadence recognized revenue of $10.9 million and $23.1 million during the three and six months ended July 2, 2022, and $11.5 million and $21.7 million during the three and six months ended July 3, 2021, from performance obligations satisfied in previous periods. These amounts represent royalties earned during the period and exclude contracts with nonrefundable prepaid royalties. Nonrefundable prepaid royalties are recognized upon delivery of the IP because Cadence’s right to the consideration is not contingent upon customers’ future shipments.

NOTE 3. RECEIVABLES, NET

Cadence’s current and long-term receivables balances as of July 2, 2022 and January 1, 2022 were as follows:

	As of
	July 2, 2022		January 1, 2022
	(In thousands)
Accounts receivable	$	241,342	$	185,599
Unbilled accounts receivable	153,451		155,689
Long-term receivables	6,223		5,098
Total receivables	401,016		346,386
Less allowance for doubtful accounts	(3,055)		(3,692)
Total receivables, net	$	397,961	$	342,694

Cadence’s customers are primarily concentrated within the semiconductor and electronics systems industries. As of July 2, 2022, one customer accounted for 11% of Cadence’s total receivables. As of January 1, 2022, no customer accounted for 10% or more of Cadence’s total receivables.

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NOTE 4. DEBT

Revolving Credit Facility

In June 2021, Cadence entered into a five-year senior unsecured revolving credit facility with a group of lenders led by Bank of America, N.A., as administrative agent (the “2021 Credit Facility”). The 2021 Credit Facility provides for borrowings up to $700 million, with the right to request increased capacity up to an additional $350 million upon the receipt of lender commitments, for total maximum borrowings of $1.05 billion. The 2021 Credit Facility expires on June 30, 2026. Any outstanding loans drawn under such credit facility are due at maturity on June 30, 2026, subject to an option to extend the maturity date. Outstanding borrowings may be repaid at any time prior to maturity. Debt issuance costs of $1.3 million were recorded to other assets in Cadence’s condensed consolidated balance sheet at the inception of the agreement and are being amortized to interest expense over the term of the 2021 Credit Facility.

Interest accrues on borrowings under the 2021 Credit Facility at a rate equal to, at Cadence’s option, either (1) LIBOR plus a margin between 0.750% and 1.250% per annum, determined by reference to the credit rating of Cadence’s unsecured debt, or (2) the base rate plus a margin between 0.000% and 0.250% per annum, determined by reference to the credit rating of Cadence’s unsecured debt. Interest is payable quarterly. A commitment fee ranging from 0.070% to 0.175% is assessed on the daily average undrawn portion of revolving commitments. The 2021 Credit Facility also includes provisions addressing the potential transition from LIBOR to a new replacement benchmark.

The 2021 Credit Facility contains customary negative covenants that, among other things, restrict Cadence’s ability to incur additional indebtedness and grant liens. In addition, the 2021 Credit Facility contains financial covenants that require Cadence to maintain a funded debt to EBITDA ratio not greater than 3.25 to 1, with a step up to 3.75 to 1 for one year following an acquisition by Cadence of at least $250.0 million that results in a pro forma leverage ratio between 3.00 to 1 and 3.50 to 1. As of July 2, 2022, Cadence was in compliance with all financial covenants associated with the 2021 Credit Facility.

2024 Notes

In October 2014, Cadence issued $350.0 million aggregate principal amount of 4.375% Senior Notes due October 15, 2024 (the “2024 Notes”). Cadence received net proceeds of $342.4 million from the issuance of the 2024 Notes, net of a discount of $1.4 million and issuance costs of $6.2 million. Both the discount and issuance costs are being amortized to interest expense over the term of the 2024 Notes using the effective interest method. Interest is payable in cash semi-annually in April and October. The 2024 Notes are unsecured and rank equal in right of payment to all of Cadence’s existing and future senior indebtedness. The carrying value of the 2024 Notes was $348.0 million and $347.6 million as of July 2, 2022 and January 1, 2022, respectively. The fair value of the 2024 Notes was approximately $355.3 million as of July 2, 2022.

Cadence may redeem the 2024 Notes, in whole or in part, at a redemption price equal to the greater of (a) 100% of the principal amount of the notes to be redeemed, and (b) the sum of the present values of the remaining scheduled payments of principal and interest, plus any accrued and unpaid interest, as more particularly described in the indenture governing the 2024 Notes.

The indenture governing the 2024 Notes includes customary representations, warranties and restrictive covenants, including, but not limited to, restrictions on Cadence’s ability to grant liens on assets, enter into sale and lease-back transactions, or merge, consolidate or sell assets, and also includes customary events of default.

NOTE 5. ACQUISITIONS

During the second quarter of fiscal 2022, Cadence completed one business combination for aggregate cash consideration of $25.0 million. The total purchase consideration was allocated to assets acquired based on their respective estimated fair values on the acquisition date. Cadence recorded $15.0 million of acquired intangible assets, which consisted of $8.2 million of existing technology and $6.8 million of in-process technology. Cadence also recognized $10.0 million of goodwill, which is primarily attributed to an assembled workforce. The goodwill recognized is expected to be deductible for tax purposes.

Transaction costs associated with acquisitions are included in general and administrative expense in Cadence’s condensed consolidated income statement. During the three and six months ended July 2, 2022, transaction costs associated with acquisitions were $6.3 million and $6.5 million, respectively. During the three and six months ended July 3, 2021, transaction costs associated with acquisitions were $0.3 million and $1.9 million, respectively. For additional information relating to Cadence’s acquisitions subsequent to the period end date covered by this quarterly report, see Note 15 in the notes to condensed consolidated financial statements.

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NOTE 6. GOODWILL AND ACQUIRED INTANGIBLES

Goodwill

The changes in the carrying amount of goodwill during the six months ended July 2, 2022 were as follows:

	Gross Carrying Amount
	(In thousands)
Balance as of January 1, 2022	$	928,358
Goodwill resulting from acquisitions	9,984
Effect of foreign currency translation	(13,882)
Balance as of July 2, 2022	$	924,460

Acquired Intangibles, Net

Acquired intangibles as of July 2, 2022 were as follows, excluding intangibles that were fully amortized as of January 1, 2022:

	Gross Carrying Amount		Accumulated Amortization		Acquired Intangibles, Net
	(In thousands)
Existing technology	$	397,401	$	(259,372)	$	138,029
Agreements and relationships	193,674		(129,517)		64,157
Tradenames, trademarks and patents	9,048		(2,253)		6,795
Total acquired intangibles with definite lives	600,123		(391,142)		208,981
In-process technology	6,800		—		6,800
Total acquired intangibles	$	606,923	$	(391,142)	$	215,781

In-process technology as of July 2, 2022 consisted of acquired projects that, if completed, will contribute to Cadence’s existing product offerings. As of July 2, 2022, these projects were expected to be completed during the second quarter of fiscal 2023. During the three and six months ended July 2, 2022, there were no transfers from in-process technology to existing technology.

Acquired intangibles as of January 1, 2022 were as follows, excluding intangibles that were fully amortized as of January 2, 2021:

	Gross Carrying Amount		Accumulated Amortization		Acquired Intangibles, Net
	(In thousands)
Existing technology	$	405,481	$	(254,599)	$	150,882
Agreements and relationships	205,057		(130,187)		74,870
Tradenames, trademarks and patents	10,666		(3,153)		7,513
Total acquired intangibles	$	621,204	$	(387,939)	$	233,265

Amortization expense from existing technology and maintenance agreements is included in cost of product and maintenance. Amortization expense for the three and six months ended July 2, 2022 and July 3, 2021 by condensed consolidated income statement caption was as follows:

	Three Months Ended				Six Months Ended
	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
	(In thousands)
Cost of product and maintenance	$	10,068	$	12,232	$	22,039	$	24,000
Amortization of acquired intangibles	4,633		5,030		9,597		9,661
Total amortization of acquired intangibles	$	14,701	$	17,262	$	31,636	$	33,661

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As of July 2, 2022, the estimated amortization expense for intangible assets with definite lives was as follows for the following five fiscal years and thereafter:

	(In thousands)
2022 - remaining period	$	20,763
2023	37,432
2024	35,672
2025	23,744
2026	18,379
2027	16,862
Thereafter	56,129
Total estimated amortization expense	$	208,981

NOTE 7. STOCK-BASED COMPENSATION

Stock-based compensation expense is reflected in Cadence’s condensed consolidated income statements for the three and six months ended July 2, 2022 and July 3, 2021 as follows:

	Three Months Ended				Six Months Ended
	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
	(In thousands)
Cost of product and maintenance	$	875	$	909	$	1,705	$	1,716
Cost of services	1,113		992		2,163		2,019
Marketing and sales	12,902		10,294		24,659		21,500
Research and development	37,067		31,286		72,189		64,144
General and administrative	12,313		7,037		23,023		13,735
Total stock-based compensation expense	$	64,270	$	50,518	$	123,739	$	103,114

Cadence had total unrecognized compensation expense related to stock option and restricted stock grants of $408.7 million as of July 2, 2022, which will be recognized over the remaining vesting period. The remaining weighted average vesting period of unvested awards is 2.3 years.

NOTE 8. STOCK REPURCHASE PROGRAM

In August 2021, Cadence’s Board of Directors increased the prior authorization to repurchase shares of Cadence common stock by authorizing an additional $1 billion. The actual timing and amount of repurchases are subject to business and market conditions, corporate and regulatory requirements, stock price, acquisition opportunities and other factors.

During the three months ended July 2, 2022, Cadence repurchased approximately 1.6 million shares on the open market, for an aggregate purchase price of $250.0 million.

In June 2022, Cadence also entered into an accelerated share repurchase (“ASR”) agreement with Royal Bank of Canada to repurchase an aggregate of $100.0 million of Cadence common stock. The ASR agreement was accounted for as two separate transactions (1) a repurchase of common stock and (2) an equity-linked contract on Cadence’s own stock. Under the ASR agreement, Cadence received an initial share delivery of approximately 0.5 million shares, which represented the number of shares at a market price equal to $70.0 million. An equity-linked contract for $30.0 million, representing the remaining shares to be delivered by Royal Bank of Canada under the ASR agreement, was recorded to stockholders’ equity as of July 2, 2022 and is expected to settle in the third quarter of fiscal 2022 upon completion of the repurchases. The shares Cadence receives are treated as a repurchase of common stock for purposes of calculating earnings per share. The final number of shares that Cadence will repurchase under the ASR agreement will be based on Cadence’s daily volume-weighted average share prices during the term of the ASR agreement, less a discount.

As of July 2, 2022, approximately $527 million of Cadence’s share repurchase authorization remained available to repurchase shares of Cadence common stock.

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The shares repurchased under Cadence’s repurchase authorizations and the total cost of repurchased shares, including commissions, during the three and six months ended July 2, 2022 and July 3, 2021 were as follows:

	Three Months Ended				Six Months Ended
	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
	(In thousands)
Shares repurchased	2,138		1,720		3,704		3,043
Total cost of repurchased shares	$	320,033	$	220,023	$	570,049	$	392,290

NOTE 9. NET INCOME PER SHARE

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

The calculations for basic and diluted net income per share for the three and six months ended July 2, 2022 and July 3, 2021 are as follows:

	Three Months Ended				Six Months Ended
	July 2, 2022		July 3, 2021		July 2, 2022		July 3, 2021
	(In thousands, except per share amounts)
Net income	$	186,920	$	155,900	$	422,255	$	343,069
Weighted average common shares used to calculate basic net income per share	271,520		273,565		272,028		273,843
Stock-based awards	3,652		4,993		4,069		5,556
Weighted average common shares used to calculate diluted net income per share	275,172		278,558		276,097		279,399
Net income per share - basic	$	0.69	$	0.57	$	1.55	$	1.25
Net income per share - diluted	$	0.68	$	0.56	$	1.53	$	1.23

The following table presents shares of Cadence’s common stock outstanding for the three and six months ended July 2, 2022 and July 3, 2021 that were excluded from the computation of diluted net income per share because the effect of including these shares in the computation of diluted net income per share would have been anti-dilutive:

	Three Months Ended		Six Months Ended
	July 2, 2022	July 3, 2021	July 2, 2022	July 3, 2021
	(In thousands)
Long-term market-based awards	1,658	—	1,347	—
Options to purchase shares of common stock	857	331	760	235
Non-vested shares of restricted stock	81	75	82	67
Total potential common shares excluded	2,596	406	2,189	302

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NOTE 10. FAIR VALUE

Inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Cadence’s market assumptions. These two types of inputs have created the following fair value hierarchy:

•Level 1 – Quoted prices for identical instruments in active markets;

•Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

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

This hierarchy requires Cadence to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. Cadence recognizes transfers between levels of the hierarchy based on the fair values of the respective financial instruments at the end of the reporting period in which the transfer occurred. There were no transfers between levels of the fair value hierarchy during the six months ended July 2, 2022.

On a quarterly basis, Cadence measures at fair value certain financial assets and liabilities. The fair value of financial assets and liabilities was determined using the following levels of inputs as of July 2, 2022 and January 1, 2022:

	Fair Value Measurements as of July 2, 2022
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Cash equivalents:
Money market funds	$	501,795	$	501,795	$	—	$	—
Marketable equity securities	4,371		4,371		—		—
Securities held in Non-Qualified Deferred Compensation (“NQDC”) trust	49,196		49,196		—		—
Total Assets	$	555,362	$	555,362	$	—	$	—
	Total		Level 1		Level 2		Level 3
	(In thousands)
Liabilities
Foreign currency exchange contracts	$	6,915	$	—	$	6,915	$	—
Total Liabilities	$	6,915	$	—	$	6,915	$	—
	Fair Value Measurements as of January 1, 2022
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Cash equivalents:
Money market funds	$	658,474	$	658,474	$	—	$