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 October 1, 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 October 1, 2022, approximately 274,316,000 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 October 1, 2022 and January 1, 2022	1
	Condensed Consolidated Income Statements for the three and nine months ended October 1, 2022 and October 2, 2021	2
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended October 1, 2022 and October 2, 2021	3
	Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended October 1, 2022 and October 2, 2021	4
	Condensed Consolidated Statements of Cash Flows for the three and nine months ended October 1, 2022 and October 2, 2021	6
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	34
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	36
Item 6.	Exhibits	37
	Signatures	39

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

	As of
	October 1, 2022		January 1, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	1,026,051	$	1,088,940
Receivables, net	391,181		337,596
Inventories	114,283		115,721
Prepaid expenses and other	138,968		173,512
Total current assets	1,670,483		1,715,769
Property, plant and equipment, net	348,238		305,911
Goodwill	1,348,494		928,358
Acquired intangibles, net	353,912		233,265
Deferred taxes	783,315		763,770
Other assets	463,645		439,226
Total assets	$	4,968,087	$	4,386,299
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Revolving credit facility	$	150,000	$	—
Accounts payable and accrued liabilities	454,688		417,283
Current portion of deferred revenue	652,306		553,942
Total current liabilities	1,256,994		971,225
Long-term liabilities:
Long-term portion of deferred revenue	102,167		101,148
Long-term debt	647,799		347,588
Other long-term liabilities	252,999		225,663
Total long-term liabilities	1,002,965		674,399
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock and capital in excess of par value	2,697,632		2,467,701
Treasury stock, at cost	(3,522,219)		(2,740,003)
Retained earnings	3,654,848		3,046,288
Accumulated other comprehensive loss	(122,133)		(33,311)
Total stockholders’ equity	2,708,128		2,740,675
Total liabilities and stockholders’ equity	$	4,968,087	$	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				Nine Months Ended
	October 1, 2022		October 2, 2021		October 1, 2022		October 2, 2021
Revenue:
Product and maintenance	$	845,788	$	706,160	$	2,494,317	$	2,093,098
Services	56,766		44,735		167,524		122,110
Total revenue	902,554		750,895		2,661,841		2,215,208
Costs and expenses:
Cost of product and maintenance	62,351		54,185		203,863		174,933
Cost of services	25,249		22,402		74,245		62,380
Marketing and sales	152,925		143,401		432,407		412,194
Research and development	323,629		289,105		901,121		845,324
General and administrative	73,688		42,990		174,051		123,275
Amortization of acquired intangibles	3,946		5,000		13,543		14,661
Restructuring	14		(222)		42		(968)
Total costs and expenses	641,802		556,861		1,799,272		1,631,799
Income from operations	260,752		194,034		862,569		583,409
Interest expense	(5,463)		(4,196)		(13,852)		(12,729)
Other income (expenses), net	(3,017)		(1,143)		(13,879)		3,701
Income before provision for income taxes	252,272		188,695		834,838		574,381
Provision for income taxes	65,967		12,388		226,278		55,005
Net income	$	186,305	$	176,307	$	608,560	$	519,376
Net income per share – basic	$	0.69	$	0.65	$	2.24	$	1.90
Net income per share – diluted	$	0.68	$	0.63	$	2.21	$	1.86
Weighted average common shares outstanding – basic	271,131		273,194		271,694		273,636
Weighted average common shares outstanding – diluted	274,957		278,311		275,683		279,046

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

	Three Months Ended				Nine Months Ended
	October 1, 2022		October 2, 2021		October 1, 2022		October 2, 2021
Net income	$	186,305	$	176,307	$	608,560	$	519,376
Other comprehensive income (loss), net of tax effects:
Foreign currency translation adjustments	(40,768)		(5,483)		(90,764)		(9,618)
Changes in defined benefit plan liabilities	15		(288)		1,942		(520)
Total other comprehensive loss, net of tax effects	(40,753)		(5,771)		(88,822)		(10,138)
Comprehensive income	$	145,552	$	170,536	$	519,738	$	509,238

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

	Three Months Ended October 1, 2022
	Common Stock
		Par Value						Accumulated
		and Capital						Other
		in Excess		Treasury		Retained		Comprehensive
	Shares	of Par		Stock		Earnings		Loss		Total
Balance, July 2, 2022	273,870	$	2,590,893	$	(3,352,827)	$	3,468,543	$	(81,380)	$	2,625,229
Net income	—	—		—		186,305		—		$	186,305
Other comprehensive loss, net of taxes	—	—		—		—		(40,753)		$	(40,753)
Purchase of treasury stock	(959)	—		(150,013)		—		—		$	(150,013)
Equity forward contract	—	17,965		(17,965)						$	—
Issuance of common stock and reissuance of treasury stock under equity incentive plans, net of forfeitures	1,574	23,095		30,363		—		—		$	53,458
Stock received for payment of employee taxes on vesting of restricted stock	(169)	(7,772)		(31,777)		—		—		$	(39,549)
Stock-based compensation expense	—	73,451		—		—		—		$	73,451
Balance, October 1, 2022	274,316	$	2,697,632	$	(3,522,219)	$	3,654,848	$	(122,133)	$	2,708,128
	Three Months Ended October 2, 2021
	Common Stock
		Par Value						Accumulated
		and Capital						Other
		in Excess		Treasury		Retained		Comprehensive
	Shares	of Par		Stock		Earnings		Loss		Total
Balance, July 3, 2021	276,780	$	2,354,801	$	(2,509,668)	$	2,693,402	$	(21,792)	$	2,516,743
Net income	—	—		—		176,307		—		$	176,307
Other comprehensive loss, net of taxes	—	—		—		—		(5,771)		$	(5,771)
Purchase of treasury stock	(723)	—		(110,011)		—		—		$	(110,011)
Issuance of common stock and reissuance of treasury stock under equity incentive plans, net of forfeitures	1,249	9,319		22,061		—		—		$	31,380
Stock received for payment of employee taxes on vesting of restricted stock	(165)	(5,075)		(25,057)		—		—		$	(30,132)
Stock-based compensation expense	—	52,746		—		—		—		$	52,746
Balance, October 2, 2021	277,141	$	2,411,791	$	(2,622,675)	$	2,869,709	$	(27,563)	$	2,631,262

	Nine Months Ended October 1, 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	—	—		—		608,560		—		$	608,560
Other comprehensive loss, net of taxes	—	—		—		—		(88,822)		$	(88,822)
Purchase of treasury stock	(4,664)	—		(720,062)		—		—		$	(720,062)
Equity forward contract	—	(12,035)		(17,965)		—		—		$	(30,000)
Issuance of common stock and reissuance of treasury stock under equity incentive plans, net of forfeitures	2,738	60,327		43,353		—		—		$	103,680
Stock received for payment of employee taxes on vesting of restricted stock	(554)	(15,551)		(87,542)		—		—		$	(103,093)
Stock-based compensation expense	—	197,190		—		—		—		$	197,190
Balance, October 1, 2022	274,316	$	2,697,632	$	(3,522,219)	$	3,654,848	$	(122,133)	$	2,708,128
	Nine Months Ended October 2, 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	—	—		—		519,376		—		$	519,376
Other comprehensive loss, net of taxes	—	—		—		—		(10,138)		$	(10,138)
Purchase of treasury stock	(3,766)	—		(502,301)		—		—		$	(502,301)
Issuance of common stock and reissuance of treasury stock under equity incentive plans, net of forfeitures	2,640	52,236		31,396		—		—		$	83,632
Stock received for payment of employee taxes on vesting of restricted stock	(674)	(14,244)		(93,941)		—		—		$	(108,185)
Stock-based compensation expense	—	155,860		—		—		—		$	155,860
Balance, October 2, 2021	277,141	$	2,411,791	$	(2,622,675)	$	2,869,709	$	(27,563)	$	2,631,262

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended
	October 1, 2022		October 2, 2021
Cash and cash equivalents at beginning of period	$	1,088,940	$	928,432
Cash flows from operating activities:
Net income	608,560		519,376
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	98,178		106,962
Amortization of debt discount and fees	810		952
Stock-based compensation	197,190		155,860
(Gain) loss on investments, net	4,777		(330)
Deferred income taxes	(49,834)		(34,566)
Provisions for losses on receivables	471		234
ROU asset amortization and change in operating lease liabilities	(883)		(2,917)
Other non-cash items	158		146
Changes in operating assets and liabilities, net of effect of acquired businesses:
Receivables	(57,309)		15,132
Inventories	(8,020)		(25,608)
Prepaid expenses and other	30,596		36,632
Other assets	17,644		8,127
Accounts payable and accrued liabilities	24,514		10,501
Deferred revenue	113,712		84,183
Other long-term liabilities	(2,305)		10,417
Net cash provided by operating activities	978,259		885,101
Cash flows from investing activities:
Purchases of non-marketable investments	(1,000)		—
Proceeds from the sale of non-marketable investments	—		128
Purchases of property, plant and equipment	(86,295)		(49,977)
Purchases of intangible assets	(1,000)		—
Cash paid in business combinations, net of cash acquired	(586,163)		(220,026)
Net cash used for investing activities	(674,458)		(269,875)
Cash flows from financing activities:
Proceeds from term loan	300,000		—
Proceeds from revolving credit facility	450,000		—
Payment on revolving credit facility	(300,000)		—
Payment of debt issuance costs	(425)		(1,285)
Proceeds from issuance of common stock	103,682		83,632
Stock received for payment of employee taxes on vesting of restricted stock	(103,093)		(108,185)
Payments for repurchases of common stock	(750,062)		(502,301)
Net cash used for financing activities	(299,898)		(528,139)
Effect of exchange rate changes on cash and cash equivalents	(66,792)		(1,700)
Increase (decrease) in cash and cash equivalents	(62,889)		85,387
Cash and cash equivalents at end of period	$	1,026,051	$	1,013,819
Supplemental cash flow information:
Cash paid for interest	$	8,508	$	8,117
Cash paid for taxes, net	148,151		47,687

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.

Fiscal Year End

On September 7, 2022, Cadence’s Board of Directors approved a change in its fiscal year end from the Saturday closest to December 31 of each year to December 31 of each year. Cadence’s fiscal quarters will end on March 31, June 30, and September 30. The fiscal year change is effective beginning with Cadence’s 2023 fiscal year, which will begin on January 1, 2023.

Cadence’s fiscal year end date for fiscal 2022 will remain December 31, 2022 as previously disclosed. Consistent with SEC guidance, no transition report is required in connection with the change in Cadence’s fiscal year end. Accordingly, Cadence intends to file an Annual Report on Form 10-K for the year ended December 31, 2022, and the new fiscal year will take effect from January 1, 2023 to December 31, 2023.

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.

Despite continued 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 October 24, 2022, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change, as new events or developments 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.

6

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. Cadence adopted this standard on January 2, 2022, the first day of fiscal 2022. The adoption of this standard did not impact acquired contract assets or liabilities from business combinations that occurred prior to the date of adoption, and the impact in current and future periods will depend on the contract assets and contract liabilities acquired. For business combinations completed during the third quarter of fiscal 2022, Cadence recognized deferred revenue of $11.8 million from the acquired businesses as if Cadence had originated the contracts in accordance with Topic 606 rather than at fair value. For additional information relating to Cadence’s acquisitions, see Note 5 in the notes to condensed consolidated financial statements.

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 nine months ended October 1, 2022 and October 2, 2021:

	Three Months Ended				Nine Months Ended
	October 1, 2022		October 2, 2021		October 1, 2022		October 2, 2021
Custom Integrated Circuit (“IC”) Design and Simulation	22	%	23	%	22	%	23	%
Digital IC Design and Signoff	29	%	29	%	28	%	28	%
Functional Verification, including Emulation and Prototyping Hardware*	25	%	23	%	26	%	25	%
Intellectual Property (“IP”)	12	%	14	%	13	%	13	%
System Design and Analysis	12	%	11	%	11	%	11	%
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 single customer accounted for 10% or more of total revenue during the three and nine months ended October 1, 2022 or the three and nine months ended October 2, 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. 

7

The following table shows the percentage of Cadence’s revenue that is classified as recurring or up-front for the three and nine months ended October 1, 2022 and October 2, 2021:

	Three Months Ended				Nine Months Ended
	October 1, 2022		October 2, 2021		October 1, 2022		October 2, 2021
Revenue recognized over time	81	%	86	%	82	%	84	%
Revenue from arrangements with non-cancelable commitments	3	%	3	%	2	%	3	%
Recurring revenue	84	%	89	%	84	%	87	%
Up-front revenue	16	%	11	%	16	%	13	%
Total	100	%	100	%	100	%	100	%

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.

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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.

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

	As of
	October 1, 2022		January 1, 2022
	(In thousands)
Contract assets	$	38,442	$	6,811
Deferred revenue	754,473		655,090

Cadence recognized revenue of $63.9 million and $488.9 million during the three and nine months ended October 1, 2022, and $59.8 million and $389.8 million during the three and nine months ended October 2, 2021, that was included in the deferred revenue balance at the beginning of each respective fiscal year. All other activity in deferred revenue, with the exception of deferred revenue assumed from acquisitions, 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 $5.5 billion as of October 1, 2022, which included $433.5 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 October 1, 2022, Cadence expected to recognize 54% 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 $12.1 million and $35.2 million during the three and nine months ended October 1, 2022, and $13.3 million and $35.0 million during the three and nine months ended October 2, 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.

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NOTE 3. RECEIVABLES, NET

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

	As of
	October 1, 2022		January 1, 2022
	(In thousands)
Accounts receivable	$	240,369	$	185,599
Unbilled accounts receivable	153,376		155,689
Long-term receivables	9,473		5,098
Total receivables	403,218		346,386
Less allowance for doubtful accounts	(2,564)		(3,692)
Total receivables, net	$	400,654	$	342,694

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

NOTE 4. DEBT

Cadence’s outstanding debt as of October 1, 2022 and January 1, 2022 was as follows:

	October 1, 2022						January 1, 2022
	(In thousands)
	Principal		Unamortized Discount		Carrying Value		Principal		Unamortized Discount		Carrying Value
Revolving Credit Facility	$	150,000	$	—	$	150,000	$	—	$	—	$	—
2024 Notes	350,000		(1,794)		348,206		350,000		(2,412)		347,588
2025 Term Loan	300,000		(407)		299,593		—		—		—
Total outstanding debt	$	800,000	$	(2,201)	$	797,799	$	350,000	$	(2,412)	$	347,588

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”). In September 2022, Cadence amended the 2021 Credit Facility to, among other things, allow Cadence to change its fiscal year to match the calendar year commencing in 2023 and change the interest rate benchmark for loans under the 2021 Credit Facility from LIBOR to Term SOFR. The material terms of the 2021 Credit Facility otherwise remain unchanged.

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 the 2021 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) SOFR plus a margin between 0.750% and 1.250% per annum, determined by reference to the credit rating of Cadence’s unsecured debt, plus a SOFR adjustment of 0.10% 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. As of October 1, 2022, the interest rate on the 2021 Credit Facility was 3.82%. 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 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 October 1, 2022, Cadence was in compliance with all financial covenants associated with the 2021 Credit Facility.

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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 $348.2 million and $347.6 million as of October 1, 2022 and January 1, 2022, respectively. The fair value of the 2024 Notes was approximately $345.8 million as of October 1, 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.

2025 Term Loan

In September 2022, Cadence entered into a $300.0 million three-year senior non-amortizing term loan facility due on September 7, 2025 with a group of lenders led by Bank of America, N.A., as administrative agent (the “2025 Term Loan”). The 2025 Term Loan is unsecured and ranks equal in right of payment to all of Cadence’s unsecured indebtedness. Proceeds from the loan were used to fund Cadence’s acquisition of OpenEye Scientific Software, Inc. (“OpenEye”).

Amounts outstanding under the 2025 Term Loan accrue interest at a rate equal to, at Cadence’s option, either (1) Term SOFR plus a margin between 0.625% per annum and 1.125% per annum, determined by reference to the credit rating of Cadence’s unsecured debt, plus a SOFR adjustment of 0.10% or (2) base rate plus a margin between 0.000% per annum and 0.125% per annum, determined by reference to the credit rating of Cadence’s unsecured debt. As of October 1, 2022, the interest rate on the 2025 Term Loan was 4.08%. Interest is payable quarterly. Borrowings bear interest at what is estimated to be current market rates of interest. Accordingly, the carrying value of the 2025 Term Loan approximates fair value.

The 2025 Term Loan contains customary negative covenants that, among other things, restrict Cadence’s ability to incur additional indebtedness, grant liens and make certain asset dispositions. In addition, the 2025 Term Loan contains a financial covenant that requires 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 October 1, 2022, Cadence was in compliance with all financial covenants associated with the 2025 Term Loan.

NOTE 5. ACQUISITIONS

Acquisition of OpenEye Scientific Software, Inc.

On August 31, 2022, Cadence acquired all of the outstanding equity of OpenEye, a leading provider of computational molecular modeling and simulation software used by pharmaceutical and biotechnology companies for drug discovery. The addition of OpenEye’s technologies and experienced team with its deep scientific expertise is expected to accelerate Cadence’s Intelligent System Design™ strategy and broadens Cadence’s System Design and Analysis technology portfolio. The acquisition expands Cadence’s total addressable market, bringing Cadence’s computational software expertise to apply proven algorithmic, simulation and solver advances to life sciences. The aggregate cash consideration for Cadence’s acquisition of OpenEye, net of cash acquired of $13.2 million, was $461.1 million. Subject to service and other conditions, Cadence expects to recognize expense for consideration paid to certain former OpenEye shareholders, now employed by Cadence, through the first quarter of fiscal 2026.

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The total purchase consideration was allocated to the assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date as follows:

	Fair Value
	(In thousands)
Current assets	$	24,890
Goodwill	368,148
Acquired intangibles	117,400
Other long-term assets	6,542
Total assets acquired	516,980
Current liabilities	15,489
Long-term liabilities	27,225
Total liabilities assumed	42,714
Total purchase consideration	$	474,266

The allocation of purchase consideration to certain assets and liabilities has not been finalized. Cadence will continue to evaluate certain estimates and assumptions, primarily related to taxes and assumed liabilities, during the measurement period (up to one year from the acquisition date). The recorded goodwill is attributed to intangible assets that do not qualify for separate recognition, including the acquired assembled workforce, and will not be deductible for tax purposes.

Acquired Intangibles

	Fair Value		Weighted-Average Amortization Period
	(In thousands)		(in years)
Existing technology	$	53,900	7.0 years
Agreements and relationships	61,400		12.3 years
Tradenames, trademarks and patents	2,100		7.0 years
Total acquired intangibles with definite lives	$	117,400	9.8 years

Acquisition of FFG Holdings Limited

On July 14, 2022, Cadence acquired all of the outstanding equity of FFG Holdings Limited (“Future Facilities”), a provider of electronics cooling analysis and energy performance optimization solutions for data center design and operations using physics-based 3D digital twins. The addition of Future Facilities’ technologies and expertise supports Cadence’s Intelligent System Design strategy and broadens its System Design and Analysis technology portfolio with the addition of solutions that enable companies to make informed business decisions about data center design, operations and lifecycle management that reduce their carbon footprint. The aggregate cash consideration for Cadence’s acquisition of Future Facilities, net of cash acquired of $2.8 million, was $100.1 million. Subject to service and other conditions, Cadence expects to recognize expense for consideration paid to certain former Future Facilities shareholders, now employed by Cadence, subject to service and other conditions, through the third quarter of fiscal 2025.

The total purchase consideration was allocated to the assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date as follows:

	Fair Value
	(In thousands)
Current assets	$	7,992
Goodwill	67,868
Acquired intangibles	38,100
Other long-term assets	3,102
Total assets acquired	117,062
Current liabilities	4,952
Long-term liabilities	9,210
Total liabilities assumed	14,162
Total purchase consideration	$	102,900

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The allocation of purchase consideration to certain assets and liabilities has not been finalized. Cadence will continue to evaluate certain estimates and assumptions, primarily related to taxes and assumed liabilities, during the measurement period (up to one year from the acquisition date). The recorded goodwill is attributed to intangible assets that do not qualify for separate recognition, including the acquired assembled workforce and expected synergies from combining operations of Future Facilities with Cadence. The goodwill will not be deductible for tax purposes.

Acquired Intangibles

	Fair Value		Weighted-Average Amortization Period
	(In thousands)		(in years)
Existing technology	$	20,900	6.0 years
Agreements and relationships	15,600		9.0 years
Tradenames, trademarks and patents	1,600		8.0 years
Total acquired intangibles with definite lives	$	38,100	7.3 years

Other 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.

Pro Forma Financial Information

Cadence has not presented pro forma financial information for acquisitions completed during the first three quarters of fiscal 2022 because the results of operations from the acquired businesses are not material to Cadence’s condensed consolidated financial statements.

Transaction Costs

Transaction costs associated with acquisitions are included in general and administrative expense in Cadence’s condensed consolidated income statement. During the three and nine months ended October 1, 2022, transaction costs associated with acquisitions were $3.6 million and $10.1 million, respectively. During the three and nine months ended October 2, 2021, transaction costs associated with acquisitions were $0.1 million and $2.0 million, respectively.

NOTE 6. GOODWILL AND ACQUIRED INTANGIBLES

Goodwill

The changes in the carrying amount of goodwill during the nine months ended October 1, 2022 were as follows:

	Gross Carrying Amount
	(In thousands)
Balance as of January 1, 2022	$	928,358
Goodwill resulting from acquisitions	446,000
Effect of foreign currency translation	(25,864)
Balance as of October 1, 2022	$	1,348,494

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Acquired Intangibles, Net

Acquired intangibles as of October 1, 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	$	468,489	$	(267,918)	$	200,571
Agreements and relationships	269,597		(133,089)		136,508
Tradenames, trademarks and patents	12,545		(2,512)		10,033
Total acquired intangibles with definite lives	750,631		(403,519)		347,112
In-process technology	6,800		—		6,800
Total acquired intangibles	$	757,431	$	(403,519)	$	353,912

In-process technology as of October 1, 2022 consisted of acquired projects that, if completed, will contribute to Cadence’s existing product offerings. As of October 1, 2022, these projects were expected to be completed during the fourth quarter of fiscal 2023. During the three and nine months ended October 1, 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 nine months ended October 1, 2022 and October 2, 2021 by condensed consolidated income statement caption was as follows:

	Three Months Ended				Nine Months Ended
	October 1, 2022		October 2, 2021		October 1, 2022		October 2, 2021
	(In thousands)
Cost of product and maintenance	$	8,867	$	11,774	$	30,906	$	35,774
Amortization of acquired intangibles	3,946		5,000		13,543		14,661
Total amortization of acquired intangibles	$	12,813	$	16,774	$	44,449	$	50,435

As of October 1, 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	$	14,870
2023	56,040
2024	54,280
2025	42,213
2026	36,298
2027	34,056
Thereafter	109,355
Total estimated amortization expense	$	347,112

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NOTE 7. STOCK-BASED COMPENSATION

Stock-based compensation expense is reflected in Cadence’s condensed consolidated income statements for the three and nine months ended October 1, 2022 and October 2, 2021 as follows:

	Three Months Ended				Nine Months Ended
	October 1, 2022		October 2, 2021		October 1, 2022		October 2, 2021
	(In thousands)
Cost of product and maintenance	$	1,046	$	885	$	2,751	$	2,601
Cost of services	1,331		1,158		3,494		3,177
Marketing and sales	14,991		10,784		39,650		32,284
Research and development	43,327		32,957		115,516		97,101
General and administrative	12,756		6,962		35,779		20,697
Total stock-based compensation expense	$	73,451 </