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Cadence Design Systems 10-K 2007 Documents found in this filing:
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Commission file number 0-15867
(Exact Name of Registrant as Specified in its Charter)
(408) 943-1234
(Registrant’s Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes [ X ] No [ ]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes [ ] No [ X ]
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes
[ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act. (check one):
Large accelerated filer [ X ] Accelerated filer
[ ] Non-accelerated filer
[ ]
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Act).
Yes [ ] No [ X ]
The aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price
at which the common equity was last sold as of the last business
day of the registrant’s most recently completed second
fiscal quarter ended July 1, 2006 was $4,910,530,182.
On February 3, 2007, approximately 279,823,852 shares
of the Registrant’s Common Stock, $0.01 par value,
were outstanding.
Portions of the definitive proxy statement for the Cadence
Design Systems, Inc. 2007 Annual Meeting are incorporated by
reference into Part III hereof.
2006
FORM 10-K
ANNUAL REPORT
Table of Contents
Table of Contents
PART I.
This Annual Report on
Form 10-K
and the documents incorporated by reference in this Annual
Report contain forward-looking statements. Certain of such
statements, including, without limitation, statements regarding
the extent and timing of future revenues and expenses and
customer demand, statements regarding the deployment of our
products, statements regarding our reliance on third parties and
other statements using words such as “anticipates,”
“believes,” “could,” “estimates,”
“expects,” “intends,” “may,”
“plans,” “should,” “will” and
“would,” and words of similar import and the negatives
thereof, constitute forward-looking statements. These statements
are predictions based upon our current expectations about future
events. Actual results could vary materially as a result of
certain factors, including but not limited to, those expressed
in these statements. We refer you to the “Proprietary
Technology,” “Competition,” “Risk
Factors,” “Results of Operations,”
“Disclosures About Market Risk” and “Liquidity
and Capital Resources” sections contained in this Annual
Report and the risks discussed in our other Securities Exchange
Commission, or SEC, filings, which identify important risks and
uncertainties that could cause actual results to differ
materially from those contained in the forward-looking
statements.
We urge you to consider these factors carefully in evaluating
the forward-looking statements contained in this Annual Report.
All subsequent written or spoken forward-looking statements
attributable to our company or persons acting on our behalf are
expressly qualified in their entirety by these cautionary
statements. The forward-looking statements included in this
Annual Report are made only as of the date of this Annual
Report. We do not intend, and undertake no obligation, to update
these forward-looking statements.
We develop electronic design automation, or EDA, software and
hardware. We license software, sell or lease hardware technology
and provide design and methodology services throughout the world
to help manage and accelerate electronics product development
processes. Our broad range of products and services are used by
the world’s leading electronics companies to design and
develop complex integrated circuits, or ICs, and personal and
commercial electronics systems. We have approximately 5,200
employees, in approximately 60 sales offices, design centers and
research and development facilities located around the world.
We were formed as a Delaware corporation in April 1987. Our
headquarters is located at 2655 Seely Avenue,
San Jose, California 95134. Our telephone number is
(408) 943-1234.
Our website can be accessed at www.cadence.com. We make
available free of charge copies of our SEC filings and
submissions on the investor relations page of our website at
www.cadence.com as soon as practicable after
electronically filing or furnishing such documents with the SEC.
Our Corporate Governance Guidelines, Code of Business Conduct
and the charters of the Audit Committee, Compensation Committee
and Corporate Governance and Nominating Committee of our Board
of Directors are also posted on the investor relations page of
our website at www.cadence.com. Stockholders may also
request copies of these documents by writing to our Corporate
Secretary at the address above.
Communications, business productivity and consumer electronics
markets drove growth in the electronics industry for most of the
past decade. However, in recent years, the consumer market has
been the fastest growing end market for electronics and the most
influential in setting expectations for rapid change, low cost,
miniaturization and increasing functionality.
Electronic systems companies respond to these demands by
combining subsystems – such as radio frequency
wireless communication, or RF, video signal processing, and
embedded computing – onto a single silicon chip,
creating a system-on-chip, or SoC, or onto multiple chips in a
single chip package in a format referred to as
system-in-package, or SiP. These trends toward subsystem
integration have required chip makers to find solutions to
challenges previously addressed by system companies, such as
verifying system-level functionality and hardware-software
interoperability.
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SoC designs put many more transistors on each chip, increasing
the need for tight control over power consumption. This is done
not only to increase battery life in portable devices, but also
to minimize energy cost and limit heat generation, which
threaten the reliability of a device. Evolving semiconductor
manufacturing processes with smaller features (transistors and
wires) and lower supply voltages address both of these issues to
some degree, but introduce new challenges of their own.
Contemporary portable electronic devices contain chips in which
individual features can be as small as 65 nanometers –
about 6/100,000ths of a millimeter. Because of atomic level
interactions in the transistors, these chips continue to consume
power from the battery even when the device is switched off. To
overcome these issues, specific “low power” design
techniques must be developed and must be integrated throughout
the design flow, from logic design and verification through
physical implementation.
Variability in the processes used to manufacture silicon chips
has become so pervasive at 65 nanometers and below that
traditional connections between design and manufacturing teams
are insufficient to ensure chip performance and yield.
Integrating detailed models of the manufacturing process into
the chip design environment is desirable so engineers can craft
the design to avoid or overcome these manufacturing process
variations. Similarly, manufacturing teams can optimize their
processes if, along with the design, they are provided with
information about the most critical parts of the chip. However,
sharing information between design and manufacturing processes
is complicated because current data formats used to describe the
chip design differ from data formats used to describe the
manufacturing process and control the manufacturing equipment.
Moreover, design and manufacturing often takes place within two
separate companies – one company designs the chip
while another company manufactures it.
These trends pose significant new challenges for the electronics
design processes. Specifically, product performance and size
requirements of the mobile consumer electronics market require
microelectronic systems to be smaller, consume less power and
provide multiple functions all in one SoC or SiP package. This
requires designers to pay close attention to many electrical,
physical and manufacturing effects that were inconsequential in
previous generations of chip designs. The design challenge
becomes more complex with each new generation of electronics,
and providers of EDA solutions must deliver products that
address these technical challenges, while improving the
efficiency and productivity of the design process.
Our chief operating decision maker is our President and Chief
Executive Officer, or CEO. Our CEO reviews our consolidated
results within only one operating segment.
Our products are engineered to improve our customers’
design productivity and resulting design quality by providing a
comprehensive set of EDA design products. Product revenues
include all fees earned from granting licenses to use our
software, and from sales and leases of our hardware products,
and exclude revenues derived from maintenance and services. We
offer customers three license types for our software: perpetual,
term and subscription. See “Software Licensing
Arrangements” below for additional discussion of our
license types.
Product revenue was $982.7 million, or 66% of our total
revenue, in 2006, $851.5 million, or 64% of our total
revenue, in 2005 and $729.8 million, or 61% of our total
revenue, in 2004.
Product
Strategy
With the addition of emerging nanometer design considerations to
the already burgeoning set of traditional design tasks, complex
SoC or IC design can no longer be accomplished using a
collection of discrete design tools. What previously consisted
of sequential design activities must be merged and accomplished
nearly simultaneously without time-consuming data translation
steps. We combine our design technologies into
“platforms” for four major design activities:
functional verification, digital IC design, custom IC design and
system interconnect. The four
Cadence®
design platforms are
Incisive®
functional verification,
Encounter®
digital IC design,
Virtuoso®
custom design and
Allegro®
system interconnect platforms. In addition, we augment these
platform product offerings with a comprehensive set of design
for manufacturing, or DFM, products that service both the
digital and custom IC design flows. These four platforms,
together with our DFM products, comprise our primary product
lines.
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The Incisive functional verification platform enables our
customers to employ enterprise-level verification process
automation, including verification planning, management and
process tracking, with coordination of all verification
activities across teams of specialists and different execution
platforms.
The Incisive platform is tailored for three customer segments:
The Incisive platform includes verification process automation
technologies, methodologies, and verification intellectual
property, or IP, for many standard protocols. Products include:
The Incisive Plan-to-Closure methodology (supported by technical
field experts) is designed to enable the scalable deployment of
best practices and to mitigate our customers’ language,
technology and methodology adoption risks.
The Encounter digital IC design platform enables our
customers to implement all aspects of their digital
nanometer-scale designs. It is based on a single user interface
and unified in-memory data model, and is specifically designed
to facilitate the analysis and optimization of chip performance,
power consumption, and silicon area and manufacturability
throughout our customers’ design processes. The Encounter
platform is comprised of the following core technologies:
Unlike traditional “front-end/back-end” systems, the
Encounter platform does not require customers to perform
time-consuming translations between common tasks such as
placement, power distribution, routing, and timing and crosstalk
analysis. The Encounter platform supports hierarchical designs,
with support for designs containing hundreds of millions of
transistors on a single chip. Since 2005, the Encounter platform
has been offered in three levels: Encounter L, XL and GXL. These
levels are scaled to provide customers with technologies
tailored to specific degrees of design complexity in the
digital IC space.
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The Virtuoso custom design platform enables design
predictability by ensuring that the circuit design
representation will perform correctly in the final manufactured
chip. With the Virtuoso platform, designers are able to deliver
silicon-accurate analog, custom digital, RF, and mixed-signal
designs, while addressing the growing number of physical effects
in package, power grid, interconnect, devices and substrate
employing a “top-down” language-based design.
The Virtuoso platform reduces design time by providing:
The
OpenAccesstm
database (described below in “Third Party Programs and
Initiatives”) is used as a mechanism for integration across
the Virtuoso platform.
With the 2006 introduction of the Virtuoso 6.1.0 platform
we completed our Virtuoso platform product segmentation which
began in 2005. The Virtuoso L, XL and GXL offerings provide
our customers with a diverse set of custom design capabilities
for entry-level design to the most complex DFM-aware designs.
The Allegro system interconnect design platform enables design
teams to design high-performance interconnect across the domains
of IC, package and printed circuit board, or PCB, reducing cost
and time to market. The system interconnect – between
input-output buffers and across ICs, packages and
PCBs – can be optimized through the platform’s
co-design methodology, reducing both hardware costs and design
cycles. Designers use the Allegro platform’s
constraint-driven methodology and advanced capabilities for
design capture, signal integrity and physical implementation.
Silicon design-in kits speed time to market by allowing IC
companies to shorten new device adoption time and allowing
systems companies to accelerate PCB system design cycles. In
2006, with the release of our SiP products, we have entered an
emerging market designed to accelerate products to market where
designers are looking for alternatives between SoCs and PCBs. In
2006, the Allegro L, XL and GXL products were introduced
along with the XL and GXL offerings for Cadence’s SiP
products.
The system interconnect product group includes the Allegro
system interconnect platform, the
OrCAD®
product line of PCB design products which are engineered for
individual or small design team productivity and a family of IC
packaging and SiP technologies. The OrCAD product line is
marketed worldwide through a network of alternative channel
partners.
The physical layout of each IC requires detailed analysis and
optimization to ensure that the design can be manufactured in
volume while performing as expected. Some of our products that
deliver DFM capabilities for nanometer SoC design include:
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Today’s growing silicon complexity creates an array of
design challenges for semiconductor and systems design teams.
Among these challenges is the application of EDA technologies to
overcome design hurdles in certain key markets driving the
semiconductor industry, particularly the wireless and digital
personal entertainment segments. Cadence kits are designed to
allow companies in these sectors to achieve shorter, more
predictable design cycles and greater design productivity by
greatly simplifying the application and integration of EDA
technologies and verification IP to address major design
challenges in these markets: analog-mixed signal, or AMS, RF,
SiP, low power and verification.
Each kit addresses application-specific design issues by
combining a verified methodology and enabling standards-based
IP – all applied to a segment representative design
and delivered with application consulting. Following the
introduction of the AMS Methodology and RF Design Methodology
Kits, in 2006 we introduced the RF SiP Methodology Kit and the
Functional Verification Kit for ARM.
We offer verification and application specific programming, or
ASP, services through
Time-to-Market
Engineering, or TtME, services. Our TtME offering provides
customers with consulting services, project services and/or
complete turnkey services for verification acceleration and
system emulation. QuickCycles allows customers access to our
Palladium simulation acceleration and emulation products on a
pay-as-you-go basis, either on the customer internet site or
remotely over a high-speed, secure network connection.
We recognize that certain of our customers may also use
internally-developed design tools or design tools provided by
other EDA companies, as well as IP available from multiple
suppliers. We support the integration of third party design
products through our OpenAccess Initiative and
Connections®
and OpenChoice programs. OpenAccess is a full-featured EDA
database that supports access and manipulation of its internal
EDA data via a fully documented and freely available programming
interface. This provides an open application program interface
through which applications developed by our customers, by their
other EDA vendors, or by university research groups can all
operate within a single database and with our products. We have
licensed the OpenAccess database to the OpenAccess Coalition,
which is operated by the Silicon Integration Initiative, or Si2,
an organization of EDA, electronic system and semiconductor
industry leaders focused on improving productivity and reducing
cost in creating and producing integrated silicon systems.
The Connections Program provides other EDA companies with access
to our products to ensure that our products work well with those
third party tools. Over 130 EDA providers are members of the
Connections Program. The OpenChoice program was instituted to
enable interoperability and facilitate open collaboration with
leading providers of library, processor, memory core and
verification IP to build, validate and deliver accurate models
optimized for Cadence design and verification solutions. The
program aims to ensure IP quality and provide our customers with
access to optimized IP. A key component of the OpenChoice
program is to assist and support library
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providers in the integration of our design and verification
products and model formats into customer-owned tooling, or COT,
library solutions.
In 2006, we formed the Power Forward Initiative with a group of
22 electronics industry leaders who recognized the urgent need
for an automated, power-aware design infrastructure to
facilitate the production of ICs that consume significantly less
power. The goal of the group is to participate in the refinement
and standardization of the Common Power Format, or CPF. CPF is a
specification language that holistically captures low-power
design intent so that it can be communicated consistently
throughout the IC design process. We have contributed the CPF
specification to Si2, which will manage the standardization,
maintenance and distribution of CPF for the benefit of the
electronics industry.
In addition, we work with vendors of Application Specific
Integrated Circuits, or ASICs, to ensure predictable and smooth
handoff of design data from mutual customers to ASIC
implementation. These programs foster relationships throughout
the silicon design chain with leading IP partners, silicon
manufacturers and library provider partners to support both ASIC
and COT solutions for our customers. They are integral to
providing complete design chain solutions to IC and electronic
systems designers who depend on coordinated offerings from
multiple suppliers.
We provide technical support to our customers to facilitate
their use of our software and hardware products. A high level of
customer service and support is critical to the adoption and
successful use of our products.
We have a global customer support organization and specialized
field application engineering teams located in each of our
operating regions to provide assistance to customers where and
when they need it.
Standard maintenance support includes three major components:
our
Sourcelink®
online support portal, which provides 24 hour access to
real-time technical information on our products; contact center
support (telephone, email and web access to our support
engineers); and software updates (periodic updates with
regression-tested critical fixes and updated functionality
available via CDs or secure internet download).
Maintenance is offered to customers as an integral,
non-cancelable component of our subscription license agreements,
or as a separate agreement subject to annual renewal for our
term and perpetual license customers.
Some of our customers have relocated, or expanded the presence
of their design teams, away from their headquarters or
historical locations to locations in emerging growth regions.
Accordingly, to provide responsive and effective support for
these customers, we expect to continue expanding the presence of
our own support and application engineering teams in these
emerging growth regions.
Maintenance revenue was $366.3 million, or 25% of our total
revenue, in 2006, $351.5 million, or 26% of our total
revenue, in 2005 and $330.7 million, or 28% of our total
revenue, in 2004. We expect that maintenance revenue in 2007
will be generated predominantly from backlog.
We offer a number of fee-based services, including education and
engineering services related to IC design and methodology. These
services may be sold separately or sold and performed in
conjunction with the sale, lease or license of our products.
Services revenue was $134.9 million, or 9% of our total
revenue, in 2006, $126.2 million, or 9% of our total
revenue, in 2005 and $137.0 million, or 11% of our total
revenue, in 2004.
Our education services include Internet, classroom and custom
courses, the content of which ranges from how to use the most
recent features of our EDA products to instruction in the latest
IC design techniques.
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We offer engineering services and reusable design technologies
to aid customers with the design of complex ICs. We focus our
offerings primarily on SoC devices, including both ASICs and
Application Specific Standard Parts, and on analog and mixed
signal ICs. The customers for these services primarily consist
of semiconductor and systems companies developing products for
the communications, computing and consumer markets. We offer
engineering capabilities to assist customers from product
concept through volume manufacturing.
We also make our design IP portfolio available to customers as
part of our technology and services solutions. These reusable
design and methodology components enable us to more efficiently
deliver our services, and allow our customers to reduce the
design complexity and time to market for the development of
complex SoCs.
In our design and methodology service practices, we leverage our
cumulative experience and knowledge of design practices across
many customers and different design environments to improve our
own service teams’ and our customers’ productivity. We
work with customers using outsourcing, consultative and
collaborative models depending on their projects and needs. Our
Virtual Computer-Aided Design, or VCAD, model enables our
engineering teams at one or more of our locations to virtually
work
“side-by-side”
with our customers’ teams located elsewhere during the
course of their design and engineering projects through a secure
private network infrastructure.
Through collaboration with our customers, we are able to design
advanced ICs and gain direct and early visibility to industry
design issues that may not be addressed adequately by
today’s EDA solutions. This enables us to accelerate the
development of new software technology and products to meet the
market’s current and future design requirements.
We generally use a direct sales force consisting of sales people
and applications engineers to market our products and provide
maintenance and services to existing and prospective customers.
Applications engineers provide technical pre-sales and
post-sales support for software products. Due to the complexity
of many of our EDA products and the electronic design process in
general, the sales cycle is generally long, requiring three to
six months or more. During the sales cycle, our direct sales
force generally provides technical presentations, product
demonstrations and support for
on-site
customer evaluation of our software. We also use traditional
marketing approaches to promote our products and services,
including advertising, direct mail, telemarketing, trade shows,
public relations and the Internet. As EDA products mature and
become widely understood by the marketplace, we selectively
utilize value added resellers to broaden our reach and reduce
cost of sales. All OrCAD and selected Incisive products are
primarily marketed through these channels. With respect to
international sales, we generally market and support our
products and services through our subsidiaries.
We sell software using three license types: subscription, term
and perpetual. Customers who prefer to license technology for a
specified, limited period of time will choose either a
subscription or term license, and customers who prefer to have
the right to use the technology continuously without time
restriction will choose a perpetual license. Customers who
desire rights to remix in new technology during the life of the
contract will select a subscription license, which allows them
limited access to unspecified new technology on a
when-and-if-available
basis, as opposed to a term or perpetual license which does not
include remix rights to new technology. Payment terms for
subscription and term licenses generally provide for payments to
be made in installments over the license period and payment
terms for perpetual licenses generally are net 30 days.
Our revenue recognition depends on a number of contract-specific
terms and conditions, including the license type, payment terms,
creditworthiness of the customer and other factors as more fully
described in this Annual Report under the heading “Critical
Accounting Estimates” under Item 7,
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” Revenue associated
with subscription licenses is recognized over multiple periods
during the license term, whereas product revenue associated with
term and perpetual licenses is generally recognized upon the
later of the effective date of the license or delivery of the
product, assuming all
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other criteria for revenue recognition have been met. Although
it can vary from quarter to quarter, approximately two-thirds of
our product revenue was recognized from backlog during each of
the past three years.
Our revenue and results of operations may miss expectations due
to a shortfall in product revenue generated from current
transactions or variance in the actual mix of license types
executed in any given period, and due to other contract-specific
terms and conditions as discussed above. We are subject to
greater credit risk on subscription and term licenses, as
compared to perpetual licenses, due to the installment payment
terms generally associated with those license types. Otherwise,
the particular risks to us of one license type versus another
type do not vary considerably.
From time to time we sell receivables generated by our licenses
with installment payment terms to third party financing
institutions on a non-recourse or limited-recourse basis.
For a further description of our license agreements, revenue
recognition policies and results of operations, please refer to
the discussion under the heading “Critical Accounting
Estimates” under Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
Our investment in research and development was
$460.1 million in 2006, $390.7 million in 2005 and
$368.1 million in 2004.
The primary areas of our research and development include SoC
design, the design of silicon devices in the nanometer range,
high-performance IC packaging, SiP and PCB design, system-level
modeling and verification, high-performance logic verification
technology and hardware/software co-verification. Because the
electronics industry combines rapid innovation with rapidly
increasing design and manufacturing complexity, we make
significant investments in enhancing our current products, as
well as creating new products and technologies and integrating
those products and technologies together into segmented
solutions.
Our future performance depends largely on our ability to
maintain and enhance our current product development and
commercialization to meet advancing semiconductor manufacturing
capability and design complexity, develop, acquire or interface
to new products from third parties, and develop solutions that
meet increasingly demanding productivity, quality,
predictability and cost requirements. In addition to our
research and development team, we maintain Cadence Laboratories,
an advanced research group responsible for exploring specific
new technologies, moving those technologies into product
development and maintaining strong industry relationships.
Our software production consists of configuring the
customer’s order, outsourcing the recording of the product
electronically or on CD-ROM, and producing customer-unique
access keys that allow customers to use licensed products.
Software and documentation are primarily distributed to
customers by secure electronic delivery. User manuals and other
documentation are generally available by secure electronic
delivery or on CD-ROM, but are occasionally supplied in hard
copy format.
Cadence performs final assembly and test of its hardware
verification, acceleration and emulation products in
San Jose, California. Subcontractors manufacture all major
subassemblies, including all individual PCBs and custom ICs, and
supply them to us for qualification and testing prior to their
incorporation into the assembled product.
Our success depends, in part, upon our proprietary technology.
We generally rely on patents, copyrights, trademarks, trade
secret laws, licenses and restrictive agreements to establish
and protect our proprietary rights in technology and products.
Many of our products include software or other intellectual
property licensed from third parties. We may have to seek new
licenses or renew existing licenses for this third party
software and other intellectual property in the future. As part
of performing design and methodology services for customers, our
design
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and methodology services business licenses certain software and
other intellectual property of third parties, including that of
our competitors.
We compete in the EDA market for products and maintenance
primarily with three companies: Synopsys, Inc., Mentor Graphics
Corporation and Magma Design Automation, Inc. We also compete
with numerous smaller EDA companies, with manufacturers of
electronic devices that have developed or have the capability to
develop their own EDA products, and with numerous electronics
design and consulting companies. We generally compete on the
basis of product quality, product features, integration in a
platform or compatibility with other tools, price, payment terms
and maintenance offerings.
Our maintenance business flows directly from our product
business. The competitive issues associated with our maintenance
business are substantially the same as those for our product
business in that every maintenance contract is the direct result
of a product contract, and once we have entered into a product
contract, maintenance is generally purchased by the customer to
ensure access to bug fixes and service releases, as and when
they are made available, and other continued support.
Certain competitive factors in the design and methodology
services business as described herein differ from those of the
products and maintenance businesses. While we do compete with
other EDA companies in the design and methodology services
business, we compete more with independent design and
methodology service businesses. These companies vary greatly in
focus, geographic location, capability, cost structure and
pricing. In addition, manufacturers of electronic devices may be
reluctant to purchase services from independent vendors, such as
Cadence, because they wish to promote their own internal design
departments. We compete with these companies by focusing on the
design of complex analog and digital ICs. It is our strategy to
use design and methodology services as a differentiator to
further promote our products and maintenance businesses.
Our backlog on December 30, 2006 was approximately
$1.9 billion, as compared to $1.8 billion on
December 31, 2005. Backlog consists of revenue to be
recognized in future fiscal periods after December 30, 2006
from:
The substantial majority of our backlog is generated by our
product and maintenance businesses because customer licenses
generally include both product and maintenance components.
Historically, we have not experienced significant cancellations
of our contracts with customers. However, we often reschedule
the required completion dates of design and methodology services
contracts which, at times, defers revenue recognition under
those contracts beyond the original expected completion date.
Changes in customer license types or payment terms also can
impact the timing of revenue recognition.
Historically, orders and revenue have been lowest in our first
quarter and highest in our fourth quarter, with a material
decline between the fourth quarter of one year and the first
quarter of the next year. We expect the first quarter will
remain our lowest quarter for orders and revenues; orders and
revenues in other quarters will vary based on the particular
timing and type of licenses entered into with large customers.
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We have approximately 60 sales offices, design centers and
research and development facilities located around the world. We
consider customer sales and support requirements, the
availability of a skilled workforce, and costs and efficiencies,
among other relative benefits, when determining what operations
to locate internationally. For additional information regarding
our international operations, see the discussion under the
heading “The effect of foreign exchange rate
fluctuations and other risks to our international operations may
seriously harm our financial condition” in
Item 1A, “Risk Factors” and Note 21 to our
Consolidated Financial Statements.
As of December 30, 2006, we employed approximately 5,200
individuals, with approximately 1,900 in sales, services,
marketing, support and manufacturing activities, approximately
2,700 in product research and development and approximately 600
in management, administration and finance. None of our employees
are represented by a labor union, and we have experienced no
work stoppages. We believe that our employee relations are good.
Item 1A. Risk
Factors
Our business faces many risks. Described below are
what we believe to be the material risks that we face. If any of
the events or circumstances described in the following risks
actually occurs, our business, financial condition or results of
operations could suffer.
Risks
Related to Our Business
Purchases of our products and services are dependent upon the
commencement of new design projects by IC manufacturers and
electronics systems companies. The IC and electronics systems
industries are cyclical and are characterized by constant and
rapid technological change, rapid product obsolescence and price
erosion, evolving standards, short product life cycles and wide
fluctuations in product supply and demand.
The IC and electronics systems industries have experienced
significant downturns, often connected with, or in anticipation
of, maturing product cycles of both these industries’ and
their customers’ products and a decline in general economic
conditions. These downturns have been characterized by
diminished product demand, production overcapacity, high
inventory levels and accelerated erosion of average selling
prices. Any economic downturn in the industries we serve could
harm our business, operating results or financial condition.
The industries in which we compete experience rapid technology
developments, changes in industry standards, changes in customer
requirements and frequent new product introductions and
improvements. Currently, the industries we serve are
experiencing several revolutionary trends:
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If we are unable to respond quickly and successfully to these
developments, we may lose our competitive position, and our
products or technologies may become uncompetitive or obsolete.
To compete successfully, we must develop or acquire new products
and improve our existing products and processes on a schedule
that keeps pace with technological developments and the
requirements for products addressing a broad spectrum of
designers and designer expertise in our industries. We must also
be able to support a range of changing computer software,
hardware platforms and customer preferences. We cannot guarantee
that we will be successful in this effort.
We
have experienced varied operating results, and our operating
results for any particular fiscal period are affected by the
timing of significant orders for our software products,
fluctuations in customer preferences for license types and the
timing of revenue recognition under those license
types.
We have experienced, and may continue to experience, varied
operating results. In particular, we have experienced net losses
for some past periods and we may experience net losses in future
periods. Various factors affect our operating results and some
of them are not within our control. Our operating results for
any period are affected by the timing of significant orders for
our software products because a significant number of licenses
for our software products are in excess of $5.0 million.
Our operating results are also affected by the mix of license
types executed in any given period. We license software using
three different license types: subscription, term and perpetual.
Product revenue associated with term and perpetual licenses is
generally recognized at the beginning of the license period,
whereas product revenue associated with subscription licenses is
recognized over multiple periods during the term of the license.
Revenue may also be deferred under term and perpetual licenses
until payments become due and payable from customers with
nonlinear payment terms or as cash is collected from customers
with lower credit ratings. In addition, revenue is impacted by
the timing of license renewals, the extent to which contracts
contain flexible payment terms and the mix of license types
(i.e., perpetual, term or subscription) for existing customers,
which changes could have the effect of accelerating or delaying
the recognition of revenue from the timing of recognition under
the original contract.
We plan operating expense levels primarily based on forecasted
revenue levels. These expenses and the impact of long-term
commitments are relatively fixed in the short term. A shortfall
in revenue could lead to operating results below expectations
because we may not be able to quickly reduce these fixed
expenses in response to these short-term business changes.
You should not view our historical results of operations as
reliable indicators of our future performance. If revenue or
operating results fall short of the levels expected by public
market analysts or investors, the trading price of our common
stock could decline dramatically.
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Our installed customer base has traditionally generated
additional new license, service and maintenance revenues. In
future periods, customers may not necessarily license or buy
additional products or contract for additional services or
maintenance. Maintenance is generally renewable annually at a
customer’s option, and there are no mandatory payment
obligations or obligations to license additional software. If
our customers decide not to renew their maintenance agreements
or license additional products or contract for additional
services, or if they reduce the scope of the maintenance
agreements, our revenue could decrease, which could have an
adverse effect on our results of operations.
Internally developing software products, integrating acquired
software products and integrating intellectual property into
existing platforms is expensive, and these investments often
require a long time to generate returns. Our strategy involves
significant investments in software research and development and
related product opportunities. We believe that we must continue
to dedicate a significant amount of resources to our research
and development efforts to maintain our competitive position.
However, we cannot predict that we will receive significant, if
any, revenue from these investments.
Our business depends on the efforts and abilities of our
employees. The high cost of training new employees, not fully
utilizing these employees, or losing trained employees to
competing employers could reduce our gross margins and harm our
business or operating results. Competition for highly skilled
employees can be intense, particularly in geographic areas
recognized as high technology centers such as the Silicon Valley
area, where our principal offices are located, and the other
locations where we maintain facilities. If economic conditions
continue to improve and job opportunities in the technology
industry become more plentiful, we may experience increased
employee attrition and increased competition for skilled
employees. To attract, retain and motivate individuals with the
requisite expertise, we may be required to grant large numbers
of stock options or other stock-based incentive awards, which
may be dilutive to existing stockholders and increase
compensation expense. We may also be required to pay key
employees significant base salaries and cash bonuses, which
could harm our operating results.
In addition, the NASDAQ Marketplace Rules require stockholder
approval for new equity compensation plans and significant
amendments to existing plans, including increases in shares
available for issuance under such plans, and prohibit NASDAQ
member organizations from giving a proxy to vote on equity
compensation plans unless the beneficial owner of the shares has
given voting instructions. These regulations could make it more
difficult for us to grant equity compensation to employees in
the future. To the extent that these regulations make it more
difficult or expensive to grant equity compensation to
employees, we may incur increased compensation costs or find it
difficult to attract, retain and motivate employees, which could
materially and adversely affect our business.
We have acquired and expect to acquire other companies and
businesses in the future. While we expect to carefully analyze
each potential acquisition before committing to the transaction,
we may not be able to integrate and manage acquired products and
businesses effectively. In addition, acquisitions involve a
number of risks. If any of the following events occurs after we
acquire another business, it could seriously harm our business,
operating results or financial condition:
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In a number of our previously completed acquisitions, we have
agreed to make future payments, or earnouts, based on the
performance of the businesses we acquired. The performance goals
pursuant to which these future payments may be made generally
relate to achievement by the acquired business of certain
specified bookings, revenue, product proliferation, product
development or employee retention goals during a specified
period following completion of the applicable acquisition.
Future acquisitions may involve issuances of stock as full or
partial payment of the purchase price for the acquired business,
grants of incentive stock or options to employees of the
acquired businesses (which may be dilutive to existing
stockholders), expenditure of substantial cash resources or the
incurrence of material amounts of debt.
The specific performance goal levels and amounts and timing of
contingent purchase price payments vary with each acquisition.
In connection with our acquisitions completed prior to
December 30, 2006, we may be obligated to pay up to an
aggregate of $4.8 million in cash during the next
12 months and an additional $2.0 million in cash in
periods after the next 12 months through August 2008 if
certain performance goals related to one or more of the criteria
mentioned above are achieved in full.
The EDA market and the commercial electronics design and
methodology services industries are highly competitive. If we
fail to compete successfully in these industries, it could
seriously harm our business, operating results or financial
condition. To compete in these industries, we must identify and
develop or acquire innovative and cost-competitive EDA products,
integrate them into platforms and market them in a timely
manner. We must also gain industry acceptance for our design and
methodology services and offer better strategic concepts,
technical solutions, prices and response time, or a combination
of these factors, than those of other design companies and the
internal design departments of electronics manufacturers. We
cannot assure you that we will be able to compete successfully
in these industries. Factors that could affect our ability to
succeed include:
We compete in the EDA products market primarily with Synopsys,
Inc., Mentor Graphics Corporation and Magma Design Automation,
Inc. We also compete with numerous smaller EDA companies, with
manufacturers of electronic devices that have developed or have
the capability to develop their own EDA products, and with
numerous electronics design and consulting companies.
Manufacturers of electronic devices may be reluctant to
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purchase design and methodology services from independent
vendors such as us because they wish to promote their own
internal design departments.
The highly competitive markets in which we compete can put
pressure on us to reduce the prices of our products. If our
competitors offer deep discounts on certain products in an
effort to recapture or gain market segment share or to sell
other software or hardware products, we may then need to lower
our prices or offer other favorable terms to compete
successfully. Any such changes would be likely to reduce our
profit margins and could adversely affect our operating results.
Any substantial changes to our prices and pricing policies could
cause sales and software license revenues to decline or be
delayed as our sales force implements and our customers adjust
to the new pricing policies. Some of our competitors may bundle
products for promotional purposes or as a long-term pricing
strategy or provide guarantees of prices and product
implementations. These practices could, over time, significantly
constrain the prices that we can charge for our products. If we
cannot offset price reductions with a corresponding increase in
the number of sales or with lower spending, then the reduced
license revenues resulting from lower prices could have an
adverse effect on our results of operations.
We
rely on our proprietary technology as well as software and other
intellectual property rights licensed to us by third parties,
and we cannot assure you that the precautions taken to protect
our rights will be adequate or that we will continue to be able
to adequately secure such intellectual property rights from
third parties.
Our success depends, in part, upon our proprietary technology.
We generally rely on patents, copyrights, trademarks, trade
secret laws, licenses and restrictive agreements to establish
and protect our proprietary rights in technology and products.
Despite precautions we may take to protect our intellectual
property, third parties have tried in the past, and may try in
the future, to challenge, invalidate or circumvent these
safeguards. The rights granted under our patents or attendant to
our other intellectual property may not provide us with any
competitive advantages and there is no guarantee that patents
will be issued on any of our pending applications and future
patents may not be sufficiently broad to protect our technology.
Furthermore, the laws of foreign countries may not protect our
proprietary rights in those countries to the same extent as
applicable law protects these rights in the United States. Many
of our products include software or other intellectual property
licensed from third parties. We may have to seek new or renew
existing licenses for such software and other intellectual
property in the future. Our design and methodology services
business holds licenses to certain software and other
intellectual property owned by third parties, including that of
our competitors. Our failure to obtain, for our use, software or
other intellectual property licenses or other intellectual
property rights on favorable terms, or the need to engage in
litigation over these licenses or rights, could seriously harm
our business, operating results or financial condition.
There are numerous patents in the EDA industry and new patents
are being issued at a rapid rate. It is not always practicable
to determine in advance whether a product or any of its
components infringes the patent rights of others. As a result,
from time to time, we may be compelled to respond to or
prosecute intellectual property infringement claims to protect
our rights or defend a customer’s rights. For example, on
November 8, 2006, an individual filed suit against us,
Magma Design Automation, Inc., Dynalith Systems, Inc., Altera
Corp., Mentor Graphics Corp. and Aldec, Inc. in the United
States District Court for the Eastern District of Texas. The
suit alleges that certain products of Cadence and the other
defendants infringe a patent for an electronic simulation and
emulation system owned by the plaintiff. The plaintiff seeks
unspecified damages and attorneys’ fees and costs. We
dispute the plaintiff’s claims and intend to defend the
lawsuit vigorously.
Intellectual property infringement claims, regardless of merit,
could consume valuable management time, result in costly
litigation, or cause product shipment delays, all of which could
seriously harm our business, operating results or financial
condition. In settling these claims, we may be required to enter
into royalty or licensing agreements with the third parties
claiming infringement. These royalty or licensing agreements, if
available, may not have terms favorable to us. Being compelled
to enter into a license agreement with unfavorable
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terms could seriously harm our business, operating results or
financial condition. Any potential intellectual property
litigation could compel us to do one or more of the following:
If we were compelled to take any of these actions, our business
or results of operations may suffer.
Our products and services involve the storage and transmission
of customers’ proprietary information, and breaches of our
security measures could expose us to a risk of loss or misuse of
this information, litigation and potential liability. Because
techniques used to obtain unauthorized access or to sabotage
information systems change frequently and generally are not
recognized until launched against a target, we may be unable to
anticipate these techniques or to implement adequate preventive
measures. If an actual or perceived breach of our security
occurs, the market perception of the effectiveness of our
security measures could be harmed and we could lose existing
customers and our ability to obtain new customers.
The EDA market and the commercial electronics design and
methodology services industries are highly competitive and
change quickly. We have responded to increased competition and
changes in the industries in which we compete, in part, by
restructuring our operations and at times reducing the size of
our workforce. Despite our restructuring efforts in prior years,
we may not achieve all of the operating expense reductions and
improvements in operating margins and cash flows anticipated
from those restructuring activities in the periods contemplated.
Our inability to realize these benefits may result in an
inefficient business structure that could negatively impact our
results of operations.
As part of our restructuring activities in prior years, we have
reduced the workforce in certain revenue-generating portions of
our business. These reductions in staffing levels could require
us to forego certain future opportunities due to resource
limitations, which could negatively affect our long-term
revenues.
We cannot assure you that we will not be required to implement
further restructuring activities or reductions in our workforce
based on changes in the markets and industries in which we
compete or that any future restructuring efforts will be
successful.
We have a long sales cycle that generally extends at least three
to six months. The length of the sales cycle may cause our
revenue or operating results to vary from quarter to quarter.
The complexity and expense associated with our business
generally require a lengthy customer education, evaluation and
approval process. Consequently, we may incur substantial
expenses and devote significant management effort and expense to
develop potential relationships that do not result in agreements
or revenue and may prevent us from pursuing other opportunities.
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In addition, sales of our products and services may be delayed
if customers delay approval or commencement of projects because
of:
Long sales cycles for acceleration and emulation hardware
products subject us to a number of significant risks over which
we have limited control, including insufficient, excess or
obsolete inventory, variations in inventory valuation and
fluctuations in quarterly operating results.
Also, because of the timing of large orders and our
customers’ buying patterns, we may not learn of bookings
shortfalls, revenue shortfalls, earnings shortfalls or other
failures to meet market expectations until late in a fiscal
quarter. These factors may cause our operating results to
fluctuate unexpectedly.
We have significant operations outside the United States. Our
revenue from international operations as a percentage of total
revenue was approximately 48% in 2006, 54% in 2005 and 50% in
2004. We expect that revenue from our international operations
will continue to account for a significant portion of our total
revenue. We also transact business in various foreign
currencies. Recent economic and political uncertainty and the
volatility of foreign currencies in certain regions, most
notably the Japanese yen, European Union euro, British pound and
Indian rupee have had, and may in the future have, a harmful
effect on our revenue or operating results.
Fluctuations in the rate of exchange between the United States
dollar and the currencies of other countries in which we conduct
business could seriously harm our business, operating results or
financial condition. For example, if there is an increase in the
rate at which a foreign currency exchanges into United States
dollars, it will take more of the foreign currency to equal the
same amount of United States dollars than before the rate
increase. If we price our products and services in the foreign
currency, we will receive fewer United States dollars than we
did before the rate increase went into effect. If we price our
products and services in United States dollars, an increase in
the exchange rate will result in an increase in the price for
our products and services compared to those products of our
competitors that are priced in local currency. This could result
in our prices being uncompetitive in markets where business is
transacted in the local currency.
Exposure to foreign currency transaction risk can arise when
transactions are conducted in a currency different from the
functional currency of one of our subsidiaries. A
subsidiary’s functional currency is generally the currency
in which it primarily conducts its operations, including product
pricing, expenses and borrowings. Although we attempt to reduce
the impact of foreign currency fluctuations, significant
exchange rate movements may hurt our results of operations as
expressed in United States dollars.
Our international operations may also be subject to other risks,
including:
We have offices throughout the world, including key research and
development facilities outside of the United States. Our
operations are dependent upon the connectivity of our operations
throughout the world. Activities that
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interfere with our international connectivity, such as computer
“hacking” or the introduction of a virus into our
computer systems, could significantly interfere with our
business operations.
Our
operating results could be adversely affected as a result of
changes in our effective tax rates.
Our future effective tax rates could be adversely affected by
the following:
Any significant change in our future effective tax rates could
adversely impact our results of operations for future periods.
The IRS and other tax authorities regularly examine our income
tax returns. In November 2003, the IRS completed its field
examination of our federal income tax returns for the tax years
1997 through 1999 and issued a Revenue Agent’s Report, or
RAR, in which the IRS proposes to assess an aggregate tax
deficiency for the three-year period of approximately
$143.0 million. The most significant of the disputed
adjustments for the tax years 1997 through 1999 relates to
transfer pricing arrangements that we have with a foreign
subsidiary. We have filed a protest to certain of the proposed
adjustments with the Appeals Office of the IRS where the matter
is currently being considered.
In July 2006, the IRS completed its field examination of our
federal income tax returns for the tax years 2000 through 2002
and issued an RAR, in which the IRS proposes to assess an
aggregate tax deficiency for the three-year period of
approximately $324.0 million. In November 2006, the IRS
revised the proposed aggregate tax deficiency for the three-year
period to be approximately $318.0 million. The IRS is
contesting our qualification for deferred recognition of certain
proceeds received from restitution and settlement in connection
with litigation during the period. The proposed tax deficiency
for this item is approximately $152.0 million. The
remaining proposed tax deficiency of approximately
$166.0 million is primarily related to proposed adjustments
to our transfer pricing arrangements that we have with foreign
subsidiaries and to our deductions for foreign trade income. The
IRS took similar positions with respect to our transfer pricing
arrangements in the prior examination period and may make
similar claims against our transfer pricing arrangements in
future examinations. We have filed a timely protest with the IRS
and will seek resolution of the issues through the Appeals
Office of the IRS.
We believe that the proposed IRS adjustments are inconsistent
with applicable tax laws and we are challenging these proposed
adjustments vigorously. The RARs are not final Statutory Notices
of Deficiency but the IRS imposes interest on the proposed
deficiencies until the matters are resolved. Interest is
compounded daily at rates published by the IRS, which rates are
adjusted quarterly and have been between four and ten percent
since 1997.
Significant judgment is required in determining our provision
for income taxes. The calculation of our tax liabilities
involves dealing with uncertainties in the application of
complex tax regulations. In determining the adequacy of our
provision for income taxes, we regularly assess the likelihood
of adverse outcomes resulting from tax examinations including
the RARs for the tax years 1997 through 2002. We provide for tax
liabilities on our Consolidated Balance Sheets unless we
consider it probable that additional taxes will not be due.
However, the ultimate outcome of tax examinations, including the
total amount payable or the timing of any such payments upon
resolution of these issues, cannot be predicted with certainty.
In addition, we cannot assure you that such amount
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will not be materially different than that which is reflected in
our historical income tax provisions and accruals. Should the
IRS or other tax authorities assess additional taxes as a result
of a current or a future examination, we may be required to
record charges to operations in future periods that could have a
material impact on the results of operations, financial position
or cash flows in the applicable period or periods.
Forecasts of our income tax position and resultant effective tax
rate are complex and subject to uncertainty because our income
tax position for each year combines the effects of a mix of
profits and losses earned by us and our subsidiaries in tax
jurisdictions with a broad range of income tax rates, as well as
benefits from available deferred tax assets, the impact of
various accounting rules and changes to these rules and costs
resulting from tax audits. To forecast our global tax rate,
pre-tax profits and losses by jurisdiction are estimated and tax
expense by jurisdiction is calculated. If the mix of profits and
losses, our ability to use tax credits, or effective tax rates
by jurisdiction is different than those estimates, our actual
tax rate could be materially different than forecasted, which
could have a material impact on our results of operations.
We must comply with regulations of the United States Department
of Commerce and of certain other countries in shipping our
software products and transferring our technology outside the
United States and to foreign nationals. Although we have not had
any significant difficulty complying with such regulations so
far, any significant future difficulty in complying could harm
our business, operating results or financial condition.
Errors
or defects in our products and services could expose us to
liability and harm our reputation.
Our customers use our products and services in designing and
developing products that involve a high degree of technological
complexity, each of which has its own specifications. Because of
the complexity of the systems and products with which we work,
some of our products and designs can be adequately tested only
when put to full use in the marketplace. As a result, our
customers or their end users may discover errors or defects in
our software or the systems we design, or the products or
systems incorporating our design and intellectual property may
not operate as expected. Errors or defects could result in:
Companies in our industry whose employees accept positions with
competitors frequently claim that these competitors have engaged
in unfair hiring practices or that the employment of these
persons would involve the disclosure or use of trade secrets.
These claims could prevent us from hiring employees or cause us
to incur liability for damages. We could also incur substantial
costs in defending ourselves or our employees against these
claims, regardless of their merits. Defending ourselves from
these claims could also divert the attention of our management
away from our operations.
Our corporate headquarters, including certain of our research
and development operations and certain of our distribution
facilities, is located in the Silicon Valley area of Northern
California, which is a region known to experience seismic
activity. In addition, several of our facilities, including our
corporate headquarters, certain of our
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research and development operations, and certain of our
distribution operations, are in areas of San Jose,
California that have been identified by the Director of the
Federal Emergency Management Agency, or FEMA, as being located
in a special flood area. The areas at risk are identified as
being in a one hundred year flood plain, using FEMA’s Flood
Hazard Boundary Map or the Flood Insurance Rate Map. If
significant seismic or flooding activity were to occur, our
operations may be interrupted, which would adversely impact our
business and results of operations.
We maintain international research and development and other
facilities, some of which are in parts of the world that are not
as politically stable as the United States. Consequently, we may
face a greater risk of business interruption as a result of
terrorist acts or military conflicts than businesses located
domestically. Furthermore, this potential harm is exacerbated
given that damage to or disruptions at our international
research and development facilities could have an adverse effect
on our ability to develop new or improve existing products as
compared to other businesses which may only have sales offices
or other less critical operations abroad. We are not insured for
losses or interruptions caused by acts of war or terrorism.
Risks
Related to Our Securities and Indebtedness
We have a substantial level of debt. As of December 30,
2006, we had $758.4 million of outstanding indebtedness as
follows:
The level of our indebtedness, among other things, could:
If we experience a decline in revenue due to any of the factors
described in this section entitled “Risk Factors,” or
otherwise, we could have difficulty paying amounts due on our
indebtedness. In the case of the 2023 Notes, although they
mature in 2023, the holders of the 2023 Notes may require us to
repurchase for cash all or any portion of the 2023 Notes on
August 15, 2008 for 100.25% of the principal amount,
August 15, 2013 for 100.00% of the principal amount and
August 15, 2018 for 100.00% of the principal amount. As a
result, although the 2023 Notes mature in 2023, the holders may
require us to repurchase the 2023 Notes at an additional premium
in 2008, which makes it probable that we will be required to
repurchase the 2023 Notes in 2008 if they have not first been
repurchased by us or are not otherwise converted.
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If we are prohibited from paying our outstanding indebtedness,
we could try to obtain the consent of the lenders under those
arrangements to make such payment, or we could attempt to
refinance the borrowings that contain the restrictions. If we do
not obtain the necessary consents or refinance the borrowings,
we may be unable to satisfy our outstanding indebtedness. Any
such failure would constitute an event of default under our
indebtedness, which could, in turn, constitute a default under
the terms of any other indebtedness then outstanding.
If we are unable to generate sufficient cash flow or otherwise
obtain funds necessary to make required payments, or if we fail
to comply with the various requirements of our indebtedness, we
would be in default, which would permit the holders of our
indebtedness to accelerate the maturity of the indebtedness and
could cause defaults under our other indebtedness as well. Any
default under our indebtedness could have a material adverse
effect on our business, operating results and financial
condition. In addition, a material default on our indebtedness
could suspend our eligibility to register securities using
certain registration statement forms under SEC guidelines that
permit incorporation by reference of substantial information
regarding us, which could potentially hinder our ability to
raise capital through the issuance of our securities and will
increase the costs of such registration to us.
The terms of the 2023 Notes and the Convertible Senior Notes
permit the holders to convert the 2023 Notes and the Convertible
Senior Notes into shares of our common stock. The 2023 Notes are
convertible into our common stock initially at a conversion
price of $15.65 per share, which would result in an
aggregate of approximately 14.7 million shares of our
common stock being issued upon conversion, subject to adjustment
upon the occurrence of specified events. The terms of the
Convertible Senior Notes stipulate a net share settlement, which
upon conversion of the Convertible Senior Notes requires us to
pay the principal amount in cash and the conversion premium, if
any, in shares of our common stock based on a daily settlement
amount, calculated on a proportionate basis for each day of the
relevant 20
trading-day
observation period. The initial conversion rate for the
Convertible Senior Notes is 47.2813 shares of our common
stock per $1,000 principal amount of Convertible Senior Notes,
equivalent to a conversion price of approximately
$21.15 per share of our common stock. The conversion price
is subject to adjustment in some events but will not be adjusted
for accrued interest, except in limited circumstances. The
conversion of some or all of the 2023 Notes or the Convertible
Senior Notes will dilute the ownership interest of our existing
stockholders. Any sales in the public market of the common stock
issuable upon conversion could adversely affect prevailing
market prices of our common stock.
Prior to the conversion of the 2023 Notes, if the trading price
of our common stock exceeds $22.69 per share over specified
periods, basic net income per share will be diluted. We may
redeem for cash all or any part of the 2023 Notes on or after
August 15, 2008 for 100.00% of the principal amount. The
holders of the 2023 Notes may require us to repurchase for cash
all or any portion of their 2023 Notes on August 15, 2008
for 100.25% of the principal amount, on August 15, 2013 for
100.00% of the principal amount, or on August 15, 2018 for
100.00% of the principal amount, by providing to the paying
agent a written repurchase notice. The repurchase notice must be
delivered during the period commencing 30 business days prior to
the relevant repurchase date and ending on the close of business
on the business day prior to the relevant repurchase date. We
may redeem for cash all or any part of the 2023 Notes on or
after August 15, 2008 for 100.00% of the principal amount,
except for those 2023 Notes that holders have required us to
repurchase on August 15, 2008 or on other repurchase dates,
as described above.
Each $1,000 of principal of the 2023 Notes is initially
convertible into 63.879 shares of our common stock, subject to
adjustment upon the occurrence of specified events. Holders of
the 2023 Notes may convert their 2023 Notes prior to maturity
only if:
As a result, although the 2023 Notes mature in 2023, the holders
may require us to repurchase their notes at an additional
premium in 2008, which makes it probable that we will be
required to repurchase the 2023 Notes in 2008
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if they have not first been repurchased by us or are not
otherwise converted. As of December 30, 2006, none of the
conditions allowing holders of the 2023 Notes to convert had
been met.
Each $1,000 of principal of the Convertible Senior Notes is
initially convertible into 47.2813 shares of our common
stock, subject to adjustment upon the occurrence of specified
events. Holders of the Convertible Senior Notes may convert
their notes at their option on any day prior to the close of
business on the scheduled trading day immediately preceding
December 15, 2011 in the case of the 2011 Notes and
December 15, 2013 in the case of the 2013 Notes, in each
case only if:
On and after November 2, 2011, in the case of the 2011
Notes, and November 1, 2013, in the case of 2013 Notes,
until the close of business on the scheduled trading day
immediately preceding the maturity date of such Convertible
Senior Notes, holders may convert their Convertible Senior Notes
at any time, regardless of the foregoing circumstances. As of
December 30, 2006, none of the conditions allowing holders
of the Convertible Senior Notes to convert had been met.
Although the conversion price of the 2023 Notes is currently
$15.65 per share, the hedge and warrant transactions that
we entered into in connection with the issuance of the 2023
Notes effectively increased the conversion price of the 2023
Notes until various dates in 2008 to approximately
$23.08 per share, which would result in an aggregate
issuance upon conversion prior to August 15, 2008 of
approximately 10.2 million shares of our common stock. We
entered into hedge and warrant transactions to reduce the
potential dilution from the conversion of the 2023 Notes;
however, we cannot guarantee that such hedge and warrant
instruments will fully mitigate the dilution. In addition, the
existence of the 2023 Notes may encourage short selling by
market participants because the conversion of the 2023 Notes
could depress the price of our common stock.
Although the conversion price of the Convertible Senior Notes is
currently $21.15 per share, we entered into hedge and separate
warrant transactions to reduce the potential dilution from the
conversion of the Convertible Senior Notes. However, we cannot
guarantee that such hedges and warrant instruments will fully
mitigate the dilution. In addition, the existence of the
Convertible Senior Notes may encourage short selling by market
participants because the conversion of the Convertible Senior
Notes could depress the price of our common stock.
Under the terms of the 2023 Notes and the Convertible Senior
Notes, we may be required to repurchase the 2023 Notes and the
Convertible Senior Notes following a “fundamental
change” in our corporate ownership or structure, such as a
change of control in which substantially all of the
consideration does not consist of publicly traded securities,
prior to maturity of the 2023 Notes and the Convertible Senior
Notes, as the case may be. Following a fundamental change, in
certain circumstances, we may choose to pay the repurchase price
of the 2023 Notes in cash, shares of our common stock or a
combination of cash and shares of our common stock. If we choose
to pay all or any part of the repurchase price of the 2023 Notes
in shares of our common stock, this would result in dilution to
the holders of our common stock. The repurchase price for the
Convertible Senior Notes in the event of a fundamental change
must be paid solely in cash. These repayment obligations may
have the effect of discouraging, delaying or preventing a
takeover of our company that may otherwise be beneficial to
investors.
We entered into hedge transactions with various financial
institutions, at the time of issuance of the Convertible Senior
Notes and the 2023 Notes, with the objective of reducing the
potential dilutive effect of issuing our common stock upon
conversion of the Convertible Senior Notes and the 2023 Notes.
We also entered into separate warrant transactions with the same
financial institutions. In connection with our hedge and warrant
transactions, these
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financial institutions purchased our common stock in secondary
market transactions and entered into various
over-the-counter
derivative transactions with respect to our common stock. These
entities or their affiliates are likely to modify their hedge
positions from time to time prior to conversion or maturity of
the Convertible Senior Notes and the 2023 Notes by purchasing
and selling shares of our common stock, other of our securities
or other instruments they may wish to use in connection with
such hedging. Any of these transactions and activities could
adversely affect the value of our common stock and, as a result,
the number of shares and the value of the common stock holders
will receive upon conversion of the Convertible Senior Notes and
the 2023 Notes. In addition, subject to movement in the price of
our common stock, if the hedge transactions settle in our favor,
we could be exposed to credit risk related to the other party
with respect to the payment we are owed from such other party.
We have not requested a rating of the Convertible Senior Notes
from any rating agency and we do not anticipate that the
Convertible Senior Notes will be rated. However, if one or more
rating agencies independently elects to rate the Convertible
Senior Notes and assigns the Convertible Senior Notes a rating
lower than the rating expected by investors, or reduces such
rating in the future, the market price or liquidity of the
Convertible Senior Notes and our common stock could be harmed.
Should a decline in the market price of the Convertible Senior
Notes result, as compared to the price of our common stock, this
may trigger the right of the holders of the Convertible Senior
Notes to convert the Convertible Senior Notes into cash and
shares of our common stock.
Our certificate of incorporation and bylaws and certain
provisions of the Delaware General Corporation Law that apply to
us could make it difficult for another company to acquire
control of our company. For example:
All or any one of these factors could limit the price that
certain investors would be willing to pay for shares of our
common stock and could delay, prevent or allow our board of
directors to resist an acquisition of our company, even if a
proposed transaction were favored by a majority of our
independent stockholders.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Our headquarters is located in San Jose, California, and we
own the related land and buildings. We also own buildings in
India. As of December 30, 2006, the total square footage of
our owned buildings was approximately 925,000.
In January 2007, we completed the sale of certain of our land
and buildings in San Jose, California, representing 262,500
of our square footage owned as of December 30, 2006.
Concurrently with the sale, we leased back from the purchaser
all available space in the buildings. The lease agreement
includes an initial term of two years, with two options to
extend the lease for six months each.
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We lease additional facilities for our sales offices in the
United States and various foreign countries, and for our
research and development and design and methodology services
facilities worldwide. We sublease certain of these facilities
where space is not fully utilized or has been involved in
restructuring activities.
We believe that these facilities and the undeveloped land we own
adjacent to our current headquarters are adequate for our
current needs and that suitable additional or substitute space
will be available as needed to accommodate any expansion of our
operations.
Item 3.
Legal Proceedings
From time to time, we are involved in various disputes and
litigation matters that arise in the ordinary course of
business. These include disputes and lawsuits related to
intellectual property, mergers and acquisitions, licensing,
contract law, distribution arrangements and employee relations
matters. Periodically, we review the status of each significant
matter and assess its potential financial exposure. If the
potential loss from any claim or legal proceeding is considered
probable and the amount or the range of loss can be estimated,
we accrue a liability for the estimated loss in accordance with
Statement of Financial Accounting Standards, or
SFAS, No. 5, “Accounting for Contingencies.”
Legal proceedings are subject to uncertainties, and the outcomes
are difficult to predict. Because of such uncertainties,
accruals are based only on the best information available at the
time. As additional information becomes available, we reassess
the potential liability related to pending claims and litigation
matters and may revise estimates.
On November 8, 2006, an individual filed suit against us,
Magma Design Automation, Inc., Dynalith Systems, Inc., Altera
Corp., Mentor Graphics Corp. and Aldec, Inc. in the United
States District Court for the Eastern District of Texas. The
suit alleges that certain products of Cadence and the other
defendants infringe a patent for an electronic simulation and
emulation system owned by the plaintiff. The plaintiff seeks
unspecified damages and attorneys’ fees and costs. We
dispute the plaintiff’s claims and intend to defend the
lawsuit vigorously.
While the outcome of these disputes and litigation matters
cannot be predicted with any certainty, management does not
believe that the outcome of any current matters will have a
material adverse effect on our consolidated financial position
or results of operations.
Item 4.
Submission of Matters to a Vote of Security
Holders
None.
Executive
Officers of the Registrant
The executive officers of Cadence are as follows:
Executive officers are appointed by the Board of Directors and
serve at the discretion of the Board.
MICHAEL J. FISTER has served as President and Chief Executive
Officer of Cadence since May 2004. Mr. Fister has been a
member of the Cadence Board of Directors since July 2004. Prior
to joining Cadence, from 1987 to 2004, Mr. Fister held
several positions with Intel Corporation, most recently as
Senior Vice President and General Manager for the Enterprise
Platforms Group. Mr. Fister is a director of Autodesk, Inc.
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KEVIN BUSHBY has served as Executive Vice President, Worldwide
Field Operations of Cadence since 2001. From 1995 to 2001,
Mr. Bushby served as Vice President and General Manager,
European Operations of Cadence. Prior to joining Cadence, from
1990 to 1995, Mr. Bushby held several positions with Unisys
Corporation, most recently as Vice President Sales and
Marketing, Client Server Systems Division.
MOSHE GAVRIELOV has served as Executive Vice President and
General Manager, Verification Division of Cadence since April
2005. Mr. Gavrielov has over 25 years of technology
and business management experience, including serving as CEO of
Verisity Ltd. from 1998 to April 2005 before joining Cadence.
Prior to joining Verisity, Mr. Gavrielov served at LSI
Logic from 1988 to 1998 in several executive management
positions. Those positions included Executive Vice President of
the products organization, Senior Vice President of
international markets, General Manager of LSI Logic Europe and
General Manager of the ASIC division.
JAMES S. MILLER, JR. has served as Executive Vice President,
Products and Technologies Organization of Cadence since February
2006. From 2004 to 2006, Mr. Miller served as Senior Vice
President, Development of Cadence. Prior to joining Cadence,
Mr. Miller was at Intel Corporation from 2003 to 2004,
where he was most recently Enterprise Platform Design Manager
for both a multiprocessor platform and server memory technology
for the Enterprise Products Group. From 1999 to 2002,
Mr. Miller was Vice President of Silicon Development at
Silicon Spice, and later Technical Director with Broadcom
Corporation following its acquisition of Silicon Spice. From
1986 to 1998, Mr. Miller was at Intel where he held a
number of leadership roles, including management of the server
and workstation chipset organization and the
Itanium®
processor and
Pentium® II
processor organizations.
WILLIAM PORTER has served as Executive Vice President and Chief
Financial Officer of Cadence since February 2006. From 1999 to
2006, Mr. Porter served as Senior Vice President and Chief
Financial Officer of Cadence. From 1994 to 1999, Mr. Porter
served as Vice President, Corporate Controller and Assistant
Secretary of Cadence. Prior to joining Cadence, Mr. Porter
served as Technical Accounting and Reporting Manager and as
Controller of Cupertino Operations with Apple Computer, Inc.
R.L. SMITH MCKEITHEN has served as Senior Vice President,
General Counsel and Secretary of Cadence since 1998. From 1996
to 1998, Mr. McKeithen served as Vice President, General
Counsel and Secretary of Cadence. Prior to joining Cadence, from
1994 to 1996, Mr. McKeithen served as Vice President,
General Counsel and Secretary of Strategic Mapping, Inc., a
software company. From 1988 to 1994, Mr. McKeithen served
as Vice President, General Counsel and Secretary of Silicon
Graphics, Inc.
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PART II.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the NASDAQ Global Select Market
under the symbol CDNS. We have never declared or paid any cash
dividends on our common stock in the past, and we do not plan to
pay cash dividends in the foreseeable future. As of
February 3, 2007, we had approximately 1,150 registered
stockholders and approximately 58,715 beneficial owners of our
common stock.
The following table sets forth the high and low sales price for
Cadence common stock for each calendar quarter in the two-year
period ended December 30, 2006:
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The following graph compares the cumulative
5-year total
return to shareholders of Cadence Design Systems, Inc.’s
common stock relative to the cumulative total returns of the
S & P 500 Index, the NASDAQ Composite Index and the
S & P Information Technology Index. The graph assumes
that the value of the investment in the company’s common
stock and in each of the indexes (including reinvestment of
dividends) was $100 on December 29, 2001 and tracks it
through December 30, 2006.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Cadence Design Systems, Inc., The S & P 500 Index, The NASDAQ Composite Index And The S & P Information Technology Index 
* $100
invested on 12/29/01 in stock or on 12/31/01 in index-incuding
reinvestment of dividends.
Indexes calculated on month-end basis.
Copyright
©
2007, Standard & Poor’s, a division of The
McGraw-Hill Companies, Inc. All rights reserved.
www.researchdatagroup.com/S&P.htm
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On December 19, 2006, we issued $250.0 million
principal amount of 1.375% Convertible Senior Notes Due 2011, or
the 2011 Notes, and $250.0 million of
1.500% Convertible Senior Notes Due 2013, or the 2013 Notes
and collectively, the Convertible Senior Notes, to three initial
purchasers in a private placement pursuant to Section 4(2)
of the Securities Act for resale to qualified institutional
buyers pursuant to SEC Rule 144A. See the discussion under
the heading “Liquidity and Capital Resources –
Other Factors Affecting Liquidity and Capital Resources”
below for an additional description of the Convertible Senior
Notes, including the aggregate offering price, the aggregate
underwriting discounts and the terms of conversion of the
Convertible Senior Notes.
On December 19, 2006, we also sold warrants to various
parties for the purchase of up to 23.6 million shares of
our common stock at a price of $31.50 per share in a private
placement pursuant to Section 4(2) of the Securities Act.
See the discussion under the heading “Liquidity and Capital
Resources – Other Factors Affecting Liquidity and
Capital Resources” below for an additional description of
the warrants, including the aggregate proceeds received by us
and the terms of conversion of the warrants.
ISSUER
PURCHASES OF EQUITY SECURITIES
In August 2001, our Board of Directors authorized a program to
repurchase shares of our common stock in the open market with a
value of up to $500.0 million in the aggregate, which
amount was exhausted during February 2006. In February 2006, our
Board of Directors authorized a new program to repurchase shares
of our common stock with a value of up to $500.0 million in
the aggregate. In November 2006, our Board of Directors
authorized an additional program to repurchase shares of our
common stock with a value of up to $500.0 million in the
aggregate. The following table sets forth the repurchases we
made during the three months ended December 30, 2006:
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The following selected consolidated financial data should be
read in conjunction with our Consolidated Financial Statements
and the Notes thereto and the information contained in
Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.” Historical
results are not necessarily indicative of future results.
The following discussion should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included
elsewhere in this Annual Report on
Form 10-K.
Certain of such statements, including, without limitation,
statements regarding the extent and timing of future revenues
and expenses and customer demand, statements regarding the
deployment of our products, statements regarding our reliance on
third parties and other statements using words such as
“anticipates,” “believes,”
“could,” “estimates,” “expects,”
“intends,” “may,” “plans,”
“should,” “will” and “would,” and
words of similar import and the negatives thereof, constitute
forward-looking statements. These statements are predictions
based upon our current expectations about future events. Actual
results could vary materially as a result of certain factors,
including but not limited to, those expressed in these
statements. We refer you to the “Competition,”
“Proprietary Technology,” “Risk Factors,”
“Results of Operations,” “Disclosures About
Market Risk” and “Liquidity and Capital
Resources” sections contained in this Annual Report and the
risks discussed in our other SEC filings, which identify
important risks and uncertainties that could cause actual
results to differ materially from those contained in the
forward-looking statements.
We urge you to consider these factors carefully in evaluating
the forward-looking statements contained in this Annual Report.
All subsequent written or spoken forward-looking statements
attributable to our company or persons acting on our behalf are
expressly qualified in their entirety by these cautionary
statements. The forward-looking statements included in this
Annual Report are made only as of the date of this Annual
Report. We do not intend, and undertake no obligation, to update
these forward-looking statements.
We develop electronic design automation, or EDA, software and
hardware. We license software, sell or lease hardware
technology, provide maintenance for our software and hardware
and provide design and methodology services throughout the world
to help manage and accelerate electronics product development
processes. Our broad range of products and services are used by
the world’s leading electronics companies to design and
develop complex integrated circuits, or ICs, and personal and
commercial electronics systems.
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With the addition of emerging nanometer design considerations to
the already burgeoning set of traditional design tasks, complex
SoC or IC design can no longer be accomplished using a
collection of discrete design tools. What previously consisted
of sequential design activities must be merged and accomplished
nearly simultaneously without time-consuming data translation
steps. We combine our design technologies into
“platforms” for four major design activities:
functional verification, digital IC design, custom IC design and
system interconnect. The four Cadence design platforms are
Incisive functional verification, Encounter digital IC design,
Virtuoso custom design and Allegro system interconnect
platforms. In addition, we augment these platform product
offerings with a comprehensive set of DFM products that service
both the digital and custom IC design flows. These four
platforms, together with our DFM products, comprise our primary
product lines.
Functional verification was the fastest growing product group of
our business in 2006, driven by our Incisive verification
solutions. We offer a complete solution for verification
management from planning to closure. During 2006, we also
introduced a significant upgrade of our Virtuoso platform. An
early adopter program for this platform helped stimulate demand.
This release is the most significant upgrade to the custom
product line in many years. Finally, in late 2006 we introduced
the Logic Design Team solution, which combines technology from
our Incisive verification and Encounter digital design platforms
to create an integrated, front-end environment for logic
designers.
We have identified certain items that management uses as
performance indicators to manage our business, including
revenue, certain elements of operating expenses and cash flow
from operations, and we describe these items more fully below
under the heading “Results of Operations” below.
In preparing our Consolidated Financial Statements, we make
assumptions, judgments and estimates that can have a significant
impact on our revenue, operating income and net income, as well
as on the value of certain assets and liabilities on our
Consolidated Balance Sheets. We base our assumptions, judgments
and estimates on historical experience and various other factors
that we believe to be reasonable under the circumstances. Actual
results could differ materially from these estimates under
different assumptions or conditions. At least quarterly, we
evaluate our assumptions, judgments and estimates and make
changes accordingly. We believe that the assumptions, judgments
and estimates involved in the accounting for revenue
recognition, accounting for income taxes, restructuring charges
and valuation of stock-based awards have the greatest potential
impact on our Consolidated Financial Statements; therefore, we
consider these to be our critical accounting estimates.
Historically, our assumptions, judgments and estimates relative
to our critical accounting estimates have not differed
materially from actual results. For further information on our
significant accounting policies, see Note 2 to our
Consolidated Financial Statements.
We apply the provisions of Statement of Position, or SOP,
97-2,
“Software Revenue Recognition,” as amended by
SOP 98-9,
“Modification of
SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions,” to all product revenue transactions where
the software is not incidental. We also apply the provisions of
SFAS No. 13, “Accounting for Leases,” to all
hardware lease transactions. We recognize revenue when
persuasive evidence of an arrangement exists, the product has
been delivered, the fee is fixed or determinable, collection of
the resulting receivable is probable, and vendor-specific
objective evidence of fair value, or VSOE, exists.
We license software using three different license types:
Subscription licenses – Our subscription
license arrangements offer our customers the right to:
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In general, revenue associated with subscription licenses is
recognized ratably over the term of the license commencing upon
the later of the effective date of the arrangement or delivery
of the software product. Subscription license revenue is
allocated to product and maintenance revenue. The allocation to
maintenance revenue is based on vendor specific objective
evidence, or VSOE, of fair value of the undelivered maintenance
that was established in connection with the sale of our term
licenses.
Term licenses – Our term license arrangements
offer our customers the right to:
The right to remix all software products delivered pursuant to
the license agreement is not considered an exchange or return of
software because all software products have been delivered and
the customer has the continuing right to use them. In general,
revenue associated with term licenses is recognized upon the
later of the effective date of the arrangement or delivery of
the software product.
Perpetual licenses – Our perpetual licenses
consist of software licensed on a perpetual basis with no right
to return or exchange the licensed software. In general, revenue
associated with perpetual licenses is recognized upon the later
of the effective date of the license or delivery of the licensed
product.
Persuasive evidence of an arrangement –
Generally, we use a contract signed by the customer as evidence
of an arrangement for subscription and term licenses and
hardware leases. If a contract signed by the customer does not
exist, we have historically used a purchase order as evidence of
an arrangement for perpetual licenses, hardware sales,
maintenance renewals and small fixed-price service projects,
such as training classes and small methodology service
engagements of approximately $10,000 or less. For all other
service engagements, we use a signed professional services
agreement and a statement of work to evidence an arrangement. In
cases where both a signed contract and a purchase order exist,
we consider the signed contract to be the most persuasive
evidence of the arrangement. Sales through our distributors are
evidenced by a master agreement governing the relationship,
together with binding purchase orders from the distributor on a
transaction-by-transaction
basis.
Product delivery – Software and the
corresponding access keys are generally delivered to customers
electronically. Electronic delivery occurs when we provide the
customer access to the software. Occasionally, we will deliver
the software on a compact disc with standard transfer terms of
free-on-board,
or F.O.B., shipping point. Our software license agreements
generally do not contain conditions for acceptance. With respect
to hardware, delivery of an entire system is deemed to occur
upon its successful installation. For certain hardware products,
installation is the responsibility of the customer, as the
system is fully functional at the time of shipment. For these
products, delivery is deemed to be complete when the products
are shipped with freight terms of F.O.B. shipping point.
Fee is fixed or determinable – We assess
whether a fee is fixed or determinable at the outset of the
arrangement, primarily based on the payment terms associated
with the transaction. We have established a history of
collecting under the original contract without providing
concessions on payments, products or services. For our
installment contracts that do not include a substantial up front
payment, we may only determine that a fee is fixed or
determinable if the arrangement has payment periods that are
equal to or less than the term of the licenses and the
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payments are collected in equal or nearly equal installments,
when evaluated over the entire term of the arrangement.
Significant judgment is involved in assessing whether a fee is
fixed or determinable. We must also make these judgments when
assessing whether a contract amendment to a term arrangement
(primarily in the context of a license extension or renewal)
constitutes a concession. Our experience has been that we are
able to determine whether a fee is fixed or determinable for
term licenses. While we do not expect that experience to change,
if we no longer were to have a history of collecting under the
original contract without providing concessions on term
licenses, revenue from term licenses would be required to be
recognized when payments under the installment contract become
due and payable. Such a change could have a material impact on
our results of operations.
Collection is probable – We assess the
probability of collecting from each customer at the outset of
the arrangement based on a number of factors, including the
customer’s payment history and its current
creditworthiness. We have concluded that collection is not
probable for license arrangements executed with customers in
certain countries. If in our judgment collection of a fee is not
probable, we defer the revenue until the uncertainty is removed,
which generally means revenue is recognized upon our receipt of
cash payment. Our experience has been that we are able to
estimate whether collection is probable. While we do not expect
that experience to change, if we were to determine that
collection is not probable for any license arrangement,
particularly those with installment payment terms, revenue from
such license would be recognized generally upon the receipt of
cash payment. Such a change could have a material impact on our
results of operations.
Vendor-specific objective evidence of fair
value – Our VSOE for certain product elements of
an arrangement is based upon the pricing in comparable
transactions when the element is sold separately. VSOE for
maintenance is generally based upon the customer’s stated
annual renewal rates. VSOE for services is generally based on
the price charged when the services are sold separately. For
multiple element arrangements, VSOE must exist to allocate the
total fee among all delivered and undelivered elements of a term
or perpetual license arrangement. If VSOE does not exist for all
elements to support the allocation of the total fee among all
delivered and undelivered elements of the arrangement, revenue
is deferred until such evidence does exist for the undelivered
elements, or until all elements are delivered, whichever is
earlier. If VSOE of all undelivered elements exists but VSOE
does not exist for one or more delivered elements, revenue is
recognized using the residual method. Under the residual method,
the VSOE of the undelivered elements is deferred, and the
remaining portion of the arrangement fee is recognized as
revenue as the elements are delivered. Our experience has been
that we are able to estimate VSOE.
Finance fee revenue – Finance fees result from
discounting to present value the product revenue derived from
our installment contracts in which the payment terms extend
beyond one year from the effective date of the contract. Finance
fees are recognized using a method that approximates the
effective interest method over the relevant license term and are
classified as product revenue. Finance fee revenue represented
approximately 2% of total revenue for each of the years ended
December 30, 2006, December 31, 2005 and
January 1, 2005. Upon the sale of an installment contract,
we recognize the remaining finance fee revenue associated with
the installment contract.
Services revenue – Services revenue consists
primarily of revenue received for performing design and
methodology services. These services are not related to the
functionality of the products licensed. Revenue from service
contracts is recognized either on the time and materials method,
as work is performed, or on the
percentage-of-completion
method. For contracts with fixed or
not-to-exceed
fees, we estimate on a monthly basis the
percentage-of-completion,
which is based on the completion of milestones relating to the
arrangement. We have a history of accurately estimating project
status and the costs necessary to complete projects. A number of
internal and external factors can affect our estimates,
including labor rates, utilization and efficiency variances and
specification and testing requirement changes. If different
conditions were to prevail such that accurate estimates could
not be made, then the use of the completed contract method would
be required and the recognition of all revenue and costs would
be deferred until the project was completed. Such a change could
have a material impact on our results of operations.
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We provide for the effect of income taxes in our Consolidated
Financial Statements in accordance with SFAS No. 109,
“Accounting for Income Taxes.” Under
SFAS No. 109, income tax expense (benefit) is
recognized for the amount of taxes payable or refundable for the
current year, and for deferred tax assets and liabilities for
the tax consequences of events that have been recognized in an
entity’s financial statements or tax returns.
We must make significant assumptions, judgments and estimates to
determine our current provision for income taxes, our deferred
tax assets and liabilities and any valuation allowance to be
recorded against our deferred tax assets. Our judgments,
assumptions and estimates relating to the current provision for
income taxes take into account current tax laws, our
interpretation of current tax laws and possible outcomes of
current and future audits conducted by foreign and domestic tax
authorities. Changes in tax laws or our interpretation of tax
laws and developments in current and future tax audits could
significantly impact the amounts provided for income taxes in
our results of operations, financial position or cash flows. Our
assumptions, judgments and estimates relating to the value of
our net deferred tax assets take into account predictions of the
amount and category of future taxable income from potential
sources including tax planning strategies that would, if
necessary, be implemented to prevent a loss carryforward or tax
credit carryforward from expiring unused. Actual operating
results and the underlying amount and category of income in
future years could render our current assumptions, judgments and
estimates of recoverable net deferred taxes inaccurate, thus
materially affecting our consolidated financial position or
results of operations.
We account for restructuring charges in accordance with SEC
Staff Accounting Bulletin No. 100, “Restructuring
and Impairment Charges,” as amended. From fiscal 2001
through fiscal 2005, we undertook significant restructuring
initiatives. All restructuring activities initiated prior to
fiscal 2003 were accounted for in accordance with Emerging
Issues Task Force, or EITF,
No. 94-3,
“Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)” and EITF
No. 88-10,
“Costs Associated with Lease Modifications or
Terminations.” For restructuring activities initiated after
fiscal 2002, we accounted for the leased facilities in
accordance with SFAS No. 146, “Accounting for
Costs Associated with Exit or Disposal Activities.” In
addition, for all periods presented, we accounted for the
asset-related portions of these restructurings in accordance
with SFAS No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets.” For all periods
presented, the severance and benefits charges were accounted for
in accordance with SFAS No. 112, “Employers’
Accounting for Postemployment Benefits – An Amendment
of FASB Statements No. 5 and 43.”
These restructuring initiatives have required us to make a
number of estimates and assumptions related to losses on excess
facilities vacated or consolidated, particularly estimating
when, if at all, we will be able to sublet vacated facilities
and, if we do, the sublease terms. Closure and space reduction
costs that are part of our restructuring charges include
payments required under leases, less any applicable estimated
sublease income after the facilities are abandoned, lease buyout
costs and certain contractual costs to maintain facilities
during the abandonment period.
We regularly evaluate the adequacy of our restructuring accrual,
and adjust the balance based on changes in estimates and
assumptions. We may incur future charges for new restructuring
activities as well as changes in estimates to amounts previously
recorded.
We account for stock-based compensation in accordance with the
fair value recognition provisions of SFAS No. 123R,
“Share-Based Payment.” Under SFAS No. 123R,
stock-based compensation expense is measured at the grant date
based on the value of the award and is recognized as expense
over the vesting period. Determining the fair value of
stock-based awards at the grant date requires judgment,
including estimating the expected volatility of our stock, the
expected term of stock options, the risk-free interest rate for
the period, expected dividends and expected forfeitures. The
computation of the expected volatility assumption used in the
Black-Scholes pricing model for option grants is based on
implied volatility calculated using an average of the volatility
of publicly traded
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options for our common stock and our 2023 Notes. We use this
approach to determine volatility because options for our common
stock are actively traded, the market prices of both the traded
options and underlying shares are measured at a similar point in
time to each other and on a date reasonably close to the grant
date of the employee stock options, the traded options have
exercise prices that are both
near-the-money
and close to the exercise price of the employee stock options,
and the remaining maturities of the traded options on which the
estimate is based are at least one year. When establishing the
expected life assumption, we review annual historical employee
exercise behavior with respect to option grants having similar
vesting periods. In addition, judgment is also required in
estimating the amount of stock-based awards that we expect to be
forfeited. We calculate a separate expected forfeiture rate for
both stock options and restricted stock issuances based on
historical trends. The valuation of all options and the expected
forfeiture rates for options and restricted stock are calculated
based on one employee pool as there is no significant difference
in exercise behavior between classes of employees. If actual
results differ significantly from these estimates, stock-based
compensation expense and our results of operations could be
materially affected.
We primarily generate revenue from licensing our EDA software,
selling or leasing our hardware technology, providing
maintenance for our software and hardware and providing design
and methodology services. We principally utilize three license
types: subscription, term and perpetual. The different license
types provide a customer with different terms of use for our
products, such as:
Customer decisions regarding these aspects of license
transactions determine the license type, timing of revenue
recognition and potential future business activity. For example,
if a customer chooses a fixed term of use, this will result in
either a subscription or term license. A business implication of
this decision is that, at the expiration of the license period,
the customer must decide whether to continue using the
technology and therefore renew the license agreement. Because
larger customers generally use products from two or more of our
five product groups, rarely will a large customer completely
terminate its relationship with us at expiration of the license.
See the discussion under the heading “Critical Accounting
Estimates” above for an additional description of license
types and timing of revenue recognition.
A substantial portion of our revenue is recognized over multiple
periods. As a result, we do not believe that pricing volatility
has been a material component of the change in our revenue from
period to period.
The amount of revenue recognized in future periods will depend
on, among other things, the terms and timing of our contract
renewals or additional product sales with existing customers,
the size of such transactions and sales to new customers.
The value and duration of contracts, and consequently product
revenue recognized, is affected by the competitiveness of our
products. Product revenue recognized in any period is also
affected by the extent to which customers purchase subscription,
term or perpetual licenses, and the extent to which contracts
contain flexible payment terms. The timing of revenue
recognition is also affected by changes in the extent to which
existing contracts contain flexible payment terms and by changes
in contractual arrangements (e.g., subscription to term)
with existing customers.
We analyze our software and hardware businesses by product
group, combining revenues for both product and maintenance
because of their interrelationship. We have formulated a design
solution strategy that combines our design technologies into
“platforms,” which are included in the various product
groups described below.
Our product groups are:
Functional Verification: Products in this group,
which include the Incisive functional verification platform, are
used to verify that the high level, logical specification of an
IC design is correct.
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Digital IC Design: Products in this group, which
include the Encounter digital IC design platform, are used to
accurately convert the high-level, logical specification of a
digital IC into a detailed physical blueprint and then detailed
design information showing how the IC will be physically
implemented. This data is used for creation of the photomasks
used in chip manufacture.
Custom IC Design: Our custom design products, which
include the Virtuoso custom design platform, are used for ICs
that must be designed at the transistor level, including analog,
radio frequency, memories, high performance digital blocks and
standard cell libraries. Detailed design information showing how
an IC will be physically implemented is used for creation of the
photomasks used in chip manufacture.
System Interconnect: This product group consists of
our PCB and IC package design products, including the Allegro
and OrCAD products. The Allegro system interconnect platform
offering focuses on system interconnect design platform, which
enables consistent co-design of ICs, IC packages and PCBs, while
the OrCAD line focuses on cost-effective, entry-level PCB
solutions.
Design for Manufacturing: Included in this product
group are our physical verification and analysis products. These
products are used to analyze and verify that the physical
blueprint of the integrated circuit has been constructed
correctly and can be manufactured successfully.
The following table shows our revenue for the fiscal years 2006,
2005 and 2004 and the percentage change in revenue between years:
2006
compared to 2005
Product revenue was higher in 2006, as compared to 2005,
primarily because of increased revenue from licenses for
Functional Verification and Custom IC Design products, partially
offset by a small decrease in revenue from licenses for Design
for Manufacturing products. Functional verification was the
fastest growing platform in 2006. Services revenue increased in
2006 as compared to 2005 due to an increase in utilization and
realization rates for our services personnel.
2005
compared to 2004
Product revenue was higher in 2005, as compared to 2004,
primarily because of increased revenue from licenses for Digital
IC Design, Functional Verification and Custom IC products.
Services revenue was lower in 2005, as compared to 2004, due to
our reduced capacity to satisfy demand for our design services
after having implemented certain restructuring activities.
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The following table shows the percentage of product and related
maintenance revenue contributed by each of our five product
groups, and Services and other in fiscal 2006, 2005 and 2004:
As described under the heading “Critical Accounting
Estimates” above, certain of our licenses allow customers
the ability to remix among software products. Additionally, we
have licensed a combination of our products to customers with
the actual product selection and number of licensed users to be
determined at a later date. For these arrangements, we estimate
the allocation of the revenue to product groups based upon the
expected usage of our products by these customers. The actual
usage of our products by these customers may differ and
therefore the revenue allocated in the above table may differ.
Although we believe the methodology of allocating revenue to
product groups is reasonable, there can be no assurance that
such allocated amounts reflect the amounts that would result had
the customer individually licensed each specific software
solution at the onset of the arrangement. However, during the
term of the arrangement, we reevaluate the allocation of revenue
based on actual deployment of our products.
The decrease in percentage of Services and other in 2005, as
compared to 2004, is primarily due to $11.0 million of
revenue recognized from the sale of IP in 2004. This sale of IP
in 2004 is included in Services and other in the preceding table
and in Product revenue in the accompanying Consolidated Income
Statements.
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The rate of revenue change varies geographically primarily due
to differences in the timing and size of term licenses in those
regions. No single customer accounted for 10% or more of total
revenue in 2006, 2005 or 2004.
Changes in foreign currency exchange rates, primarily due to
fluctuations of the Japanese yen in relation to the United
States dollar, caused our revenue to decrease by
$12.0 million in 2006, as compared to 2005, and to decrease
by $5.7 million in 2005, as compared to 2004. Additional
information about revenue and other financial information by
geography can be found in Note 21 to our Consolidated
Financial Statements.
We adopted SFAS No. 123R on January 1, 2006,
which resulted in an increase in stock-based compensation
expense of $64.1 million in 2006 as compared to 2005.
Stock-based compensation expense is reflected throughout our
costs and expenses in fiscal 2006, 2005 and 2004 as follows:
Cost of product includes costs associated with the sale or lease
of our hardware and licensing of our software products. Cost of
product primarily includes the cost of employee salary, benefits
and other employee-related costs, including stock-based
compensation expense, amortization of acquired intangibles
directly related to Cadence products, the cost of technical
documentation and royalties payable to third-party vendors. Cost
of product associated with our hardware products also includes
materials, assembly labor and overhead. These additional
manufacturing costs make our cost of hardware product higher, as
a percentage of revenue, than our cost of software product.
A summary of Cost of product in fiscal 2006, 2005 and 2004 is as
follows:
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2006
compared to 2005
Cost of product decreased $12.9 million in 2006 as compared
to 2005, primarily due to:
Cost of product depends primarily upon the extent to which we
acquire intangible assets, acquire licenses and incorporate
third-party technology in our products that are licensed or sold
in any given period, and the actual mix of hardware and software
product sales in any given period. Assuming no changes to our
current portfolio of intangibles, we expect the Amortization of
acquired intangibles component of Cost of product to continue
decreasing as the amortization periods assigned upon the
purchase of certain intangibles are completed.
Cost of services primarily includes employee salary, benefits
and other employee-related costs, costs to maintain the
infrastructure necessary to manage a services organization, and
provisions for contract losses, if any. Cost of services
increased $4.6 million in 2006 as compared to 2005
primarily due to:
Cost of maintenance includes the cost of customer services, such
as hot-line and
on-site
support, employee salary, benefits and other employee-related
costs for certain employees, and documentation of maintenance
updates. Cost of maintenance increased $4.0 million in 2006
as compared to 2005 primarily due to:
2005
compared to 2004
Cost of product decreased $2.3 million in 2005, as compared
to 2004, primarily due to:
Cost of services increased $0.9 million in 2005, as
compared to 2004, primarily due to:
Cost of maintenance increased $6.7 million in 2005, as
compared to 2004, primarily due to:
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2006
compared to 2005
Overall operating expenses increased $122.5 million in
2006, as compared to 2005, primarily due to:
2005
compared to 2004
Operating expenses increased $97.4 million in 2005, as
compared to 2004, primarily due to:
2006
compared to 2005
Marketing and sales expenses increased $39.4 million in
2006, as compared to 2005, primarily due to:
2005
compared to 2004
Marketing and sales expenses increased $33.1 million in
2005, as compared to 2004, primarily due to:
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2006
compared to 2005
Research and development expenses increased $69.4 million
in 2006, as compared to 2005, primarily due to:
2005
compared to 2004
Research and development expense increased $22.6 million in
2005, as compared to 2004, primarily due to:
2006
compared to 2005
General and administrative expenses increased $13.7 million
in 2006, as compared to 2005, primarily due to:
2005
compared to 2004
General and administrative expense increased $41.7 million
in 2005, as compared to 2004, primarily due to:
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Assuming no changes to our current portfolio of intangibles, we
expect the Amortization of acquired intangibles to continue
decreasing as the amortization periods assigned upon the
purchase of certain intangibles are completed.
2006
compared to 2005
Amortization of acquired intangibles decreased
$24.7 million in 2006, as compared to 2005. Amortization of
acquired intangible assets from prior year acquisitions
decreased $27.5 million during 2006 due to the full
amortization of certain acquired intangibles. This decrease was
partially offset by $2.8 million of amortization of
intangibles acquired during 2006.
2005
compared to 2004
Amortization of acquired intangibles decreased $7.9 million
in 2005, as compared to 2004. Amortization of acquired
intangible assets from prior year acquisitions decreased
$21.0 million during 2005 due to the full amortization of
certain acquired intangibles. This decrease was partially offset
by $13.1 million of amortization of intangibles acquired
during 2005.
We initiated a separate plan of restructuring in each year from
2001 through 2005 in an effort to operate more efficiently while
improving operating margins and cash flows. The restructuring
plans initiated each year from 2001 through 2005, or the 2001
Restructuring, 2002 Restructuring, 2003 Restructuring, 2004
Restructuring and 2005 Restructuring, respectively, were
intended to decrease costs through workforce reductions and
facility and resource consolidation, in order to improve our
cost structure. The 2001 and 2002 Restructurings primarily
related to our design services business and certain other
business or infrastructure groups throughout the world. The 2003
Restructuring, 2004 Restructuring and 2005 Restructuring were
targeted at reducing costs throughout the company. The 2004
Restructuring has been completed and there was no remaining
balance accrued for this restructuring as of December 30,
2006.
In addition, we have recorded estimated provisions for
termination benefits and outplacement costs, long-term asset
impairments, and other restructuring costs. Each reporting
period, we evaluate the adequacy of the lease loss accrual for
each plan of restructuring. We adjust the lease loss accrual for
changes in real estate markets or other factors that may affect
estimated costs or sublease income. We also consider executed
sublease agreements and adjust the lease loss accrual if
sublease income under the agreement differs from initial
estimates.
During 2005, in conjunction with the workforce reduction in our
European design services business, we completed a sale-leaseback
transaction involving land and a building in Livingston,
Scotland. Proceeds from the sale were $33.6 million and the
total gain on the sale was $3.6 million. We leased back a
portion of the facility for the next two years and another
portion for ten years, with an option to terminate the ten year
lease after five years. We deferred the gain on the sale and are
recognizing the gain ratably over the maximum lease term of ten
years.
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A summary of restructuring and other charges by plan of
restructuring in fiscal years 2006, 2005 and 2004 is as follows:
Due to the immateriality of the 2003 Restructuring, 2002
Restructuring and 2001 Restructuring, they have been combined in
the above table.
Frequently, asset impairments are based on significant estimates
and assumptions, particularly regarding remaining useful life
and utilization rates. We may incur other charges in the future
if management determines that the useful life or utilization of
certain long-lived assets has been reduced.
The initial facility closure and space reduction costs included
in these restructurings were comprised of payments required
under leases, less any applicable estimated sublease income
after the properties were abandoned, lease buyout costs and
other contractual charges. To estimate the initial lease loss,
which is the loss after our cost recovery efforts from
subleasing all or part of a building, management made certain
assumptions related to the time period over which the relevant
building would remain vacant and sublease terms, including
sublease rates and contractual common area charges.
As of December 30, 2006, our accrued estimate of the lease
loss related to all restructuring activities initiated since
2001 was $31.3 million. This amount may be adjusted in the
future based upon changes in the assumptions used to estimate
the lease loss. Since 2001, we have recorded facilities
consolidation charges, net of credits, of $97.0 million
under the 2001 through 2005 Restructurings related to space
reductions or facility closures of 49 sites. As of
December 30, 2006, 28 of these sites had been vacated and
space reductions had occurred at the remaining 21 sites. We
expect to pay all of the facilities-related restructuring
liabilities for all our restructuring plans prior to 2016.
Because the restructuring charges and related benefits are
derived from management’s estimates made during the
formulation of the restructurings, based on then-currently
available information, our restructuring activities may not
achieve the benefits anticipated on the timetable or at the
level contemplated. Demand for our products and services and,
ultimately, our future financial performance, is difficult to
predict with any degree of certainty. Accordingly, additional
actions, including further restructuring of our operations, may
be required in the future.
Our workforce reduction activities related to the 2004
Restructuring and the 2005 Restructuring were completed prior to
December 31, 2005. We recorded a credit during the twelve
months ended December 30,
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2006 to remove the remaining severance and benefits accrual
related to the 2005 Restructuring. The other activity recorded
in each of the restructuring plans for the year ended
December 30, 2006 relates to payment of remaining lease
obligations net of sublease payments received and changes in
estimate related to lease loss accruals.
We expect to incur an additional $1.0 million to
$2.0 million of future costs in connection with the 2005
Restructuring and an additional $3.0 million to
$5.0 million of future costs in connection with the 2003
Restructuring, primarily for facilities-related charges, which
will be expensed as incurred. The actual amount of additional
costs incurred could vary depending on changes in market
conditions and the timing of these restructuring activities.
Upon consummation of an acquisition, we immediately charge to
expense any acquired in-process research and development that
has not yet reached technological feasibility and has no
alternative future use. The value assigned to acquired
in-process research and development is determined by identifying
research projects in areas for which technological feasibility
has not been established. The values are determined by
estimating costs to develop the acquired in-process research and
development into commercially viable products, estimating the
resulting net cash flows from such projects and discounting the
net cash flows back to their present value. The discount rates
utilized include a factor that reflects the uncertainty
surrounding successful development of the acquired in-process
research and development.
The following table summarizes our write-offs of acquired
in-process research and development charges in fiscal 2006, 2005
and 2004:
The following table summarizes, as of December 30, 2006,
the status of in-process research and development acquired in
fiscal 2006, 2005 and 2004:
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We recorded a Loss on extinguishment of debt of
$40.8 million during the year ended December 30, 2006,
which includes a premium paid to repurchase a portion of the
2023 Notes of $38.9 million and a write-off of the related
portion of unamortized deferred costs of issuing the 2023 Notes
of $1.9 million.
2006
compared to 2005
Interest expense increased $6.9 million in 2006, as
compared to 2005, primarily due to the increased interest of
$6.4 million related to the Term Loan.
2005
compared to 2004
Interest expense decreased $0.8 million in 2005, as
compared to 2004, primarily due to a decrease of
$0.6 million in imputed interest on acquisition-related
payments that occur over time.
Other income (expense), net, for fiscal 2006, 2005 and 2004 was
as follows:
The increases in interest income in 2006, as compared to 2005,
and in 2005, as compared to 2004, were due to increases in our
Cash and cash equivalents balances as well as higher interest
rates applicable to those balances.
In January 2006, KhiMetrics, Inc., a cost method investment held
by Telos Venture Partners L.P., a limited partnership in which
we and our 1996 Deferred Compensation Venture Investment Plan
Trust were the sole limited partners, was sold for consideration
of $6.53 per share of common stock. Under the purchase
agreement, 10% of the consideration was held in escrow to pay
the cost of resolving any claims that could have been asserted
against KhiMetrics on or before the first anniversary of the
acquisition. The escrow amount remaining after resolution of
such claims was distributed to the former stockholders of
KhiMetrics in January and February 2007. No gain was recorded on
amounts held in escrow during 2006. In connection with this
sale, we received approximately $20.2 million in cash and
recorded a gain of approximately $17.1 million during the
year ended December 30, 2006.
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In addition, our 1996 Deferred Compensation Venture Investment
Plan Trust received $2.9 million in cash and recorded a
gain of $2.5 million during the year ended
December 30, 2006.
The provision for income taxes and the effective tax rates in
fiscal 2006, 2005 and 2004 were as follows:
2006
compared to 2005
Our effective tax rate decreased in 2006, as compared to 2005,
primarily due to the $30.1 million of non-recurring
federal, state and foreign income taxes incurred upon our 2005
repatriation of $500.0 million of certain foreign earnings
under the American Jobs Creation Act, which increased the 2005
annual effective tax rate by approximately 23 percentage
points.
2005
compared to 2004
Our effective tax rate increased in 2005, as compared to 2004,
primarily due to the non-recurring income taxes related to our
2005 repatriation of certain foreign earnings, and an increase
in foreign income tax expense from operations in 2005.
In July 2006, the FASB issued FIN No. 48,
“Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109,” which
prescribes a new recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN No. 48 is
effective for fiscal year 2007. The cumulative effect of
applying FIN No. 48 will be reported as an adjustment
to the opening balance of retained earnings (or other
appropriate components of equity or net assets on our
Consolidated Balance Sheet) for fiscal year 2007. We are
currently studying the transition effects of adopting
FIN No. 48 and we are not yet able to assess the
impact of FIN No. 48 on our 2007 financial statements
and, therefore, we are not currently able to disclose the
expected effect of its adoption nor our outlook for the fiscal
2007 effective tax rate.
As of December 30, 2006, we had total net deferred tax
assets of approximately $150.1 million. Realization of the
deferred tax assets will depend on generating sufficient taxable
income of the appropriate character prior to the expiration of
certain net operating loss, capital loss and tax credit
carryforwards. Although realization is not assured, we believe
it is more likely than not that the net deferred tax assets will
be realized. The amount of the net deferred tax assets, however,
could be reduced or increased in the near term if actual facts,
including the estimate of future taxable income, differ from
those estimated.
The IRS and other tax authorities regularly examine our income
tax returns. In November 2003, the IRS completed its field
examination of our federal income tax returns for the tax years
1997 through 1999 and issued a Revenue Agent’s Report, or
RAR, in which the IRS proposes to assess an aggregate tax
deficiency for the three-year period of approximately
$143.0 million. The most significant of the disputed
adjustments for the tax years 1997 through 1999 relates to
transfer pricing arrangements that we have with a foreign
subsidiary. We have filed a protest to certain of the proposed
adjustments with the Appeals Office of the IRS where the matter
is currently being considered.
In July 2006, the IRS completed its field examination of our
federal income tax returns for the tax years 2000 through 2002
and issued an RAR, in which the IRS proposes to assess an
aggregate tax deficiency for the three-year period of
approximately $324.0 million. In November 2006, the IRS
revised the proposed aggregate tax deficiency
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for the three-year period to be approximately
$318.0 million. The IRS is contesting our qualification for
deferred recognition of certain proceeds received from
restitution and settlement in connection with litigation during
the period. The proposed tax deficiency for this item is
approximately $152.0 million. The remaining proposed tax
deficiency of approximately $166.0 million is primarily
related to proposed adjustments to our transfer pricing
arrangements that we have with foreign subsidiaries and to our
deductions for foreign trade income. The IRS took similar
positions with respect to our transfer pricing arrangements in
the prior examination period and may make similar claims against
our transfer pricing arrangements in future examinations. We
have filed a timely protest with the IRS and will seek
resolution of the issues through the Appeals Office of the IRS.
We believe that the proposed IRS adjustments are inconsistent
with applicable tax laws and we are challenging these proposed
adjustments vigorously. The RARs are not final Statutory Notices
of Deficiency but the IRS imposes interest on the proposed
deficiencies until the matters are resolved. Interest is
compounded daily at rates published by the IRS, which rates are
adjusted quarterly and have been between four and ten percent
since 1997.
Significant judgment is required in determining our provision
for income taxes. The calculation of our tax liabilities
involves dealing with uncertainties in the application of
complex tax regulations. In determining the adequacy of our
provision for income taxes, we regularly assess the likelihood
of adverse outcomes resulting from tax examinations including
the RARs for the tax years 1997 through 2002. We provide for tax
liabilities on our Consolidated Balance Sheets unless we
consider it probable that additional taxes will not be due.
However, the ultimate outcome of tax examinations, including the
total amount payable or the timing of any such payments upon
resolution of these issues, cannot be predicted with certainty.
In addition, we cannot assure you that such amount will not be
materially different than that which is reflected in our
historical income tax provisions and accruals. Should the IRS or
other tax authorities assess additional taxes as a result of a
current or a future examination, we may be required to record
charges to operations in future periods that could have a
material impact on our results of operations, financial position
or cash flows in the applicable period or periods.
Disclosures
About Market Risk
Our exposure to market risk for changes in interest rates
relates primarily to our portfolio of Cash and cash equivalents.
While we are exposed to interest rate fluctuations in many of
the world’s leading industrialized countries, our interest
income and expense is most sensitive to fluctuations in the
general level of United States interest rates. In this regard,
changes in United States interest rates affect the interest
earned on our Cash and cash equivalents and costs associated
with foreign currency hedges.
We invest in high quality credit issuers and, by policy, limit
the amount of our credit exposure to any one issuer. As part of
our policy, our first priority is to reduce the risk of
principal loss. Consequently, we seek to preserve our invested
funds by limiting default risk, market risk and reinvestment
risk. We mitigate default risk by investing in only high quality
credit securities that we believe to have low credit risk and by
positioning our portfolio to respond appropriately to a
significant reduction in a credit rating of any investment
issuer or guarantor. The short-term interest-bearing portfolio
of Cash and cash equivalents includes only marketable securities
with active secondary or resale markets to ensure portfolio
liquidity.
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All highly liquid investments with a maturity of three months or
less at the date of purchase are considered to be cash
equivalents. Investments with maturities greater than
three months are classified as available-for-sale and are
considered to be short-term investments. The carrying value of
our interest-bearing instruments approximated fair value as of
December 30, 2006. The following table presents the
carrying value and related weighted average interest rates for
our interest-bearing instruments, which are all classified as
Cash and cash equivalents on our Consolidated Balance Sheet as
of December 30, 2006.
Our operations include transactions in foreign currencies and,
therefore, we benefit from a weaker dollar, and we are adversely
affected by a stronger dollar relative to major currencies
worldwide. The primary effect of foreign currency transactions
on our results of operations from a weakening United States
dollar is an increase in revenue offset by a smaller increase in
expenses. Conversely, the primary effect of foreign currency
transactions on our results of operations from a strengthening
United States dollar is a reduction in revenue offset by a
smaller reduction in expenses.
We enter into foreign currency forward exchange contracts with
financial institutions to protect against currency exchange
risks associated with existing assets and liabilities. A foreign
currency forward exchange contract acts as a hedge by increasing
in value when underlying assets decrease in value or underlying
liabilities increase in value due to changes in foreign exchange
rates. Conversely, a foreign currency forward exchange contract
decreases in value when underlying assets increase in value or
underlying liabilities decrease in value due to changes in
foreign exchange rates. These forward contracts are not
designated as accounting hedges under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging
Activities,” and, therefore, the unrealized gains and
losses are recognized in Other income, net, in advance of the
actual foreign currency cash flows with the fair value of these
forward contracts being recorded as accrued liabilities or other
assets.
Our policy governing hedges of foreign currency risk does not
allow us to use forward contracts for trading purposes. Our
forward contracts generally have maturities of 90 days or
less. The effectiveness of our hedging program depends on our
ability to estimate future asset and liability exposures. We
enter into currency forward exchange contracts based on
estimated future asset and liability exposures. Recognized gains
and losses with respect to our current hedging activities will
ultimately depend on how accurately we are able to match the
amount of currency forward exchange contracts with actual
underlying asset and liability exposures.
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The following table provides information, as of
December 30, 2006, about our forward foreign currency
contracts. The information is provided in United States dollar
equivalent amounts. The table presents the notional amounts, at
contract exchange rates, and the weighted average contractual
foreign currency exchange rates expressed as units of the
foreign currency per United States dollar, which in some cases
may not be the market convention for quoting a particular
currency. All of these forward contracts matured prior to
January 12, 2007.
While we actively monitor our foreign currency risks, there can
be no assurance that our foreign currency hedging activities
will substantially offset the impact of fluctuations in currency
exchange rates on our results of operations, cash flows and
financial position.
Equity
Price Risk
In December 2006, we issued $250.0 million principal amount
of 1.375% Convertible Senior Notes Due 2011, or the 2011 Notes,
and $250.0 million of 1.500% Convertible Senior Notes
Due 2013, or the 2013 Notes and collectively, the Convertible
Senior Notes, to three initial purchasers in a private placement
pursuant to Section 4(2) of the Securities Act for resale
to qualified institutional buyers pursuant to SEC
Rule 144A. Concurrently with the issuance of the
Convertible Senior Notes, we entered into hedge transactions
with various parties and in separate transactions, sold warrants
to various parties to reduce the potential dilution from the
conversion of the Convertible Senior Notes and to mitigate any
negative effect such conversion may have on the price of our
common stock. For an additional description of the Convertible
Senior Notes, including the hedge and warrants transactions, see
the discussion under the heading “Liquidity and Capital
Resources — Factors Affecting Liquidity and Capital
Resources” below.
In August 2003, we issued $420.0 million principal amount
of our 2023 Notes to two initial purchasers in a private
placement pursuant to Section 4(2) of the Securities Act
for resale to qualified institutional buyers pursuant to SEC
Rule 144A. Concurrently with the issuance of the 2023
Notes, we entered into hedge transactions with one of the
initial purchasers and in a separate transaction, sold warrants
to one of the initial purchasers to reduce the potential
dilution from the conversion of the 2023 Notes and to mitigate
any negative effect such conversion may have on the price of our
common stock. For an additional description of the 2023 Notes,
including the hedge and warrants transactions, see the
discussion under the heading “Liquidity and Capital
Resources — Factors Affecting Liquidity and Capital
Resources” below.
We have a portfolio of equity investments that includes
marketable equity securities and non-marketable equity
securities. Our equity investments are made primarily in
connection with our strategic investment program.
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Under our strategic investment program, from time to time we
make cash investments in companies with technologies that are
potentially strategically important to us.
The fair value of our portfolio of
available-for-sale
marketable equity securities, which are included in Short-term
investments on the accompanying Consolidated Balance Sheets, was
$23.7 million as of December 30, 2006 and
$33.0 million as of December 31, 2005. While we
actively monitor these investments, we do not currently engage
in any hedging activities to reduce or eliminate equity price
risk with respect to these equity investments. Accordingly, we
could lose all or part of our investment portfolio of marketable
equity securities if there is an adverse change in the market
prices of the companies we invest in.
Our investments in non-marketable equity securities would be
negatively affected by an adverse change in equity market
prices, although the impact cannot be directly quantified. Such
a change, or any negative change in the financial performance or
prospects of the companies whose non-marketable securities we
own, would harm the ability of these companies to raise
additional capital and the likelihood of our being able to
realize any gains or return of our investments through liquidity
events such as initial public offerings, acquisitions and
private sales. These types of investments involve a high degree
of risk, and there can be no assurance that any company we
invest in will grow or will be successful or that we will be
able to liquidate a particular investment when desired.
Accordingly, we could lose all or part of our investment.
Our investments in non-marketable equity securities had a
carrying amount of $31.4 million as of December 30,
2006 and $37.9 million as of December 31, 2005. If we
determine that an
other-than-temporary
decline in fair value exists for a non-marketable equity
security, we write down the investment to its fair value and
record the related write-down as an investment loss in our
Consolidated Income Statements.
As of December 30, 2006, our principal sources of liquidity
consisted of $958.4 million of Cash and cash equivalents
and short-term investments, as compared to $894.6 million
as of December 31, 2005 and $593.0 million as of
January 1, 2005. The primary sources of our cash in 2006
and 2005 were:
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Our primary uses of cash in 2006 and 2005 consisted of:
Net working capital increased $93.4 million as of
December 30, 2006, as compared to December 31, 2005,
primarily due to:
Net working capital increased $149.5 million as of
December 31, 2005, as compared to January 1, 2005,
primarily due to:
Cash flows from operating activities are provided by net income,
adjusted for certain non-cash charges, as well as changes in the
balance of certain assets and liabilities. Our cash flows from
operating activities are significantly influenced by the payment
terms set forth in our license agreements and by sales of our
receivables.
We have entered into agreements whereby we may transfer accounts
receivable to certain financing institutions on a non-recourse
or limited-recourse basis. These transfers are recorded as sales
and accounted for in accordance with SFAS No. 140,
“Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities.” During 2006, we
transferred accounts receivable, net of the losses on the sale
of the receivables, totaling $180.6 million, which
approximated fair value, to financing institutions on a
non-recourse basis, as compared to $192.1 million in 2005
and $30.1 million in 2004.
2006
compared to 2005
Net cash provided by operating activities decreased by
$5.1 million in 2006, as compared to 2005. The decrease was
primarily due to:
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2005
compared to 2004
Net cash provided by operating activities increased by
$53.8 million in 2005, as compared to 2004. The increase
was primarily due to:
Our primary investing activities consisted of:
In January 2006, KhiMetrics, Inc., a cost method investment held
by Telos Venture Partners L.P., a limited partnership in which
we and our 1996 Deferred Compensation Venture Investment Plan
Trust were the sole limited partners, was sold for consideration
of $6.53 per share of common stock. Under the purchase
agreement, 10% of the consideration was held in escrow to pay
the cost of resolving any claims that could have been asserted
against KhiMetrics on or before the first anniversary of the
acquisition. The escrow amount remaining after resolution of
such claims was distributed to the former stockholders of
KhiMetrics in January and February 2007. No gain was recorded on
amounts held in escrow during 2006. In connection with this
sale, we received approximately $20.2 million in cash and
recorded a gain of approximately $17.1 million during the
year ended December 30, 2006. In addition, our 1996
Deferred Compensation Venture Investment Plan Trust received
$2.9 million in cash and recorded a gain of
$2.5 million during the year ended December 30, 2006.
2006
compared to 2005
Net cash used for investing activities decreased by
$110.9 million in 2006, as compared to 2005. The decrease
was primarily due to:
2005
compared to 2004
Net cash used for investing activities increased by
$7.7 million in 2005, as compared to 2004. The increase was
primarily due to:
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Financing cash flows consisted primarily of net proceeds from
the issuance of the Convertible Senior Notes in 2006, including
payments for the hedge transactions and the proceeds from the
separate warrant transactions, payments on the Term Loan in
2006, proceeds received from the Term Loan in 2005, the
repurchase of treasury stock and the issuance of stock under
certain employee plans in both 2006 and 2005.
2006
compared to 2005
Net cash used for financing activities was $233.9 million
in 2006, as compared to net cash provided by financing
activities of $205.3 million in 2005, a decrease of
$439.2 million. The decrease was primarily due to:
2005
compared to 2004
Net cash provided by financing activities was
$205.3 million in 2005, as compared to net cash used for
financing activities of $21.1 million in 2004, an increase
of $226.4 million. The increase of cash provided by
financing activities was primarily due to:
Income
Taxes
We provide for United States income taxes on the earnings of
foreign subsidiaries unless the earnings are considered
permanently invested outside of the United States. As of
December 30, 2006, the cumulative amount of earnings upon
which United States income taxes have not been provided was
approximately $274.0 million. As of December 30, 2006,
the unrecognized deferred tax liability for these earnings was
approximately $84.0 million.
The IRS and other tax authorities regularly examine our income
tax returns. In November 2003, the IRS completed its field
examination of our federal income tax returns for the tax years
1997 through 1999 and issued a Revenue Agent’s Report, or
RAR, in which the IRS proposes to assess an aggregate tax
deficiency for the three-year period of approximately
$143.0 million. In July 2006, the IRS completed its field
examination of our federal income tax returns for the tax years
2000 through 2002 and issued an RAR, in which the IRS proposes
to assess an aggregate tax deficiency for the three-year period
of approximately $324.0 million. In November 2006, the IRS
revised the proposed aggregate tax deficiency for the three-year
period to be approximately $318.0 million.
We believe that the proposed IRS adjustments are inconsistent
with applicable tax laws and we are challenging these proposed
adjustments vigorously. The RARs are not final Statutory Notices
of Deficiency but the IRS imposes
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interest on the proposed deficiencies until the matters are
resolved. Interest is compounded daily at rates published by the
IRS, which rates are adjusted quarterly and have been between
four and ten percent since 1997.
For an additional description of the IRS examinations for the
years 1997 through 1999 and 2000 through 2002, see the
discussion under the heading “Provision for Income
Taxes” above.
Term
Loan
In December 2005, our Irish subsidiary, Castlewilder, entered
into a syndicated term facility agreement, or Credit Agreement,
with Banc of America Securities LLC as lead arranger, and Bank
of America, N.A., as Administrative Agent. The Credit Agreement
provides for a three-year $160.0 million unsecured term
loan, or Term Loan. Under the terms of the Credit Agreement,
Castlewilder, at its election, may prepay the loan, in whole or
in part, with no prepayment fee. During the year ended
December 30, 2006, Castlewilder made quarterly principal
payments of $32.0 million, plus additional prepayments of
$100.0 million of the principal amount due under the loan,
thereby reducing principal payments due under the Term Loan in
2007 and 2008. As of December 30, 2006, scheduled principal
payments on the Term Loan due during 2007 are $28.0 million.
1.375% Convertible
Senior Notes Due 2011 and 1.500% Convertible Senior Notes
Due 2013
In December 2006, we issued $250.0 million principal amount
of 1.375% Convertible Senior Notes Due 2011, or the 2011 Notes,
and $250.0 million of 1.500% Convertible Senior Notes
Due 2013, or the 2013 Notes, and collectively, the Convertible
Senior Notes, to three initial purchasers in a private placement
pursuant to Section 4(2) of the Securities Act for resale
to qualified institutional buyers pursuant to SEC
Rule 144A. We received net proceeds of approximately
$487.0 million after transaction fees of approximately
$13.0 million, including $12.0 million of underwriting
discounts, that were recorded in Other long-term assets on the
Consolidated Balance Sheet as of December 30, 2006 and are
being amortized to interest expense over the term of the
Convertible Senior Notes. A portion of the net proceeds totaling
$228.5 million was used to purchase $189.6 million
principal amount of our Zero Coupon Zero Yield Senior
Convertible Notes due 2023, or the 2023 Notes.
Holders may convert their Convertible Senior Notes prior to
maturity upon the occurrence of one of the following events:
On and after November 2, 2011, in the case of the 2011
Notes, and November 1, 2013, in the case of 2013 Notes,
until the close of business on the scheduled trading day
immediately preceding the maturity date, holders may convert
their Convertible Senior Notes at any time, regardless of the
foregoing circumstances. We may not redeem the Convertible
Senior Notes prior to maturity.
The initial conversion rate for the Convertible Senior Notes is
47.2813 shares of our common stock per $1,000 principal
amount of Convertible Senior Notes, equivalent to a conversion
price of approximately $21.15 per share of our common
stock. Upon conversion, a holder will receive the sum of the
daily settlement amounts, calculated on a proportionate basis
for each day, during a specified observation period following
the conversion date. The daily settlement amount during each
date of the observation period consists of:
In addition, if a fundamental change occurs prior to maturity,
we will, in certain cases, increase the conversion rate by an
amount up to $8.27 per share, for a holder that elects to
convert its Convertible Senior Notes in connection with such
fundamental change, which amount will be paid entirely in cash.
A fundamental change is any transaction or event (whether by
means of an exchange offer, liquidation, tender offer,
consolidation, merger, combination, reclassification,
recapitalization or otherwise) in connection with which more
than 50% of our common stock is
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exchanged for, converted into, acquired for or constitutes
solely the right to receive, consideration which is not at least
90% shares of common stock, or depositary receipts representing
such shares, that are:
As of December 30, 2006, none of the conditions allowing
the holders of the Convertible Senior Notes to convert had been
met.
Interest on the Convertible Senior Notes began accruing in
December 2006 and is payable semi-annually each
December 15th and June 15th.
Concurrently with the issuance of the Convertible Senior Notes,
we entered into hedge transactions with various parties whereby
we have the option to purchase up to 23.6 million shares of
our common stock at a price of $21.15 per share, subject to
adjustment. These options expire on December 15, 2011, in
the case of the 2011 Notes, and December 15, 2013, in the
case of the 2013 Notes, and must be settled in net shares. The
aggregate cost of these hedge transactions was
$119.8 million and has been recorded as a reduction to
stockholders’ equity in accordance with EITF
No. 00-19,
“Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own
Stock.” The estimated fair value of the hedges acquired in
connection with the issuance of the Convertible Senior Notes was
$118.3 million as of December 30, 2006. Subsequent
changes in the fair value of these hedges will not be recognized
as long as the instruments remain classified as equity.
In separate transactions, we also sold warrants to various
parties for the purchase of up to 23.6 million shares of
our common stock at a price of $31.50 per share in a private
placement pursuant to Section 4(2) of the Securities Act.
The warrants expire on various dates from February 2012 through
April 2012 in the case of the 2011 Notes, and February 2014
through April 2014 in the case of the 2013 Notes, and must be
settled in net shares. We received $39.4 million in cash
proceeds from the sale of these warrants, which has been
recorded as a reduction to stockholders’ equity in
accordance with EITF
No. 00-19.
The estimated fair value of the warrants sold in connection with
the issuance of the Convertible Senior Notes was
$42.6 million as of December 30, 2006. Subsequent
changes in the fair value of these warrants will not be
recognized as long as the instruments remain classified as
equity. The warrants will be included in diluted earnings per
share, or EPS, to the extent the impact is not considered
anti-dilutive.
Zero
Coupon Zero Yield Senior Convertible Notes due 2023
In August 2003, we issued $420.0 million principal amount
of our 2023 Notes to two initial purchasers in a private
placement pursuant to Section 4(2) of the Securities Act
for resale to qualified institutional buyers pursuant to SEC
Rule 144A. We received net proceeds of $406.4 million
after transaction fees of $13.6 million that were recorded
in Other long-term assets and are being amortized to interest
expense using the straight-line method over five years, which is
the duration of the first redemption period. The 2023 Notes were
issued by us at par and bear no interest. The 2023 Notes are
convertible into our common stock initially at a conversion
price of $15.65 per share, which would result in an
aggregate of 26.8 million shares issued upon conversion,
subject to adjustment upon the occurrence of specified events.
In connection with the issuance of the Convertible Senior Notes
in December 2006, we repurchased $189.6 million principal
amount of the 2023 Notes, reducing the aggregate number of
shares to be issued upon conversion to 14.7 million.
We may redeem for cash all or any part of the 2023 Notes on or
after August 15, 2008 for 100.00% of the principal amount.
The holders of the 2023 Notes may require us to repurchase for
cash all or any portion of their 2023 Notes on August 15,
2008 for 100.25% of the principal amount, on August 15,
2013 for 100.00% of the principal amount or on August 15,
2018 for 100.00% of the principal amount, by providing to the
paying agent a written repurchase notice. The repurchase notice
must be delivered during the period commencing 30 business days
prior to the relevant repurchase date and ending on the close of
business on the business day prior to the relevant repurchase
date. In addition, we may redeem for cash all or any part of the
2023 Notes on or after August 15, 2008
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for 100.00% of the principal amount, except for those 2023 Notes
that holders have required us to repurchase on August 15,
2008 or on other repurchase dates, as described above.
Each $1,000 of principal of the 2023 Notes will initially be
convertible into 63.8790 shares of our common stock,
subject to adjustment upon the occurrence of specified events.
Holders of the 2023 Notes may convert their 2023 Notes prior to
maturity only if:
In the event of a fundamental change in our corporate ownership
or structure, the holders may require us to repurchase all or
any portion of their 2023 Notes for 100.00% of the principal
amount. Upon a fundamental change in our corporate ownership or
structure, in certain circumstances we may choose to pay the
repurchase price in cash, shares of our common stock or a
combination of cash and shares of our common stock. As of
December 30, 2006, none of the conditions allowing the
holders of the 2023 Notes to convert had been met.
In connection with the issuance of the Convertible Senior Notes
in December 2006, a portion of the proceeds were used to
purchase in the open market 2023 Notes with a principal balance
of $189.6 million for a total purchase price of
$228.5 million. In connection with this purchase, we
incurred expenses of $40.8 million for the early
extinguishment of debt. The loss on early extinguishment of debt
included the call premium on the purchased 2023 Notes and the
write-off of a portion of the unamortized deferred debt issuance
costs.
Concurrently with the issuance of the 2023 Notes, we entered
into hedge transactions with a financial institution whereby we
originally acquired options to purchase up to 26.8 million
shares of our common stock at a price of $15.65 per share.
These options expire on August 15, 2008 and must be settled
in net shares. The cost of the hedge transactions to us was
$134.6 million. In connection with the purchase of a portion of
the 2023 Notes in December 2006, we also sold 12.1 million
of the hedges that were originally purchased in connection with
the 2023 Notes and received proceeds of $55.9 million.
In addition, we sold warrants for our common stock to a
financial institution for the purchase of up to
26.8 million shares of our common stock at a price of
$23.08 per share. The warrants expire on various dates from
February 2008 through May 2008 and must be settled in net
shares. We received $56.4 million in cash proceeds from the
sale of these warrants. In connection with the purchase of a
portion of the 2023 Notes in December 2006, we also purchased
12.1 million of the warrants for our common stock that were
originally issued in connection with the 2023 Notes at a cost of
$10.2 million. The remaining outstanding warrants will be
included in diluted EPS to the extent the impact is not
considered anti-dilutive.
As of December 30, 2006, the estimated fair value of the
remaining hedges acquired in connection with the issuance of the
2023 Notes was $68.3 million and the estimated fair value
of the remaining warrants sold in connection with the issuance
of the 2023 Notes was $12.0 million. Subsequent changes in
the fair value of these hedge and warrant transactions will not
be recognized as long as the instruments remain classified as
equity.
Sale-leaseback
Agreement
In January 2007, we completed the sale of certain land and
buildings in San Jose, California for a sale price of
$46.5 million. Concurrently with the sale, we leased back
from the purchaser approximately 262,500 square feet of
office space, which represents all available space in the
buildings. The lease agreement includes an initial term of two
years, with two options to extend the lease for six months each.
We have committed to lease payments related to this lease of
$2.2 million in 2007, $2.4 million in 2008 and
$0.2 million in 2009.
We received cash payment for the full sale price in January
2007. During the lease term, we intend to construct an
additional building located on our San Jose, California
campus to replace the buildings we sold in this transaction. We
expect to use approximately $22.0 million in cash during
2007 to begin construction on this new building.
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A summary of our contractual obligations as of December 30,
2006 is as follows:
As of December 30, 2006, the primary component of Other
long-term contractual obligations of $278.9 million related
to income tax and acquisition related liabilities.
We expect that current cash and short-term investment balances
and cash flows that are generated from operations will be
sufficient to meet our working capital and other capital
requirements for at least the next 12 months.
As of December 30, 2006, we did not have any significant
off-balance sheet arrangements, as defined in
Item 303(a)(4)(ii) of SEC
Regulation S-K.
In July 2006, the FASB issued FIN No. 48,
“Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109,” which
prescribes a new recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN No. 48 amends
SFAS No. 5, “Accounting for Contingencies,”
to eliminate its applicability to income taxes.
FIN No. 48 is effective for fiscal years beginning
after December 15, 2006. The cumulative effect of applying
FIN No. 48 will be reported as an adjustment to the
opening balance of retained earnings (or other appropriate
components of equity or net assets on our Consolidated Balance
Sheet) for fiscal 2007. We are currently studying the transition
effects of adopting FIN No. 48 and we are not yet able
to assess the impact of FIN No. 48 on our financial
statements and, therefore, we are currently not able to disclose
the expected effect of adoption.
In September 2006, the SEC issued Staff Accounting Bulletin, or
SAB, No. 108, “Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year
Financial Statements,” which provides interpretive guidance
on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year
misstatement. SAB No. 108 is effective for us for the
year ended December 30, 2006. The implementation of
SAB No. 108 did not have a material effect on our
consolidated financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements,” which defines fair value,
establishes guidelines for measuring fair value and expands
disclosures regarding fair value measurements.
SFAS No. 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance
found in various prior accounting pronouncements.
SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007. Earlier adoption is permitted,
provided the company has not yet issued financial statements,
including for interim periods, for that fiscal year. We are
currently evaluating the impact of SFAS No. 157, but
do
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not expect the adoption of SFAS No. 157 to have a
material impact on our consolidated financial position, results
of operations or cash flows.
Item 7A.
Quantitative and Qualitative Disclosures About Market
Risk
The information required by Item 7A is incorporated by
reference from the section of this Annual Report on
Form 10-K
entitled “Disclosures About Market Risk” found in
Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
Item 8.
Financial Statements and Supplementary Data
The financial statements required by Item 8 are submitted
as a separate section of this Annual Report on
Form 10-K.
See Item 15, “Exhibits and Financial Statement
Schedules.”
Item 9.
Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 9A.
Controls and Procedures
We carried out an evaluation required by
Rule 13a-15
of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, under the supervision and with the participation
of our management, including the Chief Executive Officer, or
CEO, and the Chief Financial Officer, or CFO, of the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of December 30, 2006.
The evaluation of our disclosure controls and procedures
included a review of our processes and implementation and the
effect on the information generated for use in this Annual
Report on
Form 10-K.
In the course of this evaluation, we sought to identify any
significant deficiencies or material weaknesses in our
disclosure controls and procedures, to determine whether we had
identified any acts of fraud involving personnel who have a
significant role in our disclosure controls and procedures, and
to confirm that any necessary corrective action, including
process improvements, was taken. This type of evaluation is done
every fiscal quarter so that our conclusions concerning the
effectiveness of these controls can be reported in our periodic
reports filed with the SEC. The overall goals of these
evaluation activities are to monitor our disclosure controls and
procedures and to make modifications as necessary. We intend to
maintain these disclosure controls and procedures, modifying
them as circumstances warrant.
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Based on their evaluation as of December 30, 2006, our CEO
and CFO have concluded that our disclosure controls and
procedures were effective to provide reasonable assurance that
the information required to be disclosed by us in our reports
filed or submitted under the Exchange Act (i) is recorded,
processed, summarized and reported within the time periods
specified in the SEC’s rules and forms and (ii) is
accumulated and communicated to our management, including the
CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure.
There were no changes in our internal control over financial
reporting during the quarter ended December 30, 2006 that
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Our management, including our CEO and CFO, does not expect that
our disclosure controls and procedures or our internal control
over financial reporting will prevent or detect all error and
all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and
instances of fraud, if any, within Cadence have been detected.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rule 13a-15(f)
under the Exchange Act). Our management assessed the
effectiveness of our internal control over financial reporting
as of December 30, 2006. In making this assessment, our
management used the criteria established in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Our
management has concluded that, as of December 30, 2006, our
internal control over financial reporting is effective based on
these criteria. Our independent registered public accounting
firm, KPMG LLP, has issued an audit report on our assessment of
our internal control over financial reporting, which is included
herein.
Item 9B.
Other Information
None.
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PART III.
Item 10.
Directors, Executive Officers and Corporate
Governance
The information required by Item 10 as to directors is
incorporated herein by reference from the sections entitled
“Proposal 1 – Election of Directors”
and “Other Matters – Section 16(a)
Beneficial Ownership Reporting Compliance” in
Cadence’s definitive proxy statement for its 2007 Annual
Meeting of Stockholders.
The executive officers of Cadence are listed at the end of
Part I of this Annual Report on
Form 10-K.
The information required by Item 10 as to Cadence’s
code of ethics is incorporated herein by reference from the
section entitled “Corporate Governance – Code of
Business Conduct” in Cadence’s definitive proxy
statement for its 2007 Annual Meeting of Stockholders.
The information required by Item 10 as to the director
nomination process and Cadence’s Audit Committee is
incorporated by reference from the section entitled
“Cadence’s Board of Directors – Committees
of the Board of Directors” in Cadence’s definitive
proxy statement for its 2007 Annual Meeting of Stockholders.
Item 11.
Executive Compensation
The information required by Item 11 is incorporated herein
by reference from the sections entitled “Cadence’s
Board of Directors – Compensation of Directors,”
“Compensation Committee Report,” “Compensation
Committee Interlocks and Insider Participation,”
“Compensation of Executive Officers” and
“Potential Payments Upon Termination or
Change-in-Control
and Employment Contracts” in Cadence’s definitive
proxy statement for its 2007 Annual Meeting of Stockholders.
Item 12.
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
The information required by Item 12 is incorporated herein
by reference from the sections entitled “Security Ownership
of Certain Beneficial Owners and Management” and
“Equity Compensation Plan Information” in
Cadence’s definitive proxy statement for its 2007 Annual
Meeting of Stockholders.
Item 13.
Certain Relationships and Related Transactions and Director
Independence
The information required by Item 13 is incorporated herein
by reference from the sections entitled “Certain
Transactions” and “Cadence’s Board of
Directors – Director Independence” in
Cadence’s definitive proxy statement for its 2007 Annual
Meeting of Stockholders.
Item 14.
Principal Accountant Fees and Services
The information required by Item 14 is incorporated herein
by reference from the section entitled “Fees Billed to
Cadence by KPMG LLP During Fiscal 2006 and 2005” in
Cadence’s definitive proxy statement for its 2007 Annual
Meeting of Stockholders.
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PART IV.
Item 15.
Exhibits and Financial Statement Schedules
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The Board of Directors and Stockholders
Cadence Design Systems, Inc.:
We have audited the accompanying consolidated balance sheets of
Cadence Design Systems, Inc. and subsidiaries (the Company) as
of December 30, 2006 and December 31, 2005, and the
related consolidated statements of income, stockholders’
equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 30, 2006. In
connection with our audit of the consolidated financial
statements, we also have audited the accompanying financial
statement schedule. These consolidated financial statements and
financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Cadence Design Systems, Inc. and subsidiaries as of
December 30, 2006 and December 31, 2005, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 30, 2006, in
conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth
therein.
As discussed in Note 2 to the consolidated financial
statements, effective January 1, 2006, the Company adopted
the provisions of Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Company’s internal control over
financial reporting as of December 30, 2006, based on the
criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated February 23, 2007 expressed an unqualified opinion on
management’s assessment of, and the effective operation of,
internal control over financial reporting.
/s/ KPMG LLP
Mountain View, California
February 23, 2007
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The Board of Directors and Stockholders
Cadence Design Systems, Inc.:
We have audited management’s assessment, included in the
accompanying “Management’s Report on Internal Control
over Financial Reporting” appearing under Item 9A,
that Cadence Design Systems, Inc. and subsidiaries (the Company)
maintained effective internal control over financial reporting
as of December 30, 2006, based on criteria established in
Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is
to express an opinion on management’s assessment and an
opinion on the effectiveness of the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
consolidated financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Cadence Design
Systems, Inc. and subsidiaries maintained effective internal
control over financial reporting as of December 30, 2006,
is fairly stated, in all material respects, based on criteria
established in Internal Control – Integrated
Framework issued by the COSO. Also, in our opinion, Cadence
Design Systems, Inc. maintained, in all material respects,
effective internal control over financial reporting as of
December 30, 2006, based on the criteria established in
Internal Control – Integrated Framework issued
by the COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Cadence Design System, Inc. and
subsidiaries as of December 30, 2006 and December 31,
2005, and the related consolidated statements of income,
stockholders’ equity and comprehensive income, and cash
flows for each of the years in the three-year period ended
December 30, 2006, and our report dated February 23,
2007 expressed an unqualified opinion on those consolidated
financial statements.
/s/ KPMG LLP
Mountain View, California
February 23, 2007
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CADENCE
DESIGN SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS December 30, 2006 and December 31, 2005 (In thousands, except per share amounts)
ASSETS
The accompanying notes are an integral part of these
consolidated financial statements.
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CADENCE
DESIGN SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS For the three fiscal years ended December 30, 2006 (In thousands, except per share amounts)
The accompanying notes are an integral part of these
consolidated financial statements.
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CADENCE
DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME For the three fiscal years ended December 30, 2006 (In thousands)
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