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 September 30, 2023

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 September 30, 2023, approximately 272,062,000 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 September 30, 2023 and December 31, 2022	1
	Condensed Consolidated Income Statements for the three and nine months ended September 30, 2023 and October 1, 2022	2
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2023 and October 1, 2022	3
	Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2023 and October 1, 2022	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and October 1, 2022	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	33
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	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	38
	Signatures	39

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

	As of
	September 30, 2023		December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	961,982	$	882,325
Receivables, net	426,505		486,710
Inventories	163,693		128,005
Prepaid expenses and other	272,283		209,727
Total current assets	1,824,463		1,706,767
Property, plant and equipment, net	379,776		371,451
Goodwill	1,500,442		1,374,268
Acquired intangibles, net	347,617		354,617
Deferred taxes	874,805		853,691
Other assets	504,272		476,277
Total assets	$	5,431,375	$	5,137,071
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Revolving credit facility	$	—	$	100,000
Accounts payable and accrued liabilities	598,261		557,158
Current portion of deferred revenue	665,906		690,538
Total current liabilities	1,264,167		1,347,696
Long-term liabilities:
Long-term portion of deferred revenue	100,609		91,524
Long-term debt	648,801		648,078
Other long-term liabilities	303,904		304,660
Total long-term liabilities	1,053,314		1,044,262
Commitments and contingencies (Note 15)
Stockholders’ equity:
Common stock and capital in excess of par value	3,077,954		2,765,673
Treasury stock, at cost	(4,463,484)		(3,824,163)
Retained earnings	4,612,485		3,895,240
Accumulated other comprehensive loss	(113,061)		(91,637)
Total stockholders’ equity	3,113,894		2,745,113
Total liabilities and stockholders’ equity	$	5,431,375	$	5,137,071

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
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
Revenue:
Product and maintenance	$	965,840	$	845,788	$	2,852,372	$	2,494,317
Services	57,254		56,766		168,991		167,524
Total revenue	1,023,094		902,554		3,021,363		2,661,841
Costs and expenses:
Cost of product and maintenance	85,813		62,351		260,269		203,863
Cost of services	23,768		25,249		70,642		74,245
Marketing and sales	176,215		152,925		509,951		432,407
Research and development	369,642		323,629		1,074,353		901,121
General and administrative	58,556		73,688		166,688		174,051
Amortization of acquired intangibles	4,612		3,946		13,181		13,543
Restructuring	11,582		14		11,582		42
Total costs and expenses	730,188		641,802		2,106,666		1,799,272
Income from operations	292,906		260,752		914,697		862,569
Interest expense	(9,059)		(5,463)		(27,196)		(13,852)
Other income (expense), net	16,106		(3,017)		32,363		(13,879)
Income before provision for income taxes	299,953		252,272		919,864		834,838
Provision for income taxes	45,632		65,967		202,619		226,278
Net income	$	254,321	$	186,305	$	717,245	$	608,560
Net income per share – basic	$	0.94	$	0.69	$	2.66	$	2.24
Net income per share – diluted	$	0.93	$	0.68	$	2.63	$	2.21
Weighted average common shares outstanding – basic	269,229		271,131		269,480		271,694
Weighted average common shares outstanding – diluted	272,427		274,957		272,859		275,683

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
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
Net income	$	254,321	$	186,305	$	717,245	$	608,560
Other comprehensive loss, net of tax effects:
Foreign currency translation adjustments	(21,692)		(40,768)		(20,546)		(90,764)
Changes in defined benefit plan liabilities	132		15		537		1,942
Unrealized losses on investments	(991)		—		(1,415)		—
Total other comprehensive loss, net of tax effects	(22,551)		(40,753)		(21,424)		(88,822)
Comprehensive income	$	231,770	$	145,552	$	695,821	$	519,738

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

	Three Months Ended September 30, 2023
	Common Stock
		Par Value						Accumulated
		and Capital						Other
		in Excess		Treasury		Retained		Comprehensive
	Shares	of Par		Stock		Earnings		Loss		Total
Balance, June 30, 2023	271,790	$	2,897,885	$	(4,257,084)	$	4,358,164	$	(90,510)	$	2,908,455
Net income	—	—		—		254,321		—		$	254,321
Other comprehensive loss, net of taxes	—	—		—		—		(22,551)		$	(22,551)
Purchase of treasury stock	(811)	—		(125,008)		—		—		$	(125,008)
Equity forward contract		61,688		(61,688)						$	—
Issuance of common stock and reissuance of treasury stock under equity incentive plans, net of forfeitures	1,230	39,810		14,029		—		—		$	53,839
Stock received for payment of employee taxes on vesting of restricted stock	(147)	(9,461)		(33,733)		—		—		$	(43,194)
Stock-based compensation expense	—	88,032		—		—		—		$	88,032
Balance, September 30, 2023	272,062	$	3,077,954	$	(4,463,484)	$	4,612,485	$	(113,061)	$	3,113,894
	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

	Nine Months Ended September 30, 2023
	Common Stock
		Par Value						Accumulated
		and Capital						Other
		in Excess		Treasury		Retained		Comprehensive
	Shares	of Par		Stock		Earnings		Loss		Total
Balance, December 31, 2022	272,675	$	2,765,673	$	(3,824,163)	$	3,895,240	$	(91,637)	$	2,745,113
Net income	—	—		—		717,245		—		$	717,245
Other comprehensive loss, net of taxes	—	—		—		—		(21,424)		$	(21,424)
Purchase of treasury stock	(2,657)	—		(515,127)		—		—		$	(515,127)
Equity forward contract		1,688		(61,688)		—		—		$	(60,000)
Issuance of common stock and reissuance of treasury stock under equity incentive plans, net of forfeitures	2,527	91,894		39,447		—		—		$	131,341
Stock received for payment of employee taxes on vesting of restricted stock	(483)	(20,229)		(101,953)		—		—		$	(122,182)
Stock-based compensation expense	—	238,928		—		—		—		$	238,928
Balance, September 30, 2023	272,062	$	3,077,954	$	(4,463,484)	$	4,612,485	$	(113,061)	$	3,113,894
	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

See notes to condensed consolidated financial statements.

CADENCE DESIGN SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended
	September 30, 2023		October 1, 2022
Cash and cash equivalents at beginning of period	$	882,325	$	1,088,940
Cash flows from operating activities:
Net income	717,245		608,560
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	106,783		98,178
Amortization of debt discount and fees	942		810
Stock-based compensation	238,928		197,190
(Gain) loss on investments, net	(12,732)		4,777
Deferred income taxes	(23,506)		(49,834)
Provisions for losses on receivables	1,692		471
ROU asset amortization and change in operating lease liabilities	(2,684)		(883)
Other non-cash items	1,962		158
Changes in operating assets and liabilities, net of effect of acquired businesses:
Receivables	50,024		(57,309)
Inventories	(47,293)		(8,020)
Prepaid expenses and other	33,307		30,596
Other assets	(26,580)		17,644
Accounts payable and accrued liabilities	43,111		24,514
Deferred revenue	(14,628)		113,712
Other long-term liabilities	10,514		(2,305)
Net cash provided by operating activities	1,077,085		978,259
Cash flows from investing activities:
Purchases of investments	(145,150)		(1,000)
Proceeds from the sale and maturity of investments	64,174		—
Purchases of property, plant and equipment	(68,634)		(86,295)
Purchases of intangible assets	—		(1,000)
Cash paid in business combinations, net of cash acquired	(163,963)		(586,163)
Net cash used for investing activities	(313,573)		(674,458)
Cash flows from financing activities:
Proceeds from term loan	—		300,000
Proceeds from revolving credit facility	50,000		450,000
Payments on revolving credit facility	(150,000)		(300,000)
Payment of debt issuance costs	—		(425)
Proceeds from issuance of common stock	131,341		103,682
Stock received for payment of employee taxes on vesting of restricted stock	(122,182)		(103,093)
Payments for repurchases of common stock	(575,127)		(750,062)
Net cash used for financing activities	(665,968)		(299,898)
Effect of exchange rate changes on cash and cash equivalents	(17,887)		(66,792)
Increase (decrease) in cash and cash equivalents	79,657		(62,889)
Cash and cash equivalents at end of period	$	961,982	$	1,026,051
Supplemental cash flow information:
Cash paid for interest	$	22,226	$	8,508
Cash paid for income taxes, net	104,721		148,151

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 December 31, 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

In fiscal 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. The fiscal year change became effective with Cadence’s 2023 fiscal year, which began on January 1, 2023. Cadence’s fiscal quarters now end on March 31, June 30, and September 30. No transition report is required in connection with this change.

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 macroeconomic and geopolitical environment, 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 23, 2023, 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

There have been no recent accounting standard updates that are material or potentially material to Cadence.

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 September 30, 2023 and October 1, 2022:

	Three Months Ended				Nine Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
Custom Integrated Circuit (“IC”) Design and Simulation	22	%	22	%	21	%	22	%
Digital IC Design and Signoff	28	%	29	%	27	%	28	%
Functional Verification, including Emulation and Prototyping Hardware*	26	%	25	%	29	%	26	%
Intellectual Property (“IP”)	11	%	12	%	11	%	13	%
System Design and Analysis	13	%	12	%	12	%	11	%
Total	100	%	100	%	100	%	100	%

_____________

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

6

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 September 30, 2023 or October 1, 2022.

Approximately 85% of Cadence’s annual revenue is characterized as recurring revenue. Recurring revenue includes revenue recognized over time from Cadence’s 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 is 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 nine months ended September 30, 2023 and October 1, 2022:

	Three Months Ended				Nine Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
Revenue recognized over time	83	%	81	%	80	%	82	%
Revenue from arrangements with non-cancelable commitments	2	%	3	%	3	%	2	%
Recurring revenue	85	%	84	%	83	%	84	%
Up-front revenue	15	%	16	%	17	%	16	%
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 stand-alone 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.

7

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.

Cadence’s contract balances as of September 30, 2023 and December 31, 2022 were as follows:

	As of
	September 30, 2023		December 31, 2022
	(In thousands)
Contract assets	$	14,353	$	22,766
Deferred revenue	766,515		782,062

Cadence recognized revenue of $106.6 million and $632.4 million during the three and nine months ended September 30, 2023, and $63.9 million and $488.9 million during the three and nine months ended October 1, 2022, 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 $5.4 billion as of September 30, 2023, which included $0.4 billion 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 September 30, 2023, Cadence expected to recognize 54% of the contracted but unsatisfied performance obligations, excluding non-cancelable commitments, as revenue over the next 12 months.

Cadence recognized revenue of $13.5 million and $40.3 million during the three and nine months ended September 30, 2023, and $12.1 million and $35.2 million during the three and nine months ended October 1, 2022, 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.

8

NOTE 3. RECEIVABLES, NET

Cadence’s current and long-term receivables balances as of September 30, 2023 and December 31, 2022 were as follows:

	As of
	September 30, 2023		December 31, 2022
	(In thousands)
Accounts receivable	$	264,580	$	314,666
Unbilled accounts receivable	164,827		174,334
Long-term receivables	9,009		2,735
Total receivables	438,416		491,735
Less allowance for doubtful accounts	(2,902)		(2,290)
Total receivables, net	$	435,514	$	489,445

Cadence’s customers are primarily concentrated within the semiconductor and electronics systems industries. As of September 30, 2023 and December 31, 2022, no single customer accounted for 10% or more of Cadence’s total receivables.

NOTE 4. DEBT

Cadence’s outstanding debt as of September 30, 2023 and December 31, 2022 was as follows:

	September 30, 2023						December 31, 2022
	(In thousands)
	Principal		Unamortized Discount		Carrying Value		Principal		Unamortized Discount		Carrying Value
Revolving Credit Facility	$	—	$	—	$	—	$	100,000	$	—	$	100,000
2024 Notes	350,000		(936)		349,064		350,000		(1,581)		348,419
2025 Term Loan	300,000		(263)		299,737		300,000		(341)		299,659
Total outstanding debt	$	650,000	$	(1,199)	$	648,801	$	750,000	$	(1,922)	$	748,078

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 the London Inter-Bank Offered Rate (“LIBOR”) to Term Secured Overnight Financing Rate (“SOFR”). The material terms of the 2021 Credit Facility otherwise remain unchanged.

The 2021 Credit Facility provides for borrowings up to $700.0 million, with the right to request increased capacity up to an additional $350.0 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. A commitment fee ranging from 0.070% to 0.175% is assessed on the daily average undrawn portion of revolving commitments. Borrowings bear interest at what is estimated to be current market rates of interest. Accordingly, the carrying value of the 2021 Credit Facility approximates fair value.

The 2021 Credit Facility 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 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 September 30, 2023, 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 a $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 fair value of the 2024 Notes was approximately $345.7 million as of September 30, 2023.

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. Debt issuance costs associated with the 2025 Term Loan were not material.

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% 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% and 0.125% per annum, determined by reference to the credit rating of Cadence’s unsecured debt. As of September 30, 2023, the interest rate on the 2025 Term Loan was 6.18%. 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 September 30, 2023, Cadence was in compliance with all financial covenants associated with the 2025 Term Loan.

NOTE 5. ACQUISITIONS

On September 6, 2023, Cadence acquired the serializer/deserializer (“SerDes”) and memory interface physical layer (“Memory”) IP business from Rambus Inc. (“Rambus”) for an aggregate cash consideration of $108.6 million. Memory and SerDes IP design and integration continues to be integral to the design of artificial intelligence, data center and hyperscale applications, CPU architectures and networking devices. The addition of the Rambus IP and seasoned team accelerates Cadence’s Intelligent System Design strategy and strengthens Cadence's IP technology portfolio.

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

	Fair Value
	(In thousands)
Current assets	$	1,460
Goodwill	80,999
Acquired intangibles	26,000
Other long-term assets	2,798
Total assets acquired	111,257
Current liabilities	2,531
Long-term liabilities	142
Total liabilities assumed	2,673
Total purchase consideration	$	108,584

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 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 be deductible for tax purposes.

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Definite-lived intangible assets acquired with Cadence’s acquisition of the SerDes and Memory business from Rambus were as follows:

	Fair Value		Weighted Average Amortization Period
	(In thousands)		(in years)
Existing technology	$	16,700	5.0 years
Agreements and relationships	9,300		7.0 years
Total acquired intangibles with definite lives	$	26,000	5.7 years

On May 4, 2023, Cadence acquired all of the outstanding equity of Pulsic, Ltd. (“Pulsic”), a longtime provider of production-proven technology for floor-planning, placement, and routing of custom ICs. The addition of Pulsic’s technologies and experienced team supports Cadence’s Intelligent System Design strategy and strengthens Cadence’s Custom IC Design and Simulation technology portfolio. The aggregate cash consideration for Cadence’s acquisition of Pulsic, net of cash acquired of $3.8 million, was $56.1 million. Subject to service and other conditions, Cadence expects to recognize expense for consideration paid to certain former Pulsic shareholders, now employed by Cadence, through the second quarter of fiscal 2025.

The total purchase consideration was allocated to the assets acquired and liabilities assumed with Cadence’s acquisition of Pulsic based on their respective fair values on the acquisition date as follows:

	Fair Value
	(In thousands)
Current assets	$	4,369
Goodwill	47,448
Acquired intangibles	12,400
Other long-term assets	89
Total assets acquired	64,306
Current liabilities	1,553
Long-term liabilities	2,885
Total liabilities assumed	4,438
Total purchase consideration	$	59,868

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.

Definite-lived intangible assets acquired with Cadence’s acquisition of Pulsic were as follows:

	Fair Value		Weighted Average Amortization Period
	(In thousands)		(in years)
Existing technology	$	8,000	6.2 years
Agreements and relationships	4,100		8.0 years
Tradenames, trademarks and patents	300		6.0 years
Total acquired intangibles with definite lives	$	12,400	6.8 years

Pro Forma Financial Information

Cadence has not presented pro forma financial information for the businesses acquired during fiscal 2023 because the results of operations for these businesses are not material to Cadence’s condensed consolidated financial statements.

Acquisition-Related Transaction Costs

Transaction costs associated with acquisitions, which consist of professional fees and administrative costs, are expensed as incurred and are included in general and administrative expense in Cadence’s condensed consolidated income statement. During the three and nine months ended September 30, 2023, transaction costs associated with acquisitions were $4.3 million and $10.3 million, respectively. During the three and nine months ended October 1, 2022, transaction costs associated with acquisitions were $3.6 million and $10.1 million, respectively.

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NOTE 6. GOODWILL AND ACQUIRED INTANGIBLES

Goodwill

The changes in the carrying amount of goodwill during the nine months ended September 30, 2023 were as follows:

	Gross Carrying Amount
	(In thousands)
Balance as of December 31, 2022	$	1,374,268
Goodwill resulting from acquisitions	128,447
Effect of foreign currency translation	(2,273)
Balance as of September 30, 2023	$	1,500,442

Acquired Intangibles, Net

Acquired intangibles as of September 30, 2023 were as follows, excluding intangibles that were fully amortized as of December 31, 2022:

	Gross Carrying Amount		Accumulated Amortization		Acquired Intangibles, Net
	(In thousands)
Existing technology	$	323,359	$	(129,807)	$	193,552
Agreements and relationships	194,625		(56,671)		137,954
Tradenames, trademarks and patents	13,242		(3,931)		9,311
Total acquired intangibles with definite lives	531,226		(190,409)		340,817
In-process technology	6,800		—		6,800
Total acquired intangibles	$	538,026	$	(190,409)	$	347,617

In-process technology as of September 30, 2023 consisted of acquired projects that, if completed, will contribute to Cadence’s existing product offerings. As of September 30, 2023, these projects were expected to be completed during the first quarter of fiscal 2024. During the three and nine months ended September 30, 2023, there were no transfers from in-process technology to existing technology.

Acquired intangibles as of December 31, 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	$	479,796	$	(278,851)	$	200,945
Agreements and relationships	274,624		(137,847)		136,777
Tradenames, trademarks and patents	12,979		(2,884)		10,095
Total acquired intangibles with definite lives	$	767,399	$	(419,582)	$	347,817
In-process technology	6,800		—		6,800
Total acquired intangibles	$	774,199	$	(419,582)	$	354,617

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 September 30, 2023 and October 1, 2022 by condensed consolidated income statement caption was as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
	(In thousands)
Cost of product and maintenance	$	10,991	$	8,867	$	31,869	$	30,906
Amortization of acquired intangibles	4,612		3,946		13,181		13,543
Total amortization of acquired intangibles	$	15,603	$	12,813	$	45,050	$	44,449

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As of September 30, 2023, the estimated amortization expense for intangible assets with definite lives was as follows for the following five fiscal years and thereafter:

	(In thousands)
2023 - remaining period	$	16,309
2024	63,382
2025	50,658
2026	44,879
2027	42,438
2028	38,371
Thereafter	84,780
Total estimated amortization expense	$	340,817

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 September 30, 2023 and October 1, 2022 as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
	(In thousands)
Cost of product and maintenance	$	1,191	$	1,046	$	3,292	$	2,751
Cost of services	1,516		1,331		4,190		3,494
Marketing and sales	18,042		14,991		48,819		39,650
Research and development	53,013		43,327		142,142		115,516
General and administrative	14,270		12,756		40,485		35,779
Total stock-based compensation expense	$	88,032	$	73,451	$	238,928	$	197,190

Cadence had total unrecognized compensation expense related to stock option and restricted stock grants of $621.5 million as of September 30, 2023, which will be recognized over a weighted average vesting period of 2.0 years.

NOTE 8. STOCK REPURCHASE PROGRAM

In August 2023, Cadence’s Board of Directors increased the prior authorization to repurchase shares of Cadence common stock by authorizing an additional $1.0 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 and nine months ended September 30, 2023, Cadence repurchased approximately 0.5 million and 1.8 million shares on the open market, for an aggregate purchase price of $125 million and $375 million, respectively.

In June 2023, Cadence also entered into an accelerated share repurchase (“ASR”) agreement with HSBC Bank USA, National Association (“HSBC”) to repurchase an aggregate of $200.0 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. In June 2023, Cadence received an initial share delivery of approximately 0.6 million shares, which represented the number of shares at a market price equal to $140.0 million. An equity-linked contract for $60 million, representing the remaining shares to be delivered by HSBC under the ASR agreement, was recorded to stockholders' equity as of June 30, 2023. In August 2023, the ASR agreement settled and resulted in a delivery of approximately 0.3 million additional shares to Cadence. In total, Cadence received approximately 0.9 million shares under the ASR agreement at an average price per share of $228.26. The shares received were treated as repurchased common stock for purposes of calculating earnings per share.

As of September 30, 2023, approximately $1.5 billion 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 nine months ended September 30, 2023 and October 1, 2022 were as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2023*		October 1, 2022**		September 30, 2023		October 1, 2022
	(In thousands)
Shares repurchased	811		959		2,657		4,664
Total cost of repurchased shares	$	185,008	$	180,013	$	575,127	$	750,062

_____________

*Includes 276 thousand shares and $60 million equity forward contract from the June 2023 ASR settled in August 2023.

**Includes 109 thousand shares and $30 million equity forward contract from the June 2022 ASR settled in September 2022.

NOTE 9. RESTRUCTURING

In August 2023, Cadence initiated a restructuring plan (the “2023 Restructuring Plan”) designed to better align its resources with its business strategy. The charges incurred with the 2023 Restructuring Plan during the three and nine months ended September 30, 2023, are comprised of severance payments and termination benefits related to headcount reductions and are included in restructuring on Cadence’s condensed consolidated income statements.

In addition to headcount reductions, Cadence is evaluating certain facilities for closure as part of the 2023 Restructuring Plan. During the three and nine months ended September 30, 2023, no facility-related restructuring charges were incurred, and charges in future periods for the facilities under consideration are not expected to exceed $5 million.

The following table presents activity for the 2023 Restructuring Plan during the nine months ended September 30, 2023:

	Severance and Benefits
	(In thousands)
Balance as of December 31, 2022	$	—
Restructuring charges	11,582
Cash payments	(2,620)
Effect of foreign currency translation	(117)
Balance as of September 30, 2023	$	8,845

All liabilities for severance and related benefits under the 2023 Restructuring Plan are included in accounts payable and accrued liabilities on Cadence’s condensed consolidated balance sheets as of September 30, 2023. Cadence expects to make cash payments to settle these liabilities through the first half of fiscal 2024.

NOTE 10. OTHER INCOME (EXPENSE), NET

Cadence’s other income (expense), net, for the three and nine months ended September 30, 2023 and October 1, 2022 are as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
	(In thousands)
Interest income	$	8,453	$	3,051	$	22,253	$	4,941
Gains (losses) on marketable equity investments	14,339		(408)		14,960		(1,993)
Losses on non-marketable equity investments	(1,050)		(1,246)		(2,225)		(2,786)
Gains (losses) on securities in Non-Qualified Deferred Compensation (“NQDC”) trust	(1,749)		(2,885)		4,556		(11,977)
Losses on foreign exchange	(3,568)		(1,299)		(4,649)		(1,418)
Other expense, net	(319)		(230)		(2,532)		(646)
Total other income (expense), net	$	16,106	$	(3,017)	$	32,363	$	(13,879)

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NOTE 11. 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 nine months ended September 30, 2023 and October 1, 2022 are as follows:

	Three Months Ended				Nine Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
	(In thousands, except per share amounts)
Net income	$	254,321	$	186,305	$	717,245	$	608,560
Weighted average common shares used to calculate basic net income per share	269,229		271,131		269,480		271,694
Stock-based awards	3,198		3,826		3,379		3,989
Weighted average common shares used to calculate diluted net income per share	272,427		274,957		272,859		275,683
Net income per share - basic	$	0.94	$	0.69	$	2.66	$	2.24
Net income per share - diluted	$	0.93	$	0.68	$	2.63	$	2.21

The following table presents shares of Cadence’s common stock outstanding for the three and nine months ended September 30, 2023 and October 1, 2022 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		Nine Months Ended
	September 30, 2023	October 1, 2022	September 30, 2023	October 1, 2022
	(In thousands)
Long-term market-based awards	1,866	1,761	1,841	1,485
Options to purchase shares of common stock	262	514	373	678
Non-vested shares of restricted stock	807	26	288	63
Total potential common shares excluded	2,935	2,301	2,502	2,226

NOTE 12. INVESTMENTS

Marketable Equity Investments

Cadence’s investments in marketable equity securities consist of purchased shares of publicly held companies and are included in prepaid expenses and other in Cadence’s condensed consolidated balance sheets. Changes in the fair value of these investments are recorded to other income (expense), net in Cadence’s condensed consolidated income statements. The carrying value of marketable equity investments was $58.4 million and $4.5 million as of September 30, 2023 and December 31, 2022, respectively.

Marketable Debt Securities

The following is a summary of Cadence’s available-for-sale debt securities recorded within prepaid expenses and other on the condensed consolidated balance sheet as of September 30, 2023:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(In thousands)
Available-for-sale securities
Mortgage-backed and asset-backed securities	$	44,042	$	6	$	(1,421)	$	42,627
Total available-for-sale securities	$	44,042	$	6	$	(1,421)	$	42,627

Gross unrealized gains and losses are recorded as a component of accumulated other comprehensive loss on Cadence's condensed consolidated balance sheets.

15

As of September 30, 2023, the fair values of available-for-sale debt securities, by remaining contractual maturity, were as follows:

	(In thousands)
Due within 1 year	$	—
Due after 1 year through 5 years	8,366
Due after 5 years through 10 years	14,174
Due after 10 years	20,087
Total	$	42,627

As of September 30, 2023, Cadence does not intend to sell any of its available-for-sale securities in an unrealized loss position, and it is more likely than not that Cadence will hold the securities until maturity or a recovery of the cost basis.

Non-Marketable Equity Investments

Cadence’s investments in non-marketable equity securities generally consist of stock or other instruments of privately held entities and are included in other assets on Cadence’s condensed consolidated balance sheets. Cadence holds a 16% interest in a privately held company that is accounted for using the equity method of accounting. The carrying value of this investment was $112.6 million and $117.7 million as of September 30, 2023 and December 31, 2022, respectively.

Cadence records its proportionate share of net income from the investee, offset by amortization of basis differences, to other income (expense), net in Cadence’s condensed consolidated income statements. For the three and nine months ended September 30, 2023, Cadence recognized losses of $1.0 million and $2.2 million, respectively. For the three and nine months ended October 1, 2022, Cadence recognized losses of $1.2 million and $2.5 million, respectively.

Cadence also holds other non-marketable investments in privately held companies where Cadence does not have the ability to exercise significant influence and the fair value of the investments is not readily determinable. The carrying value of these investments was $2.2 million and $2.3 million as of September 30, 2023 and December 31, 2022, respectively. Gains and losses on these investments were not material to Cadence’s condensed consolidated financial statements for the periods presented.

NOTE 13. 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 nine months ended September 30, 2023.

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 September 30, 2023 and December 31, 2022:

	Fair Value Measurements as of September 30, 2023
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Cash equivalents:
Money market funds	$	444,303	$	444,303	$	—	$	—
Marketable securities:
Marketable equity securities	58,411		58,411		—		—
Mortgage-backed and asset-backed securities	42,627		—		42,627		—
Securities held in NQDC trust	67,324		67,324		—		—
Total Assets	$	612,665	$	570,038	$	42,627	$	—

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	Total		Level 1		Level 2		Level 3
	(In thousands)
Liabilities
Foreign currency exchange contracts	$	10,102	$	—	$	10,102	$	—
Total Liabilities	$	10,102	$	—	$	10,102	$	—
	Fair Value Measurements as of December 31, 2022
	Total		Level 1		Level 2		Level 3
	(In thousands)
Assets
Cash equivalents:
Money market funds	$	548,373	$	548,373	$	—	$	—
Marketable equity securities	4,490		4,490		—		—
Securities held in NQDC trust	55,605		55,605		—		—
Foreign currency exchange contracts	5,306		—		5,306		—
Total Assets	$	613,774	$	608,468	$	5,306	$	—
As of December 31, 2022, Cadence did not have any financial liabilities requiring a recurring fair value measurement.

Level 1 Measurements

Cadence’s cash equivalents held in money market funds, marketable equity securities and the trading securities held in Cadence’s NQDC trust are measured at fair value using Level 1 inputs.

Level 2 Measurements

The valuation techniques used to determine the fair value of Cadence’s investments in marketable debt securities, foreign currency forward exchange contracts and 2024 Notes are classified within Level 2 of the fair value hierarchy. For additional information relating to Cadence’s debt arrangements, see Note 4 in the notes to condensed consolidated financial statements.

Level 3 Measurements

During the nine months ended September 30, 2023, Cadence acquired intangible assets of $38.4 million. The fair value of the intangible assets acquired was determined using variations of the income approach that utilizes unobservable inputs classified as Level 3 measurements.

For existing technology, the fair value was determined by applying the relief-from-royalty method. This method is based on the application of a royalty rate to forecasted revenue to quantify the benefit of owning the intangible asset rather than paying a royalty for use of the asset. To estimate royalty savings over time, Cadence projected revenue from the acquired existing technology over the estimated remaining life of the technology, including the effect of assumed technological obsolescence, before applying an assumed royalty rate. Cadence assumed technological obsolescence at rates between 10% and 13% annually, before applying an assumed royalty rate between 25% and 30%.

For agreements and relationships, the fair value was determined by using the multi-period excess earnings method. This method reflects the present value of the projected cash flows that are expected to be generated from existing customers, less charges representing the contribution of other assets to those cash flows. Projected income from existing customer relationships was determined using customer retention rates between 80% and 90%. The present value of operating cash flows from existing customers was determined using discount rates between 13.5% and 15%.

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NOTE 14. INVENTORY

Cadence’s inventory balances as of September 30, 2023 and December 31, 2022 were as follows:

	As of
	September 30, 2023		December 31, 2022
	(In thousands)
Inventories:
Raw materials	$	154,097	$	113,982
Finished goods	9,596		14,023
Total inventories	$	163,693	$	128,005

NOTE 15. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

From time to time, Cadence is involved in various disputes and litigation that arise in the ordinary course of business. These include disputes and legal proceedings related to intellectual property, indemnification obligations, mergers and acquisitions, licensing, contracts, customers, products, distribution and other commercial arrangements and employee relations matters. At least quarterly, Cadence reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount or the range of loss can be estimated, Cadence accrues a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on Cadence’s judgments using the best information available at the time. As additional information becomes available, Cadence reassesses the potential liability related to pending claims and litigation matters and may revise estimates.

Tax Proceedings

In December 2022, Cadence received a tax audit assessment of approximately $49 million from the Korea taxing authorities for years 2017-2019. The tax audit assessment is primarily related to value-added taxes. Cadence is required to pay these assessed taxes, prior to being allowed to contest or litigate the assessment in administrative and judicial proceedings. The assessment was paid by Cadence in January 2023 and recorded as a component of other assets in the condensed consolidated balance sheets. Payment of this amount is not an admission that Cadence is subject to such taxes, and Cadence continues to defend its position vigorously. Cadence did not record a reserve for this contingency as of September 30, 2023 or December 31, 2022 as Cadence does not believe a loss is probable because it believes it will ultimately prevail in full. The entire dispute resolution process may take from one to eight years.

Other Contingencies

Cadence provides its customers with a warranty on sales of hardware products, generally for a 90-day period. Cadence did not incur any significant costs related to warranty obligations during the three and nine months ended September 30, 2023 and October 1, 2022.

Cadence’s product license and services agreements typically include a limited indemnification provision for claims from third parties relating to Cadence’s intellectual property. If the potential loss from any indemnification claim is considered probable and the amount or the range of loss can be estimated, Cadence accrues a liability for the estimated loss.

In connection with a litigation campaign launched in April 2022 by Bell Semiconductor LLC (“Bell Semi”), a patent monetization entity, some customers sought defense and indemnification against claims of patent infringement asserted by Bell Semi in various district court litigation and at the U.S. International Trade Commission. Bell Semi alleged that the customers’ use of one or more features of certain Cadence products infringed one or more of six patents held by Bell Semi. Cadence offered to defend some of its customers consistent with the terms of the applicable license agreements. On July 25, 2023, Cadence and Bell Semi reached a settlement agreement involving the six patents-in-suit. The settlement amount was not material to Cadence.

Cadence did not incur any material losses from indemnification claims during the three and nine months ended September 30, 2023 and October 1, 2022.

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NOTE 16. ACCUMULATED OTHER COMPREHENSIVE LOSS

Cadence’s accumulated other comprehensive loss is comprised of the aggregate impact of foreign currency translation gains and losses, changes in defined benefit plan liabilities and unrealized gains and losses on investments, and is presented in Cadence’s condensed consolidated statements of comprehensive income.

Accumulated other comprehensive loss was comprised of the following as of September 30, 2023 and December 31, 2022:

	As of
	September 30, 2023		December 31, 2022
	(In thousands)
Foreign currency translation loss	$	(106,409)	$	(85,863)
Changes in defined benefit plan liabilities	(5,237)		(5,774)
Unrealized losses on investments	(1,415)		—
Total accumulated other comprehensive loss	$	(113,061)	$	(91,637)

For the three and nine months ended September 30, 2023 and October 1, 2022, there were no significant amounts related to foreign currency translation loss, changes in defined benefit plan liabilities or unrealized gains and losses on investments reclassified from accumulated other comprehensive loss to net income.

NOTE 17. SEGMENT REPORTING

Segment reporting is based on the “management approach,” following the method that management organizes the company’s reportable segments for which separate financial information is made available to, and evaluated regularly by, the chief operating decision maker in allocating resources and in assessing performance. Cadence’s chief operating decision maker is its CEO, who reviews Cadence’s consolidated results as one operating segment. In making operating decisions, the CEO primarily considers consolidated financial information, accompanied by disaggregated information about revenues by geographic region.

Outside the United States, Cadence markets and supports its products and services primarily through its subsidiaries. Revenue is attributed to geography based upon the country in which the product is used, or services are delivered. Long-lived assets are attributed to geography based on the country where the assets are located.

The following table presents a summary of revenue by geography for the three and nine months ended September 30, 2023 and October 1, 2022:

	Three Months Ended				Nine Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
	(In thousands)
Americas:
United States	$	421,547	$	392,222	$	1,241,488	$	1,174,734
Other Americas	15,800		15,165		47,884		39,010
Total Americas	437,347		407,387		1,289,372		1,213,744
Asia:
China	172,022		148,325		523,694		401,460
Other Asia	197,831		156,250		558,687		466,891
Total Asia	369,853		304,575		1,082,381		868,351
Europe, Middle East and Africa	158,194		142,983		479,268		431,660
Japan	57,700		47,609		170,342		148,086
Total	$	1,023,094	$	902,554	$	3,021,363	$	2,661,841

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The following table presents a summary of long-lived assets by geography as of September 30, 2023 and December 31, 2022:

	As of
	September 30, 2023		December 31, 2022
	(In thousands)
Americas:
United States	$	364,932	$	347,822
Other Americas	10,169		7,548
Total Americas	375,101		355,370
Asia:
China	41,386		51,667
Other Asia	70,743		73,329
Total Asia	112,129		124,996
Europe, Middle East and Africa	51,291		56,959
Japan	2,820		4,505
Total	$	541,341	$	541,830

NOTE 18. SUBSEQUENT EVENT

On October 2, 2023, Cadence acquired all of the outstanding equity of Intrinsix Corporation (“Intrinsix”) from CEVA, Inc. The acquisition enhances Cadence’s system and IC design services resources with the addition of a team with expertise in advanced nodes, radio frequency, mixed-signal and security algorithms. The acquisition also expands Cadence’s reach in key high-growth verticals, including aerospace and defense. The aggregate cash consideration of approximately $35 million will be allocated to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date. Cadence expects to complete the initial accounting for its acquisition of Intrinsix during the fourth quarter of fiscal 2023.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q (this “Quarterly Report”) and in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (our “Annual Report”). This Quarterly Report contains statements that are not historical in nature, are predictive, or that depend upon or refer to future events or conditions or contain other forward-looking statements. Statements including, but not limited to, statements regarding the extent, timing and mix of future revenues and customer demand; the deployment of our products and services; the impact of the macroeconomic and geopolitical environment, including but not limited to, the expanded trade control laws and regulations, the conflicts in and around Ukraine, the Middle East and other areas of the world, volatility in foreign currency exchange rates, inflation and the rise in interest rates; the impact of government actions; future costs, expenses, tax rates and uses of cash; pending legal, administrative and tax proceedings; restructuring actions and associated charges and benefits; the accounting for acquisitions and integration of acquired businesses; and other statements using words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “plans,” “projects,” “should,” “targets,” “will” and “would,” and words of similar import and the negatives thereof, constitute forward-looking statements. These statements are predictions based upon our current expectations about future events. Actual results could vary materially as a result of certain factors, including, but not limited to, those expressed in these statements. We refer you to the “Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk,” and “Liquidity and Capital Resources” sections contained in this Quarterly Report, the "Risk Factors" section contained in our Annual Report and our subsequent Quarterly Reports on Form 10-Q, and the risks discussed in our other Securities and Exchange Commission (“SEC”) filings, which identify important risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements.

We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. We disclaim any obligation to update these forward-looking statements, except as required by law.

Business Overview

Cadence is a leader in electronic system design, building upon more than 30 years of computational software expertise. We apply our underlying Intelligent System Design strategy to deliver computational software, hardware and intellectual property (“IP”) that turn design concepts into reality. We enable our customers to develop electronic products. Our products and services are designed to give our customers a competitive edge in their development of integrated circuits (“ICs”), systems-on-chip (“SoCs”), and increasingly sophisticated electronic devices and systems. Our products and services do this by optimizing performance, minimizing power consumption, shortening the time to bring our customers’ products to market, improving engineering productivity and reducing their design, development and manufacturing costs.

Our strategy is to provide the technology necessary for our customers to develop products across a variety of vertical markets including consumer, hyperscale computing, mobile, 5G communications, automotive, aerospace and defense, industrial, healthcare and life sciences. Our products and services enable our customers to develop complex and innovative electronic products, so demand for our technology is driven by our customers’ investment in new designs and products. Historically, the industry that provided the tools used by IC engineers was referred to as Electronic Design Automation (“EDA”). Today, our offerings include and extend beyond EDA.

We group our products into categories related to major design activities:

•Custom IC Design and Simulation;

•Digital IC Design and Signoff;

•Functional Verification;

•IP; and

•System Design and Analysis.

For additional information about our products, see the discussion in Item 1, “Business,” under the heading “Products and Product Categories,” in our Annual Report.