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Cadence Design Systems 10-K 2010 Documents found in this filing:Table of Contents
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 whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes [ ] 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, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o 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 4, 2009 was $1,539,777,972.
On February 6, 2010, approximately 270,240,892 shares
of the Registrant’s Common Stock, $0.01 par value,
were outstanding.
Portions of the definitive proxy statement for Cadence Design
Systems, Inc.’s 2010 Annual Meeting of Stockholders are
incorporated by reference into Part III hereof.
CADENCE
DESIGN SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 2, 2010 Table of Contents
Table of Contents
PART I.
Item 1.
Business
This Annual Report on
Form 10-K
and the documents incorporated by reference in this Annual
Report on
Form 10-K
contain forward-looking statements. Certain of such statements,
including, but not limited to, 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,” “forecasts,” “intends,”
“may,” “plans,” “projects,”
“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,” “Critical Accounting Estimates,”
“Results of Operations,” “Quantitative and
Qualitative Disclosures About Market Risk” and
“Liquidity and Capital Resources” sections contained
in this Annual Report on
Form 10-K
and the risks discussed in our other Securities Exchange
Commission, or SEC, filings, where important risks and
uncertainties that could cause actual results to differ
materially from those contained in the forward-looking
statements are identified.
We urge you to consider these factors carefully in evaluating
the forward-looking statements contained in this Annual Report
on
Form 10-K.
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 on
Form 10-K
are made only as of the date of this Annual Report on
Form 10-K.
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 engineering and education services throughout the
world to help manage and accelerate electronics product
development processes. Our customers use our products and
services to design and develop complex integrated circuits, or
ICs, and electronics systems.
We were organized as a Delaware corporation in June 1988.
Our headquarters is located at 2655 Seely Avenue, San Jose,
California 95134. Our telephone number is
(408) 943-1234.
We use our website at www.cadence.com as a channel for
distribution of important information about our company. News
releases and financial information regarding our company are
posted on and accessible at our investor relations webpage on
our website at www.cadence.com. Our website permits
investors to subscribe to
e-mail
notification alerts when we post new material information on our
website. We also make available on our investor relations
webpage, free of charge, copies of our SEC filings and
submissions as soon as reasonably 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 webpage
on our website at www.cadence.com. Stockholders may also
request copies of these documents by writing to our Corporate
Secretary at the address above. Information on our website is
not incorporated by reference in this Annual Report on
Form 10-K
unless expressly noted.
During 2008 and 2009, the semiconductor industry’s growth
declined as the overall macroeconomic environment deteriorated.
Electronics companies faced financial challenges in 2008 and
2009 because consumer spending on electronics was adversely
affected by increased unemployment, and corporate spending was
restrained by the tightened credit market and the economic
downturn. During 2009, semiconductor unit volumes decreased and
average selling prices declined. These factors, combined with
the macroeconomic environment, affect how electronics companies
address traditional challenges of cost, quality, innovation and
time-to-market
associated with highly complex electronics systems and IC
product development.
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Although estimates project moderate growth for the semiconductor
industry in 2010, we believe that increased spending on EDA and
other tools may grow more slowly than the semiconductor industry
as a whole in 2010.
Electronics companies demand ever higher levels of productivity
from their design teams, better predictability in their
development schedules and higher quality products in order to be
competitive and profitable in the price-conscious markets they
serve. Electronics companies are responding to demand for
increased functionality and miniaturization by combining
subsystems — such as radio frequency, or RF, wireless
communication, video signal processing and microprocessors
— onto a single silicon chip, creating a
system-on-chip,
or SoC, or multiple chips into 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.
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 for computing and networking equipment.
Higher power devices generate more heat, which further increases
both system cost as well as operating expenses for cooling.
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 45 nanometers, or 45/1,000,000ths of a millimeter.
Because of the electrical characteristics of the materials used
to construct the transistors, which are essentially microscopic
switches, chips continue to consume power even when transistors
in the device are switched off. To overcome these and other
power-related issues, specific “low power” design
techniques must be developed and are most effective if they are
integrated throughout the design flow, from logic design and
verification through physical implementation.
Variability in the processes and materials used to manufacture
silicon chips have 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 a 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
most often involve two or more separate companies, because
multiple companies may participate in the design of the chip and
in the manufacturing and assembly of the final device.
These trends represent significant new challenges for
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. 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 productivity,
predictability, reliability and profitability of the design
process.
Our products are engineered to improve our customers’
design productivity and design quality by providing a
comprehensive set of EDA tools. 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”
for additional discussion of our license types.
We combine our products and technologies into
“platforms” for four major design activities:
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The four
Cadence®
design platforms are branded as
Incisive®
functional verification,
Encounter®
digital IC design,
Virtuoso®
custom design and
Allegro®
system interconnect design. In addition, we augment these
platform product offerings with a set of design for
manufacturing, or DFM, products that service both the digital
and custom IC design flows. We updated all of our foundation
technologies between December 2008 and December 2009.
The products and technologies that comprise our platforms are
combined with services, ready-to-use packages of technologies
assembled from our broad portfolio and other associated
components that provide comprehensive solutions for low power,
mixed signal, enterprise verification and advanced node designs.
These solutions and their constituent elements are marketed to
users who specialize in areas such as system design and
verification, functional verification, logic design, digital
implementation, custom IC design and printed circuit board, or
PCB, and IC package / SiP design.
Our Product revenue was $400.8 million, or 47% of our total
revenue, during fiscal 2009, $516.6 million, or 50% of our
total revenue, during fiscal 2008, and $1,104.0 million, or
68% of our total revenue, during fiscal 2007. For additional
description of our Product revenue, including the current year
decrease, see the discussion under the heading “Results of
Operations” under Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
Our Functional Verification offerings are comprised of two major
categories of offerings: Logic Verification and System Design
and Verification.
Logic Verification
Our Logic Verification offering consists of the property
checking and simulation and environment capabilities within the
Incisive functional verification platform. This offering enables
our customers to employ enterprise-level verification process
automation, including verification planning, process tracking
and management that allow the coordination of verification
activities across multiple teams and various specialists.
Our Logic Verification offering includes:
Our Logic Verification offering also provides methodology-driven
and multi-product flows that allow customers to incrementally
adopt certain aspects of this offering and to address specific
challenges. These flows include:
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System Design and Verification
Our System Design and Verification consists of the
acceleration/emulation and system-level design capabilities and
includes design and verification hardware and software,
verification IP services and methodologies that provide
customers with system-wide planning and management, design and
verification IP reuse automation and system verification. In
addition, this offering provides system power exploration,
analysis and optimization.
Our System Design and Verification offering targets IP and SoC
design and verification planners and architects,
transaction-level IP developers and SoC and
system-level IP verification and validation engineers.
Our System Design and Verification offering includes:
We also offer customers consulting services for verification
acceleration and system emulation. Our QuickCycles program
allows customers access to our Palladium and Xtreme simulation
acceleration and emulation products, either on their secure
internet site or remotely over a high-speed, secure network
connection.
Digital IC Design and Implementation
Our Digital IC offerings include two major categories of
offerings: Logic Design and Implementation.
Logic Design
Our Logic Design offering is comprised of equivalency checking,
synthesis and test capabilities within the Encounter digital IC
design platform and property checking, simulation, and
environment capabilities within the Incisive functional
verification platform. This offering provides planning, design,
verification and test technologies and services to customers
across all digital design end markets. Logic Design capabilities
are aggregated into solutions that address our customers’
needs in areas such as power efficiency and advanced process
nodes. Our Logic Design offering targets engineers who are
tasked with digital chip development planning, functional
design, verification, logical implementation and
design-for-test,
or DFT.
Our Logic Design offering includes:
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Implementation
Our Implementation offering is comprised of a range of the
Encounter digital IC design platform capabilities. The
Implementation offering includes timing analysis, signal
integrity and place and route capabilities within the Encounter
digital IC design platform. This offering enables customers to
create a physical representation of logic models, analyze
electrical and physical characteristics of a design and prepare
a design for manufacturing.
Our Implementation offering includes:
Our Encounter L, XL and GXL offerings also provide designers
with the ability to chose the appropriate products that match
their needs, ranging from smaller designs on mature technologies
to the largest designs on the most advanced process nodes.
Our Custom IC Design and Verification offering is comprised of a
range of Virtuoso custom design platform capabilities and
certain DFM products capabilities. The Custom IC Design and
Verification offering includes the environment, IC layout and
simulation capabilities within the Virtuoso custom design
platform. This offering provides designers with an integrated
flow for design creation, validation and implementation of
silicon-accurate analog, custom digital, mixed-signal, memory
and RF designs, while ensuring that these designs are ready for
manufacturing through integrated DFM capabilities.
Our Virtuoso Custom IC Design and Verification offering includes:
Our Virtuoso L, XL and GXL offerings also provide designers with
the ability to choose the appropriate products that match their
needs, ranging from simple entry-level component design to the
most complex DFM-aware SoC designs.
Our System Interconnect Design offerings include the following
capabilities within the Allegro system interconnect design
platform: PCB, IC package, SiP, design management and
collaboration. Certain offerings also include the simulation
capability within the Virtuoso custom design platform. These
offerings enable engineers who
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are responsible for the capture, layout and analysis of advanced
PCB and IC packages to design high-performance electronic
products across the domains of IC, IC package and PCB, to
increase functional density and to manage design complexity
while reducing cost and time to market.
Our System Interconnect Design offering includes:
Our System Interconnect Design offerings are available as a set
of scalable capability-tiered products, including L, XL and GXL,
depending on the requirements of our customers. For the
mainstream PCB customers, where individual or small team
productivity is a focus, we provide the
OrCAD®
family of offerings that is marketed worldwide through a network
of resellers.
With the advent of silicon manufacturing technologies at
geometries of 65 nanometer and below, our customers are
increasingly concerned about manufacturability of their designs.
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. Our strategy is to
integrate DFM awareness into our core design platforms of
Encounter Digital IC and Virtuoso Custom IC. Some of our DFM
capabilities include:
Our primary focus in DFM is to address manufacturing effects as
early in the product development process as possible. As a
result, we are enhancing the DFM awareness of our core Encounter
Digital IC and Virtuoso Custom IC product offerings. Where
upstream integration is not possible, we offer certain
stand-alone DFM products.
In addition to our products, many customers use
internally-developed design tools or design tools provided by
other EDA companies, as well as IP available from multiple
suppliers. We support the use of third-party design products and
IP through vehicles such as our
Connections®
program and through our participation in the OpenAccess
Coalition, the Power Forward Initiative and other programs and
initiatives. We also contribute to the development and
deployment of EDA industry standards.
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Customer service and support is critical to the adoption and
successful use of our products. We provide our customers with
technical support to facilitate their use of our software and
hardware solutions.
We offer maintenance to our customers as an integral,
non-cancelable component of our subscription license agreements,
as a component of our term license agreements subject to annual
renewal, or as a separate agreement subject to annual renewal
for our perpetual license customers.
Our Maintenance revenue was $345.3 million, or 40% of our
total revenue, during fiscal 2009, $388.5 million, or 37%
of our total revenue, during fiscal 2008, and
$385.2 million, or 24% of our total revenue, during fiscal
2007. For additional description of our Maintenance revenue, see
the discussion under the heading “Results of
Operations” under Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
We offer a number of fee-based services, including engineering
and education services. These services may be sold separately or
sold and performed in conjunction with the sale, lease or
license of our products.
Our Services revenue was $106.5 million, or 13% of our
total revenue, during fiscal 2009, $133.5 million, or 13%
of our total revenue, during fiscal 2008, and
$125.8 million, or 8% of our total revenue, during fiscal
2007. For additional description of our Services revenue, see
the discussion under the heading “Results of
Operations” under Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
We offer engineering services to aid our customers with the
design of complex ICs and the implementation of key design
capabilities, including low power, IC packaging and board
design, mixed-signal design, functional verification, digital
implementation, analog/mixed-signal and system-level. The
customers for these services primarily consist of semiconductor
and systems companies developing products for the consumer,
communications, military and aerospace and computing markets.
These ICs range from digital SoCs, analog and RF designs to
complex mixed-signal ICs.
We offer engineering capabilities to assist customers from
product concept to volume manufacturing. We leverage our
experience and knowledge of design techniques, our products,
leading practices and different design environments to improve
the productivity of our own and our customers’ engineering
teams. Depending on the customers’ projects and needs, we
work with customers using outsourcing, consultative and
collaborative offerings. Our Virtual Computer-Aided Design
offering enables our engineering teams at one or more of our
locations to collaborate with our customers’ teams located
elsewhere in the world during the course of their design and
engineering projects through a secure network infrastructure. 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 efficiently deliver our
services and allow our customers to reduce the design complexity
and time to market when developing complex SoCs.
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 technologies. This enables us to target and
accelerate the development of new software technology and
products to satisfy current and future design requirements.
Our education services offerings can be customized and include
training programs that are conducted via the internet or in a
classroom setting. The content of these offerings ranges from
the latest IC design techniques to methodologies for using the
most recent features of our EDA products. The primary focus of
education services is to accelerate our customers’ path to
productivity in the use of our products.
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We generally market our products and provide maintenance and
services to existing and prospective customers through a direct
sales force consisting of sales people and applications
engineers. 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, 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 solutions. We also use traditional
marketing approaches to promote our products and services,
including advertising, direct mail, trade shows, public
relations and the internet. 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 also use a third-party distributor to sell
our products and services to certain customers in Japan.
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 to use 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 rights to use 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.
We offer a delivery mechanism for term and subscription licenses
called eDA Cards. eDA cards have an overall “face”
value amount that customers draw down against as they select
specific products that are priced based on the particular
duration of use the customer desires. The selection and
licensing of the specific products is accomplished through an
automated on-line system. The card expires when all of the face
value is consumed, or on the pre-determined expiration date,
whichever comes first. There are two types of eDA Cards. An eDA
Gold Card is a term license that enables a customer to access a
predetermined list of existing products. An eDA Platinum Card is
a subscription license that enables a customer to access
existing and new technology.
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 backlog as of January 2, 2010 was approximately
$1.6 billion, as compared to approximately
$1.8 billion as of January 3, 2009. Backlog consists
of revenue to be recognized in fiscal periods after
January 2, 2010 from a variety of license types, which
generally include, but are not limited to:
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 occasionally
reschedule the required completion dates of engineering services
contracts, deferring revenue recognition under those contracts
beyond the original anticipated completion date. Changes in
customer license types or payment terms also can
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impact the timing of revenue recognition. We currently expect
approximately 80% of our fiscal 2010 revenue to come from our
backlog as of January 2, 2010.
Historically, revenue has 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
following year. However, our license mix has changed such that a
substantial proportion of licenses require ratable revenue
recognition. Although we still expect the first quarter to
remain our lowest quarter for revenue within a fiscal year, we
do not expect the decrease in revenue from the fourth quarter of
one year to the first quarter of the following year to be as
significant as it has been historically.
Our investment in research and development was
$354.7 million during fiscal 2009, $457.9 million
during fiscal 2008 and $494.0 million during fiscal 2007.
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. The
electronics industry combines rapid innovation with rapidly
increasing design and manufacturing complexity, so 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 develop, acquire or operate with new
products from third parties, and to develop solutions that meet
increasingly demanding productivity, quality, predictability and
cost requirements on a schedule that keeps pace with our
customers’ technical developments and industry standards.
We perform final assembly and testing of our hardware
verification, acceleration and emulation products at our
headquarters in San Jose, California. Subcontractors
manufacture all major subassemblies, including all individual
PCBs and custom ICs, and supply them for qualification and
testing before their incorporation into the assembled product.
Software and documentation are primarily distributed to
customers by secure electronic delivery or on DVD.
Our success depends, in part, upon our proprietary technology.
We generally rely on patents, copyrights, trademarks and 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 third party software and
other intellectual property in the future. As part of performing
engineering services for customers, our engineering services
business uses certain software and other intellectual property
licensed from third parties, including that of our competitors.
We compete in the EDA industry 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, level of integration
or compatibility with other tools, price, payment terms and
maintenance offerings.
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Our maintenance business flows directly from our product
business. The competitive issues associated with our maintenance
business are substantially similar to 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 engineering services business
as described herein differ from those of the products and
maintenance businesses. While we do compete with other EDA
companies in the engineering services business, our principal
competitors are independent engineering 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, including us, because they
wish to promote their own internal design departments. We
compete with these companies by focusing on the design of
complex analog, digital and mixed-signal ICs and SoCs. It is our
strategy to use engineering services as a differentiator to
further promote our products and maintenance businesses.
We have 56 sales offices, design centers and research and
development facilities, approximately half of which are located
outside of the United States. 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”
under Item 1A, “Risk Factors” and Note 21 to
our Consolidated Financial Statements.
As of January 2, 2010, we employed approximately 4,400
individuals, with approximately 1,800 in sales, services,
marketing, support and manufacturing activities, approximately
2,000 in product research and development and approximately 600
in management, administration and finance. None of our employees
is represented by a labor union and we have experienced no work
stoppages. We believe that our employee relations are good.
The following table provides information regarding our executive
officers as of February 26, 2010:
Our executive officers are appointed by the Board of Directors
and serve at the discretion of the Board of Directors.
LIP-BU TAN has served as President and Chief Executive Officer
of Cadence since January 2009. Mr. Tan has been a member of
the Cadence Board of Directors since February 2004 and serves as
a member of the Technology Committee of the Cadence Board of
Directors. In 1987, Mr. Tan founded Walden International,
an international venture capital firm, and since that time has
served as its Chairman. Mr. Tan also serves as a director
of Flextronics International Ltd., Semiconductor Manufacturing
International Corporation and SINA Corporation.
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JOHN J. BRUGGEMAN II has served as Senior Vice President and
Chief Marketing Officer of Cadence since August 2009. Before
joining Cadence, from February 2004 to July 2009,
Mr. Bruggeman served as Chief Marketing Officer at Wind
River Systems, Inc., an embedded software company that was
acquired by Intel Corporation in July 2009. From May 2002 to
January 2004, Mr. Bruggeman was Vice President of Marketing
at Mercury Interactive Corporation, a business technology
optimization company.
THOMAS A. COOLEY has served as Senior Vice President, Worldwide
Field Operations of Cadence since October 2008. From March 1995
to October 2008, Mr. Cooley held several sales related
positions at Cadence, most recently as Corporate Vice President
of Sales for North America, Europe, Middle East, Africa, or
EMEA, and India.
JAMES J. COWIE has served as Senior Vice President and General
Counsel of Cadence since April 2008 and Secretary of Cadence
since May 2008. From August 2000 to March 2008, Mr. Cowie
held several positions at Cadence, most recently as Corporate
Vice President — Business Development, Associate
General Counsel and Assistant Secretary.
CHI-PING HSU has served as Senior Vice President, Research and
Development of Cadence since November 2008. From April 2003 to
November 2008, Mr. Hsu held several positions at Cadence,
most recently as Corporate Vice President, IC Digital and Power
Forward. Before joining Cadence, Mr. Hsu served as
President and Chief Operating Officer of Get2Chip Inc., a
supplier of high-performance
system-on-chip
synthesis that was acquired by Cadence in April 2003.
CHARLIE HUANG has served as Senior Vice President and Chief
Strategy Officer of Cadence since January 2009. From April 2007
to January 2009, Mr. Huang served as Senior Vice
President — Business Development of Cadence.
Mr. Huang was General Partner at Telos Venture Partners, a
Cadence related venture capital firm, from 2004 to 2005. From
2001 to March 2007, Mr. Huang held several positions at
Cadence related to business development. Before joining Cadence,
Mr. Huang co-founded and was Chief Executive Officer of
CadMOS Design Technology, Inc., an EDA company that was acquired
by Cadence in 2001.
NIMISH H. MODI has served as Senior Vice President, Research and
Development of Cadence since November 2008. From August 2006 to
November 2008, Mr. Modi served as Corporate Vice President,
Front-End Design. Before joining Cadence, from May 1988 to
August 2006, Mr. Modi held several positions at Intel
Corporation, a semiconductor company, most recently as Vice
President in the Enterprise Platforms Group.
KEVIN S. PALATNIK has served as Senior Vice President and Chief
Financial Officer of Cadence since April 2008. From January 2002
to April 2008, Mr. Palatnik served in a number of positions
at Cadence, including as Corporate Vice President, Technical
Field Operations and Corporate Vice President, Field Operations
Finance, and most recently as Senior Vice President and
Corporate Controller. Before joining Cadence, Mr. Palatnik
held several engineering and senior financial positions at
International Business Machines Corporation, a computer hardware
and software company.
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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 experienced
significant challenges in 2008 and 2009. The IC and electronic
systems industries have also experienced significant downturns
in connection with, or in anticipation of, maturing product
cycles of both these industries’ and their customers’
products. As in the past, the economic downturn in 2008 and 2009
was characterized by diminished product demand, production
overcapacity, high inventory levels and accelerated erosion of
average selling prices. Although estimates project moderate
growth for the semiconductor industry in 2010, we believe that
increased spending on EDA and other tools may grow more slowly
than the semiconductor industry as a whole in 2010. The economic
downturn in the industries we serve has contributed to the
reduction in our revenue in the past and could continue to
adversely affect our business, operating results and financial
condition.
We have experienced, and may continue to experience, varied
operating results. In particular, we incurred net losses during
fiscal 2009 and fiscal 2008, and we expect to incur a net loss
during fiscal 2010. 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 certain
orders for our software products.
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, changes in existing contractual
arrangements with customers and the mix of license types (i.e.,
perpetual, term or subscription) for existing customers. These
changes could have the effect of accelerating or delaying the
recognition of revenue from the timing of recognition under the
original contract. Our license mix has changed such that a
substantial proportion of licenses require ratable revenue
recognition, and we expect the change in license mix, combined
with the slow growth in spending by our customers in the
semiconductor sector, may make it difficult for us to increase
our revenue.
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. In addition,
revenue levels are harder to forecast in a difficult economic
environment. A shortfall in revenue could lead to operating
results below expectations because we may not be able to quickly
reduce these expenses in response to short-term business changes.
Generally, the majority of our contracts are executed in the
final few weeks of a fiscal quarter. This makes it difficult to
estimate with accuracy how much business will be executed before
the end of each fiscal quarter. Due to
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the volume or complexity of transactions that we review at the
very end of the quarter, or due to operational matters regarding
particular agreements, we may not finish processing or ship
products under some contracts that have been signed during that
fiscal quarter, which means that the associated revenue cannot
be recognized in that particular period.
The methods, estimates and judgments that we use in applying our
accounting policies have a significant impact on our results of
operations (see “Critical Accounting Estimates” under
Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”). Such
methods, estimates and judgments are, by their nature, subject
to substantial risks, uncertainties and assumptions, and factors
may arise over time that lead us to change our methods,
estimates and judgments. Changes in those methods, estimates and
judgments could significantly affect our results of operations.
You should not view our historical results of operations as
reliable indicators of our future performance. If our revenue,
operating results or business outlook for future periods fall
short of the levels expected by securities analysts or
investors, the trading price of our common stock could decline.
As a result of the challenging economic environment, our
customers, who are primarily concentrated in the semiconductor
sector, have experienced and may continue to experience adverse
changes in their business and, as a result, may delay or default
on their payment obligations, file for bankruptcy or modify or
cancel plans to license our products, and our suppliers may
significantly and quickly increase their prices or reduce their
output. If our customers are not successful in generating
sufficient cash or are precluded from securing financing, they
may not be able to pay, or may delay payment of, accounts
receivable that are owed to us, although these obligations are
generally not cancelable. Our customers’ inability to
fulfill payment obligations may adversely affect our revenue and
cash flow. Additionally, our customers may seek to renegotiate
pre-existing contractual commitments. Payment defaults by our
customers or significant reductions in existing contractual
commitments could have a material adverse effect on our
financial condition and operating results. Because of the high
volatility driving material fluctuations in asset prices, the
capital and credit markets have contracted, and if we were to
seek funding from the capital or credit markets in response to
any material level of customer defaults, we may not be able to
secure funding on terms acceptable to us or at all, which, may
have a material negative impact on our business.
The industries in which we compete experience rapid technology
developments, changes in industry standards and customer
requirements and frequent new product introductions and
improvements. Currently, the industries we serve are
experiencing the following trends:
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If we are unable to respond quickly and successfully to these
trends, 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.
The market price of our common stock has experienced significant
fluctuations and may fluctuate or decline in the future, and as
a result you could lose the value of your investment. The market
price of our common stock may be affected by a number of
factors, including, but not limited to:
In addition, equity markets in general, and technology
companies’ equities in particular, have experienced extreme
price and volume fluctuations. Such price and volume
fluctuations may adversely affect the market price of our common
stock for reasons unrelated to our business or operating results.
We are currently, and in the future may be, involved in various
disputes and litigation that arise in the ordinary course of
business. These include disputes and lawsuits related to
intellectual property, mergers and acquisitions, licensing,
contracts, distribution arrangements and employee relations
matters. We are also currently engaged in a consolidated
securities class action lawsuit and shareholder derivative
lawsuits. For information regarding the litigation matters in
which we are currently engaged, please refer to the discussion
under Item 1, “Legal Proceedings.” We cannot
provide any assurances that the final outcome of these lawsuits
or any other proceedings that may arise in the future will not
have a material adverse effect on our business, operating
results, financial condition or cash flows. Litigation can be
time-consuming and expensive and could divert management’s
time and attention from our business, which could have a
material adverse effect on our revenues and operating results.
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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. In some cases, maintenance is 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 operating results. Our customers, many of
which are large semiconductor companies, often have significant
bargaining power in negotiations with us. Mergers or
acquisitions of our customers can reduce the total level of
purchases of our software and services, and in some cases,
increase customers’ bargaining power in negotiations with
their suppliers, including us.
Our business depends upon the efforts and abilities of our
executive officers and other key employees, including key
development personnel. From time to time, there may be changes
in our management team resulting from the hiring and departure
of executive officers, and as a result, we may experience
disruption to our business that may harm our operating results
and our relationships with our employees, customers and
suppliers may be adversely affected. Competition for highly
skilled executive officers and 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. 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, and pay significant base salaries and cash
bonuses, which could harm our operating results. The high cost
of training new employees, not fully utilizing these employees,
or losing trained employees to competing employers could also
reduce our operating margins and harm our business or operating
results.
In addition, the NASDAQ Marketplace Rules require stockholder
approval for new equity compensation plans and significant
amendments to existing equity compensation 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.
During fiscal 2008 and fiscal 2009, we initiated restructuring
plans in an effort to decrease costs by reducing our workforce
and by consolidating facilities. We may not be able to
successfully complete and realize the expected benefits of our
restructuring plans, such as improvements in operating margins
and cash flows, in the restructuring periods contemplated. The
restructuring plans have involved and may continue to involve
higher costs or a longer timetable than we currently anticipate
or may fail to improve our operating results as we anticipate.
Our inability to realize these benefits may result in an
inefficient business structure that could negatively impact our
results of operations. Our restructuring plans have caused us
and will cause us to incur substantial costs related to
severance and other employee-related costs. Our restructuring
plans may also subject us to litigation risks and expenses. In
addition, our restructuring plans may have other consequences,
such as attrition beyond our planned reduction in workforce, a
negative impact on employee morale or our ability to attract
highly skilled employees and our competitors may seek to gain a
competitive advantage over us. The restructuring plans could
also cause our
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remaining employees to leave or result in reduced productivity
by our employees, and, in turn, this may affect our revenue and
other operating results in the future.
Developing EDA technology and integrating acquired technology
into existing platforms is expensive, and these investments
often require a long time to generate returns. Our strategy
involves significant investments in 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 and improve our competitive
position. However, we cannot predict that we will receive
significant, if any, revenue from these investments.
The EDA industry and the commercial electronics engineering
services industry 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 engineering services and offer
better strategic concepts, technical solutions, prices and
response time, or a combination of these factors, than those of
our competitors and the internal design departments of
electronics manufacturers. We may not be able to compete
successfully in these industries. Factors that could affect our
ability to succeed include:
We compete in the EDA products market with Synopsys, Inc., Magma
Design Automation, Inc. and Mentor Graphics Corporation. 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 purchase engineering 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,
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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 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 consummate any particular transaction, but may
nonetheless incur significant costs, or if a transaction is
consummated, 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
when we acquire another business, it could seriously harm our
business, operating results or financial condition:
In a number of our previously completed acquisitions, we have
agreed to make future payments, either in the form of employee
bonuses or contingent purchase price payments, or earnouts,
based on the performance of the acquired businesses or the
employees who joined us with the acquired businesses. We may use
earnouts for acquisitions in the future. The performance goals
pursuant to which these future payments may be made generally
relate to achievement by the acquired business or the employees
who joined us with the acquired business of certain specified
orders, revenue, run rate, 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
employee bonuses or contingent purchase price payments vary with
each acquisition. While we expect to derive value from an
acquisition in excess of such contingent payment obligations,
our strategy may change and we may be required to make certain
contingent payments without deriving the anticipated value.
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 the 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. Patents may not be issued on any of our
pending applications and our issued patents may not be
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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. The protection of our
intellectual property may require the expenditure of significant
financial and managerial resources. Moreover, the steps we take
to protect our intellectual property may not adequately protect
our rights or prevent third parties from infringing or
misappropriating our proprietary rights.
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 engineering services business holds
licenses to certain software and other intellectual property
owned by third parties, including that of our competitors. Our
failure to obtain software or other intellectual property
licenses or other intellectual property rights that is necessary
or helpful for our business 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.
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 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 operating results 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.
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Generally, we have a long sales cycle that can extend up to six
months or longer. 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.
In addition, sales of our products and services have been and
may in the future 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.
The majority of our contracts are executed in the final few
weeks of a fiscal quarter. This makes it difficult to determine
with accuracy how much business will be executed in each fiscal
quarter. Also, because of the timing of large orders and our
customers’ buying patterns, we may not learn of orders
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, which can cause significant fluctuations
in the trading price of our common stock.
United States generally accepted accounting principles are
subject to interpretation by the Financial Accounting Standards
Board, or FASB, the American Institute of Certified Public
Accountants, the SEC and various bodies formed to promulgate and
interpret appropriate accounting principles. A change in these
principles or interpretations could have a significant effect on
our reported financial results, and could affect the reporting
of transactions completed before the announcement of a change.
In addition, the SEC has announced a multi-year plan that could
ultimately lead to the use of International Financial Reporting
Standards by United States issuers in their SEC filings. Any
such change could have a significant effect on our reported
financial results.
We have significant operations outside the United States. Our
revenue from international operations as a percentage of total
revenue was approximately 57% during fiscal 2009, 58% during
fiscal 2008 and 54% during fiscal 2007. 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, primarily the Japanese
yen. 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 where we conduct
business could seriously harm our business, operating results or
financial condition. For example, when a foreign currency
declines in value relative to the United States dollar, it takes
more of the foreign currency to purchase the same amount of
United States dollars than before the change. If we price our
products and services in the foreign currency, we receive fewer
United States dollars than we did before the change. If we price
our products and services in United States dollars, the decrease
in value of the local currency results 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. On the other hand,
when a foreign currency increases in value relative to the
United States dollar, it takes more United States
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dollars to purchase the same amount of the foreign currency. As
we use the foreign currency to pay for payroll costs and other
operating expenses in our international operations, this results
in an increase in operating expenses.
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 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.
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The IRS and other tax authorities regularly examine our income
tax returns, and the IRS is currently examining our federal
income tax returns for the tax years 2006 through 2008. In July
2006, the IRS completed its field examination of our federal
income tax returns for the tax years 2000 through 2002 and
issued a Revenue Agent’s Report, or RAR, in which the IRS
proposed 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 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 with foreign subsidiaries and to our deductions for
foreign trade income. We have filed a timely protest with the
IRS and are seeking resolution of the issues through the Appeals
Office of the IRS, or the Appeals Office.
In May 2009, the IRS completed its field examination of our
federal income tax returns for the tax years 2003 through 2005
and issued a RAR, in which the IRS proposed to assess an
aggregate deficiency for the three-year period of approximately
$94.1 million. In August 2009, the IRS revised the proposed
aggregate tax deficiency for the three-year period to
approximately $60.7 million. The IRS is contesting our
transfer pricing arrangements with our foreign subsidiaries and
deductions for foreign trade income. The IRS made similar claims
against our transfer pricing arrangements and deductions for
foreign trade income in prior examinations and may make similar
claims in its examinations of other tax years. We have filed a
timely protest with the IRS and will seek resolution of the
issues through the Appeals Office.
We believe that the proposed IRS adjustments are inconsistent
with applicable tax laws and we are vigorously challenging these
proposed adjustments. 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 and adjusted quarterly by
the IRS and have been between 4% and 10% since 2001.
The calculation of our provision (benefit) for income taxes
requires us to use significant judgment and involves dealing
with uncertainties in the application of complex tax laws and
regulations. In determining the adequacy of our provision
(benefit) for income taxes, we regularly assess the potential
settlement outcomes resulting from income tax examinations.
However, the final outcome of tax examinations, including the
total amount payable or the timing of any such payments upon
resolution of these issues, cannot be estimated with certainty.
In addition, we cannot be certain that such amount will not be
materially different from the amount that 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 estimating
our annual income or loss, the 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 results of tax audits. To forecast
our global tax rate, pre-tax profits and losses by jurisdiction
are estimated and tax expense by jurisdiction is calculated
based on such estimates. Forecasts of annual income or loss that
are near break-even will cause our estimated annual effective
tax rate to be particularly sensitive to any changes to our
estimates of tax expense. If our estimate of the pre-tax profit
and losses, the mix of our profits and losses, our ability to
use deferred tax assets, the results of tax audits, 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.
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We must comply with regulations of the United States 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 that lose employees to 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, a region known to experience seismic activity. If
significant seismic 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.
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Risks
Related to Our Securities and Indebtedness
We have a substantial level of debt. As of January 2, 2010,
we had outstanding indebtedness with a principal balance of
$500.2 million as follows:
The level of our current or future indebtedness, among other
things, could:
While we are not currently a party to any loans that would
prohibit us from making payment on our outstanding convertible
notes, we are not prevented by the terms of the convertible
notes from entering into other loans that could prohibit such
payments. 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 any other indebtedness as well.
We have in the past and may in the future attempt to access the
capital or credit markets in order to obtain funding to meet
particular capital or liquidity needs. The capital and credit
markets have contracted and, when compounded by the difficult
economic environment and our lower levels of business, we may
not be able to secure additional funding on terms acceptable to
us or at all, which may adversely impact our business and
operating results.
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 and potentially hindering our ability to raise
capital through the issuance of our securities and will increase
the costs of such registration to us.
On the first day of fiscal 2009, we retrospectively adopted new
accounting principles as required by the “Debt with
Conversion and Other Options” subtopic of the FASB
Accounting Standards Codification, and adjusted all periods for
which the Convertible Senior Notes were outstanding before the
date of adoption. This adoption had an adverse effect on our
operating results and financial condition, particularly with
respect to interest expense ratios
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commonly referred to by lenders, and could potentially hinder
our ability to raise capital through the issuance of debt or
equity securities.
The terms of the Convertible Senior Notes permit the holders to
convert the Convertible Senior Notes into shares of our common
stock. 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 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.
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 before 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:
From November 2, 2011, in the case of the 2011 Notes, and
November 1, 2013, in the case of the 2013 Notes, and 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 January 2,
2010, none of the conditions allowing holders of the Convertible
Senior Notes to convert had been met.
Although the conversion price of the Convertible Senior Notes is
currently $21.15 per share, we entered into hedge and separate
warrant transactions concurrent with the issuance of the
Convertible Senior Notes 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 Convertible Senior Notes, we may be
required to repurchase 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 Convertible Senior Notes.
The repurchase price for the Convertible Senior Notes in the
event of a fundamental change must be paid solely in cash. This
repayment obligation may have the effect of discouraging,
delaying or preventing a takeover of our company that may
otherwise be beneficial to investors.
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We entered into hedge transactions with various financial
institutions, at the time of issuance of the Convertible Senior
Notes, with the objective of reducing the potential dilutive
effect of issuing our common stock upon conversion of the
Convertible Senior Notes. We also entered into separate warrant
transactions with the same financial institutions. In connection
with our hedge and warrant transactions, these 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 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. 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. If the financial institutions
with which we entered into these hedge transactions were to fail
or default, our ability to settle on these transactions could be
harmed or delayed.
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 allow our Board of Directors to resist,
delay or prevent 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.
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Item 2.
Properties
We own land and buildings at our headquarters located in
San Jose, California. We also own buildings in India. As of
January 2, 2010, the total square footage of our owned
buildings was approximately 950,000.
In January 2007, we completed the sale of certain of our land
and buildings in San Jose, California. Concurrently with
the sale, we leased back from the purchaser all available space
in the buildings for two years. The lease term ended in January
2009, and we have vacated the leased buildings.
We lease additional facilities in the United States and various
other countries. We sublease certain of these facilities where
space is not fully utilized or has been involved in
restructuring plans.
We believe that these facilities, including our newly
constructed building located at our 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 that arise in the ordinary course of business. These
include disputes and lawsuits related to intellectual property,
mergers and acquisitions, licensing, contracts, distribution
arrangements and employee relations matters. At least quarterly,
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. Legal proceedings are subject to
uncertainties, and the outcomes are difficult to predict.
Because of such uncertainties, accruals are based on our
judgments using 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.
During fiscal 2008, three complaints were filed in the United
States District Court for the Northern District of California,
all alleging violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and
Rule 10b-5
promulgated thereunder, on behalf of a purported class of
purchasers of Cadence’s common stock. We intend to continue
to vigorously defend these complaints and any other securities
lawsuits that may be filed. See Note 15 to our Consolidated
Financial Statements for additional details and the status of
these complaints.
Also during fiscal 2008, two derivative complaints were filed in
Santa Clara County Superior Court. These complaints purport
to bring suit derivatively, on behalf of Cadence, against
certain of Cadence’s current and former directors for
alleged breach of fiduciary duty, abuse of control, gross
mismanagement, waste of corporate assets and unjust enrichment.
We are analyzing these derivative complaints and will respond to
them appropriately. The parties to these cases have agreed to a
temporary stay of the proceedings. See Note 15 to our
Consolidated Financial Statements for additional details and the
status of these complaints.
In light of the preliminary status of these lawsuits, we cannot
predict the outcome of these matters. While the outcome of these
litigation matters cannot be predicted with any certainty, we do
not believe that the outcome of any current matters will have a
material adverse effect on our consolidated financial position,
liquidity or results of operations.
Item 4.
Submission of Matters to a Vote of Security
Holders
None.
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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 6, 2010, we had approximately 976 registered
stockholders and approximately 28,457 beneficial owners of our
common stock.
The following table sets forth the high and low sales prices for
Cadence common stock for each fiscal quarter in the two-year
period ended January 2, 2010:
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The following graph compares the cumulative
5-year total
stockholder return on our common stock relative to the
cumulative total return of the NASDAQ Composite index and the
S&P 400 Information Technology index. The graph assumes
that the value of the investment in our common stock and in each
index (including reinvestment of dividends) was $100 on
January 1, 2005 and tracks it through January 2, 2010.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Cadence Design Systems, Inc., The NASDAQ Composite Index, And The S&P 400 Information Technology Index 
* $100
invested on 1/1/05 in stock or 12/31/04 in index, including
reinvestment of dividends.
Indexes
calculated on month-end basis.
Copyright
©
2010 S&P, a division of The McGraw-Hill Companies Inc. All
rights reserved.
The stock price performance included in this graph is not
necessarily indicative of future stock price performance
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Issuer
Purchases of Equity Securities
In February 2008, 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. In August
2008, our Board of Directors authorized a new program to
repurchase shares of our common stock in the open market with a
value of up to an additional $500.0 million in the
aggregate. The following table sets forth the repurchases we
made during the three months ended January 2, 2010:
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Item 6.
Selected Financial Data – Unaudited
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
notes below the table are provided for comparability purposes
due to adoptions of recently issued accounting pronouncements on
a prospective basis from the date of adoption or to describe
significant, non-recurring transactions.
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Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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
and with Item 1A, “Risk Factors.” Please refer to
the cautionary language at the beginning of Part I of this
Annual Report on
Form 10-K
regarding forward-looking statements.
We develop EDA software and hardware. We license software, sell
or lease hardware technology, provide maintenance for our
software and hardware and provide engineering and education
services throughout the world to help manage and accelerate
product development processes for electronics. Our customers use
our products and services to design and develop complex ICs and
electronics systems. During Fiscal 2009, we had orders of
$615 million.
We primarily generate revenue from licensing our EDA software,
selling or leasing our hardware technology, providing
maintenance for our software and hardware and providing
engineering services. Substantially all of our revenue is
generated from IC manufacturers and designers and electronics
systems companies and is dependent upon their commencement of
new design projects. As a result, our revenue is significantly
influenced by our customers’ business outlook and
investment in the introduction of new products and the
improvement of existing products.
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 (loss),
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. Historically, our assumptions, judgments
and estimates relative to our critical accounting estimates have
not differed materially from actual results. We believe that the
assumptions, judgments and estimates involved in the accounting
for revenue recognition, accounting for income taxes and
allowance for doubtful accounts have the greatest potential
impact on our Consolidated Financial Statements; therefore, we
consider these to be our critical accounting estimates. For
information on our significant accounting policies, see
Note 2 to our Consolidated Financial Statements.
We begin to recognize revenue from licensing and supporting our
software and hardware products when all of the following
criteria are met:
Significant judgment is involved in the determination of whether
the facts and circumstances of an arrangement support that the
fee for the arrangement is considered to be fixed or
determinable and that collectibility of the fee is probable, and
that judgment can impact the amount of revenue that we recognize
in a reporting period. 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 and we have established a history of collecting
under the original contract without providing concessions on
payments, products
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or services. However, we have concluded that fees are not fixed
or determinable for license arrangements executed with customers
in certain countries.
For installment contracts that do not include a substantial up
front payment, we consider that a fee is fixed or determinable
only if the arrangement has payment periods that are equal to or
less than the term of the licenses and the payments are
collected in equal or nearly equal installments, when evaluated
over the entire term of the arrangement. 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 and are
collectible. Such a change could have a material adverse effect
on our results of operations.
Our experience has been that we are generally able to estimate
whether collection is probable. Significant judgment is applied
as we assess the creditworthiness of our customers to make this
determination. 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 receipt of cash
payment. If we were unable to determine that collection is
probable, such a change could have a material adverse effect on
our results of operations.
A multiple element arrangement, or MEA, is any arrangement that
includes or contemplates rights to a combination of software or
hardware products, software license types, services, training or
maintenance in a single arrangement. From time to time, we may
include individual deliverables in separately priced and
separately signed contracts with the same customer. We obtain
and evaluate all known relevant facts and circumstances in
determining whether the separate contracts should be accounted
for individually as distinct arrangements or whether the
separate contracts are, in substance, a MEA. Significant
judgment can be involved in determining whether a group of
contracts might be so closely related that they are, in effect,
part of a single arrangement.
For our subscription licenses, including “eDA Platinum
Cards,” the software license agreements typically combine
the right to use specified software products, the right to
maintenance, and the right to receive and use unspecified future
software products for no additional fee, when and if available,
during the term of the license agreement. Under these license
agreements, when all four of the revenue recognition criteria
outlined above are met, we recognize revenue ratably over the
term of the license agreement beginning with delivery of the
first product. Subscription license revenue is allocated to
product and maintenance revenue. The allocation to maintenance
revenue is based on the average substantive renewal rates
included in the sale of similar term license arrangements. In
the event that the license fee for this type of arrangement is
not considered to be fixed or determinable at the outset of the
arrangement, we recognize revenue at the lesser of (i) the
pro-rata portion of the license fee for the applicable period,
or (ii) as payments from the customer become due (if all
other conditions for revenue recognition have been satisfied).
For term and perpetual licenses, including “eDA Gold
Cards,” when all four of the revenue recognition criteria
outlined above are met, software license fees are recognized as
revenue, generally with product fees associated with the
specified products recognized “up-front” upon
completion of delivery, and with the maintenance fees recognized
ratably over the term of the maintenance period. Under our
current business model, a relatively small percentage of our
revenue from software licenses is recognized on an up-front
basis.
License agreements under which software fees are recognized
up-front do not include the right to receive unspecified future
software products. However, in the event such license agreements
are executed within close proximity or in contemplation of other
license agreements that require ratable revenue recognition with
the same customer, the licenses together may be deemed a MEA, in
which event all such revenue would be recognized over multiple
periods.
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 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
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revenue and costs would be deferred until the project was
completed. Such a change could have a material impact on our
results of operations.
We provide for the effect of income taxes in our Consolidated
Financial Statements using the asset and liability method. We
also apply a two-step approach to determining the financial
statement recognition and measurement of uncertain tax positions.
Income tax expense or 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
(benefit) 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 (benefit) for income
taxes include the geographic mix and amount of income (loss),
our interpretation of current tax laws, and possible outcomes of
current and future audits conducted by foreign and domestic tax
authorities. Our judgments also include anticipating the tax
positions we will take on tax returns before actually preparing
and filing the tax returns. Changes in our business, 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.
Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to tax benefit
carryforwards and to differences between the financial statement
amounts of assets and liabilities and their respective tax
basis. We regularly review our deferred tax assets for
recoverability and establish a valuation allowance if it is more
likely than not that some portion or all of the deferred tax
assets will not be realized. To make this assessment, we take
into account predictions of the amount and category of taxable
income from various sources and all available positive and
negative evidence about these possible sources of taxable
income. The weight given to the potential effect of negative and
positive evidence is commensurate with the extent to which the
strength of the evidence can be objectively verified. For
example, a company’s current year or previous year losses
are given more weight than its future outlook. For the years
ended January 2, 2010 and January 3, 2009, we
concluded that a significant valuation allowance was required
based on our evaluation and weighting of the positive and
negative evidence. If, in the future, we determine that these
deferred tax assets are more likely than not to be realized, a
release of all or part, of the related valuation allowance could
result in a material income tax benefit in the period such
determination is made. For additional description of the
valuation allowance, see Note 4 to our Consolidated
Financial Statements.
We only recognize an income tax position in our financial
statements that we judge is more likely than not to be sustained
solely on its technical merits in a tax audit, including
resolution of any related appeals or litigation processes. To
make this judgment, we must interpret complex and sometimes
ambiguous tax laws, regulations and administrative practices. If
an income tax position meets the more likely than not
recognition threshold, then we must measure the amount of the
tax benefit to be recognized by determining the largest amount
of tax benefit that has a greater than a 50% likelihood of being
realized upon effective settlement with a taxing authority that
has full knowledge of all of the relevant facts. It is
inherently difficult and subjective to estimate such amounts, as
this requires us to determine the probability of various
possible settlement outcomes. To determine if a tax position is
effectively settled, we must also estimate the likelihood that a
taxing authority would review a tax position after a tax
examination has otherwise been completed. We must also determine
when it is reasonably possible that the amount of unrecognized
tax benefits will significantly increase or decrease in the
12 months after each fiscal year-end. These judgments are
difficult because a taxing authority may change its behavior as
a result of our disclosures in our financial statements. We must
reevaluate our income tax positions on a quarterly basis to
consider factors such as changes in facts or circumstances,
changes in tax law, effectively settled issues under audit, and
new audit activity. Such a change in recognition or measurement
would result in recognition of a tax benefit or an additional
charge to the tax provision.
We are also required to assess whether the earnings of our
foreign subsidiaries will be indefinitely reinvested outside the
United States. As of January 2, 2010, we had recognized a
deferred tax liability of $34.7 million related
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to $67.9 million of earnings from certain foreign
subsidiaries that are not considered indefinitely invested
outside the United States. To calculate the tax liability for
the repatriation of these earnings, we are required to estimate
the geographic mix of profits and losses earned by us and our
subsidiaries in tax jurisdictions with a broad range of income
and dividend withholding tax rates, the impact of foreign
exchange rate fluctuations, and the potential outcomes of
current and future tax audits. Changes in our actual or
projected operating results, tax laws or our interpretation of
tax laws, foreign exchange rates 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.
We make judgments as to our ability to collect outstanding
receivables and provide allowances for a portion of receivables
when collection becomes doubtful. This allowance is based on our
assessment of the creditworthiness of our customers, historical
experience and the overall economic climate of the industries
that we serve. While we believe that our allowance for doubtful
accounts is adequate, we continue to monitor customer liquidity
and other economic conditions, which may result in changes to
our estimates regarding our ability to collect from our
customers. Changes in circumstances, such as an unexpected
change in a customer’s ability to meet its financial
obligation to us or a customer’s payment trends, are hard
to predict and may require us to adjust our estimates of the
recoverability of amounts due to us. These changes could have a
material adverse effect on our business, financial condition and
operating results. As a result of our assessment of increased
risk of customer delays or defaults on payment obligations, we
have increased our allowance for doubtful accounts to
$23.7 million as of January 2, 2010, as compared to
$7.5 million as of January 3, 2009.
Results
of Operations
Our fiscal 2009 financial results reflected the following:
We primarily generate revenue from licensing our EDA software,
selling or leasing our hardware technology, providing
maintenance for our software and hardware and providing
engineering services. We principally utilize three license
types: subscription, term and perpetual. The different license
types provide a customer with different conditions of use for
our products, such as:
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The timing of our product revenue is significantly affected by
the mix of orders executed in any given period. For some orders,
such as subscription orders, product and maintenance revenue is
recognized ratably over multiple periods. In addition, depending
on the individual facts and circumstances of particular orders,
we have some orders where product and maintenance revenue is
recognized as payments become due and some where revenue is only
recognized when payment is received. For other orders, all
product revenue is recognized up-front in the same quarter in
which the order is executed.
We seek to achieve a mix of orders with approximately 90% of the
total value of all executed orders consisting of orders for
which the revenue is recurring, or ratable in nature, with the
balance of the orders made up of orders for which the product
revenue is recognized up-front. During fiscal 2009,
approximately 90% of the total value of our executed orders was
comprised of ratable revenue orders. If we achieve this desired
mix of executed orders over time and there are no significant
changes to our business, eventually approximately 90% of our
revenue would come from ratable orders.
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 duration 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.
Historically, larger customers generally used products from two
or more of our five product groups and rarely completely
terminated their relationship with us upon expiration of the
license. See the discussion under the heading “Critical
Accounting Estimates – Revenue Recognition” and
Note 2 of our Consolidated Financial Statements for
additional descriptions of license types and timing of revenue
recognition.
Although we believe that pricing volatility has not generally
been a material component of the change in our revenue from
period to period, we believe that the amount of revenue
recognized in future periods will depend on, among other things,
the:
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 with existing customers (e.g.,
customers transitioning from subscription license arrangements
to term license arrangements).
Revenue Mix
We analyze our software and hardware businesses by product
group, combining revenues for both product and maintenance
because of their interrelationship. During fiscal 2009, fiscal
2008 and fiscal 2007, our product groups were as follows:
Functional Verification: Products in this
group, including the Incisive functional verification platform,
are used to verify that the high level, logical representation
of an IC design is functionally correct.
Digital IC Design: Products in this group,
including the Encounter digital IC design platform, are used to
accurately convert the high-level, logical representation 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 to manufacture semiconductors.
Custom IC Design: Our custom design products,
including the Virtuoso custom design platform, are used for ICs
that must be designed at the transistor level, including analog,
RF, memory, high performance digital blocks and
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standard cell libraries. Detailed design information showing how
an IC will be physically implemented is used for creation of the
photomasks used to manufacture semiconductors.
System Interconnect Design: This product group
consists of our PCB and IC package design products, including
the Allegro and
OrCAD®
products. The Allegro system interconnect design platform
enables consistent co-design of interconnects across 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 IC has been constructed correctly and
can be manufactured successfully. Our strategy includes focusing
on integrating DFM awareness into our core design platforms of
Encounter digital IC design and Virtuoso custom design.
For additional description of our current product strategy, see
the discussion under the heading “Products and Product
Strategy” under Item 1, “Business.”
The following table shows our revenue for fiscal 2009, fiscal
2008 and fiscal 2007 and the dollar change in revenue between
years:
Product revenue decreased during each of fiscal 2009, as
compared to fiscal 2008, and fiscal 2008, as compared to fiscal
2007, primarily because of lower business levels due to the
challenges in the macroeconomic environment, the timing of our
contract renewals with existing customers, our transition to a
ratable license mix and a longer sales cycle. As a result,
product revenue decreased for all product groups, and
particularly for Digital IC Design, Custom IC Design and
Functional Verification products during both fiscal 2009 and
fiscal 2008. We expect to recognize increased revenue during
fiscal 2010, as compared to fiscal 2009 due to higher business
levels and our continued transition to our more ratable business
model.
Services revenue decreased during fiscal 2009, as compared to
fiscal 2008, because of lower business levels due to the
challenges in the macroeconomic environment and an increase in
the proportion of arrangements for which revenue is deferred
until payments become due and payable or cash is received from
customers, primarily as a result of our assessment of the
increased risk of customer delays or defaults on payment
obligations.
Maintenance revenue decreased during fiscal 2009, as compared to
fiscal 2008, due to the following:
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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 during fiscal 2009, fiscal 2008
and fiscal 2007:
As described under the heading “Critical Accounting
Estimates,” 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, if that
proves to be the case, the revenue allocation in the above table
would 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.
No single customer accounted for 10% or more of total revenue
during fiscal 2009, fiscal 2008 or fiscal 2007.
Changes in foreign currency exchange rates caused our revenue to
increase by $7.8 million during fiscal 2009, as compared to
fiscal 2008, primarily due to a decrease in the value of the
United States dollar when compared to the Japanese yen,
partially offset by an increase in the value of the United
States dollar when compared to the British pound and the
European Union euro. Changes in foreign currency exchange rates
caused our revenue to increase by $24.5 million in fiscal
2008, as compared to fiscal 2007, primarily due to a decrease in
the value of the United States
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dollar when compared to the Japanese yen and the European Union
euro, partially offset by an increase in the value of the United
States dollar when compared to the British pound. Additional
information about revenue and other financial information by
geography can be found in Note 21 to our Consolidated
Financial Statements.
Stock-based compensation expense is reflected throughout our
costs and expenses during fiscal 2009, fiscal 2008 and fiscal
2007 as follows:
Stock-based compensation expense decreased by $26.6 million
during fiscal 2009, as compared to fiscal 2008, and
$20.1 million during fiscal 2008, as compared to fiscal
2007, due to the following:
Stock-based compensation expense during fiscal 2008 also
decreased, as compared to fiscal 2007, due to the reversal of
$6.5 million of stock-based compensation expense related to
the modification of certain performance-based restricted stock
awards, partially offset by an increase in stock option expense
due to the acceleration of vesting of certain executives that
resigned during fiscal 2008.
We expect stock-based compensation expense to continue to
decrease during fiscal 2010, primarily due to lower fair values
at grant dates for restricted stock and stock options, the
cancellation of restricted stock and stock options as a result
of our restructuring plans and other attrition, and a reduced
number of equity grants during fiscal 2010.
We plan operating expense levels primarily based on forecasted
revenue levels. To offset some of the impact of the decrease in
our revenue, we have implemented cost savings initiatives,
including reducing headcount and related costs and reducing
other discretionary spending. During fiscal 2008, we initiated a
restructuring plan to improve our operating results and to align
our cost structure with expected revenue. This restructuring
plan decreased costs during fiscal 2009 by reducing our
workforce throughout the company by approximately 625 positions.
We expect ongoing annual savings of approximately
$150.0 million related to the restructuring activities and
other expense reductions initiated in fiscal 2008.
During fiscal 2009, we initiated an additional restructuring
plan to improve our operating results and to align our cost
structure with expected revenue. The 2009 restructuring plan,
which we initiated during the second quarter of fiscal 2009 and
continued during the fourth quarter of fiscal 2009, is intended
to decrease costs by reducing our workforce throughout the
company by approximately 345 positions. We expect ongoing annual
savings of
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approximately $30.0 million related to the restructuring
activities initiated during the second quarter of fiscal 2009.
We expect that substantially all of the estimated restructuring
plan-related annual operating expense savings related to the
2009 restructuring activities that we initiated during the
fourth quarter of fiscal 2009, and announced in January 2010,
will be offset by increased spending in connection with
developing and enhancing our product technologies. See
Note 5 to our Consolidated Financial Statements for
additional details of these and our prior restructuring plans.
The following table shows cost of revenue as a percentage of
related revenue for fiscal 2009, fiscal 2008 and fiscal 2007:
Cost of services as a percentage of Services revenue increased
during fiscal 2009, as compared to fiscal 2008, primarily due to
decreased Services revenue during fiscal 2009 as noted above.
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 our 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 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 during fiscal 2009, fiscal 2008 and
fiscal 2007 is as follows:
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Cost of product decreased by $18.2 million during fiscal
2009, as compared to fiscal 2008, and $9.8 million during
fiscal 2008, as compared to fiscal 2007, due to the following:
Hardware costs decreased during fiscal 2009, as compared to
fiscal 2008, primarily due to a decrease in hardware sales and a
write-off of obsolete inventory that did not recur during fiscal
2009. Hardware costs decreased during fiscal 2008, as compared
to fiscal 2007, primarily due to a decrease in hardware sales,
partially offset by a write-off of obsolete inventory during
fiscal 2008.
Amortization of acquired intangibles decreased during fiscal
2009, as compared to fiscal 2008, due to the impairment of
certain acquired intangibles during fiscal 2008. Amortization of
acquired intangibles decreased during fiscal 2008, as compared
to fiscal 2007, because certain acquired intangible assets
became fully amortized during the related periods.
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. Cost of product as a
percentage of product revenue increased during fiscal 2008, as
compared to fiscal 2007, primarily due to decreased software
product revenue during fiscal 2008.
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
decreased by $12.8 million during fiscal 2009, as compared
to fiscal 2008, and increased $9.9 million during fiscal
2008, as compared to fiscal 2007, due to the following:
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, and documentation of maintenance updates. Cost of
maintenance
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decreased by $9.2 million during fiscal 2009, as compared
to fiscal 2008, and $5.3 million during fiscal 2008, as
compared to fiscal 2007, due to the following:
Operating expenses decreased during fiscal 2009, as compared to
fiscal 2008, primarily due to reduced headcount and related
costs as a result of our 2008 and 2009 restructuring plans, and
our cost savings initiatives to reduce discretionary spending.
In addition, fiscal 2008 was a 53-week fiscal year, while fiscal
2009 was a 52-week fiscal year. Operating expenses decreased
during fiscal 2008, as compared to fiscal 2007, primarily due to
reduced headcount and related costs and our cost savings
initiatives to reduce discretionary spending.
During fiscal 2007, we recognized a gain on the sale of land and
buildings that related to, and accordingly reduced, operating
expense for that period. There was no similar reduction during
fiscal 2008.
The following table shows operating expenses as percentage of
total revenue for fiscal 2009, fiscal 2008 and fiscal 2007:
Our operating expenses as a percentage of total revenue
increased during fiscal 2008, as compared to fiscal 2007, due to
our lower Product revenue during the period.
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Marketing and sales expense decreased by $71.6 million
during fiscal 2009, as compared to fiscal 2008, and
$48.7 million during fiscal 2008, as compared to fiscal
2007, due to the following:
Research and development expense decreased by
$103.2 million during fiscal 2009, as compared to fiscal
2008, and $36.1 million during fiscal 2008, as compared to
fiscal 2007, due to the following:
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General and administrative expense decreased by
$29.3 million during fiscal 2009 as compared to fiscal
2008, and $17.0 million during fiscal 2008, as compared to
fiscal 2007, due to the following:
Legal and other professional services costs decreased during
fiscal 2009 as compared to fiscal 2008, primarily due to a
decrease in professional services fees related to our proposed
acquisition of Mentor Graphics Corporation and the restatement
of our previously issued financial statements for the periods
ended March 29, 2008 and June 28, 2008 that did not
recur during fiscal 2009. See additional discussion of our
current litigation in Note 15 to our Consolidated Financial
Statements. Legal and other professional services costs
decreased during fiscal 2008, as compared to fiscal 2007, due to
litigation costs incurred during fiscal 2007 that did not recur
during fiscal 2008, partially offset by increased professional
services fees related to our proposed acquisition of Mentor
Graphics Corporation and the restatement of our previously
issued financial statements for the periods ended March 29,
2008 and June 28, 2008.
Losses on the sale of installment contract receivables decreased
during fiscal 2009, as compared to fiscal 2008, and during
fiscal 2008, as compared to fiscal 2007, due to a reduction in
sales of receivables. The change in our license mix has resulted
in an increased number of subscription licenses and a decrease
in the sale of receivables to financial institutions because we
generally do not sell the receivables associated with
subscription licenses. Also, as a result of the credit losses
recorded by banks during 2008 and 2009 and the financial
challenges experienced by banks, a number of banks have become
less willing to purchase assets because of capital constraints
and concerns about over-exposure to the technology sector.
Bad debt expense increased during fiscal 2009, as compared to
fiscal 2008, and during fiscal 2008, as compared to fiscal 2007,
because certain of our customers experienced and may continue to
experience adverse changes in their business, which has resulted
and may continue to result in a delay or default on their
payment obligations.
Executive severance costs during fiscal 2008 relate to the cash
payable to three of the five executives who resigned in October
2008. The expense related to the other two resignations of
executives is included in our Sales and marketing and Research
and development expenses.
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Amortization of acquired intangibles decreased
$11.3 million during fiscal 2009, as compared to fiscal
2008, and increased $3.3 million during fiscal 2008, as
compared to fiscal 2007, due to the following:
We have initiated multiple restructuring plans since 2001,
including a 2009 restructuring plan which includes restructuring
activities initiated during the second quarter of fiscal 2009 as
well as restructuring activities initiated during the fourth
quarter of fiscal 2009 and announced in January 2010. These
restructuring activities initiated during fiscal 2009 are
together referred to as the 2009 Restructuring Plan. See
Note 5 to our Consolidated Financial Statements for
additional details of these restructuring plans.
Because the restructuring charges and related benefits are
derived from management’s estimates made during the
formulation of the restructuring plans, based on then-currently
available information, our restructuring plans 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 and is especially difficult
to predict in light of the current economic challenges and
uncertainty. Accordingly, additional actions, including further
restructuring of our operations, may be required in the future.
We have recorded total costs associated with the 2009
Restructuring Plan of $35.1 million. The costs recorded as
part of the 2009 Restructuring Plan include severance payments,
severance-related benefits and costs for outplacement services
that were communicated to the affected employees before
January 2, 2010, and estimated severance payments and
related benefits that were both probable and estimable as of
January 2, 2010 for employees notified after
January 2, 2010.
Total severance and termination benefits of approximately
$16.3 million related to the 2009 Restructuring Plan were
paid to employees before January 2, 2010. Approximately
$18.6 million of severance and termination benefits related
to the 2009 Restructuring Plan will be paid after
January 2, 2010, all of which is included in Accounts
payable and accrued liabilities in our Consolidated Balance
Sheet as of January 2, 2010. Due to varying regulations in
the jurisdictions and countries in which we operate, we expect
substantially all termination benefits to be paid by
January 1, 2011. We expect ongoing annual savings of
approximately $30.0 million related to the restructuring
activities initiated during the second quarter of 2009. We
expect that substantially all of the estimated restructuring
plan-related annual operating expense savings related to the
2009 restructuring activities which we initiated during the
fourth quarter of 2009 and announced in January 2010 will be
offset by increased spending in connection with developing and
enhancing our product technologies.
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The following table presents Restructuring and other charges for
the 2008 Restructuring Plan:
During fiscal 2008, we recorded $44.3 million of headcount
reduction costs associated with the 2008 Restructuring Plan,
including severance payments, severance-related benefits and
costs for outplacement services, substantially all of which was
paid by January 2, 2010.
During fiscal 2009, we recorded a net reversal of
$2.5 million, consisting of reversals of $3.0 million
in termination and related benefits costs that were less than
initially estimated and $1.4 million of excess facilities
costs due to a reduction in the estimated lease obligation
associated with a facility vacated as part of the 2008
Restructuring Plan, partially offset by restructuring expense of
$1.9 million related to facilities included in the 2008
Restructuring Plan that we exited during fiscal 2009.
We recorded credits to Restructuring and other charges (credits)
of $1.2 million during fiscal 2009, $0.3 million
during fiscal 2008 and $9.7 million during fiscal 2007.
During fiscal 2009, we recorded a release of $1.2 million
of excess facilities costs due to a reduction in the estimated
lease obligation associated with a facility vacated as part of
the 2002 Restructuring Plan and a reduction in other facilities
costs that were less than initially estimated.
During fiscal 2007, we completed a lease termination agreement
for a facility included in the 2001 Restructuring Plan, whereby
we paid $8.2 million and were released from all future
obligations related to the facility. We recorded a credit to
Restructuring and other charges of $7.1 million during
fiscal 2007, representing the lease loss accrual related to this
facility in excess of the amount paid.
We conduct a goodwill impairment analysis annually and as
necessary if changes in facts and circumstances indicate that
the fair value of our reporting unit may be less than the
carrying amount. We completed an interim goodwill impairment
test during the fourth quarter of fiscal 2008 and recorded an
Impairment of goodwill of $1,317.2 million, representing
all of our goodwill. For additional description of our
impairment of goodwill, see Note 13 to our Consolidated
Financial Statements.
In connection with our cost savings initiatives that were
implemented during the fourth quarter of fiscal 2008, we made
certain changes to our DFM product strategy. As a result, we
recognized an impairment charge of $42.5 million arising
from the abandonment of certain identifiable intangible assets
and reducing to net realizable value certain other identifiable
intangible assets. We also abandoned and impaired
$4.6 million of other long-lived assets during fiscal 2008.
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On the first day of fiscal 2009, we adopted new accounting
principles as required by the “Debt with Conversion and
Other Options” subtopic of the FASB Accounting Standards
Codification, which requires issuers of certain types of
convertible notes to separately account for the liability and
equity components in a manner that will reflect the
entity’s nonconvertible debt borrowing rate when interest
cost is recognized in subsequent periods. This retroactive
adoption required us to adjust our Consolidated Financial
Statements for prior years to reflect increased interest expense
in each of those years. The primary components of Interest
expense for fiscal 2009, fiscal 2008 and fiscal 2007 consisted
of the non-cash component associated with the amortization of
the debt discount as required under these new accounting
principles and the contractual interest expense of our
Convertible Senior Notes.
Other income (expense), net, for fiscal 2009, fiscal 2008 and
fiscal 2007 was as follows:
The decrease in interest income during fiscal 2009, as compared
to fiscal 2008, and during fiscal 2008, as compared to fiscal
2007, was due to lower average cash balances and lower interest
rates.
We determined that certain of our non-marketable securities were
other-than-temporarily
impaired and we wrote down the investments by $5.2 million
during fiscal 2009, $8.6 million during fiscal 2008 and
$2.6 million during fiscal 2007. During fiscal 2008, we
determined that two of our
available-for-sale
securities were
other-than-temporarily
impaired based on the severity and the duration of the
impairments, and we wrote down the investments by
$8.1 million. All of these impairments are included in the
Write-down of investments line in the above table.
During fiscal 2008, we purchased approximately 4.3 million
shares of Mentor Graphics common stock in connection with our
proposed acquisition of Mentor Graphics. After the announcement
of our withdrawal of the proposed acquisition of Mentor Graphics
during fiscal 2008, we sold our entire equity interest in Mentor
Graphics at a loss of $9.4 million, which is included in
the Gains (losses) on
available-for-sale
securities line in the above table.
The $9.3 million loss on liquidation of subsidiary is
primarily attributable to currency translation adjustment
losses, net of gains, previously recorded in Accumulated other
comprehensive income on our Consolidated Balance Sheet for a
subsidiary that was completely liquidated during fiscal 2008.
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The provision (benefit) for income taxes and the effective tax
rates during fiscal 2009, fiscal 2008 and fiscal 2007 were as
follows:
During fiscal 2009, a change in United States federal tax law
allowed companies to elect to carry back the fiscal
2009 net operating loss for a period of three, four or five
years instead of the general two-year carryback period. Our
benefit for income taxes during fiscal 2009 is primarily due to
$27.3 million of tax benefit from the fiscal 2009 United
States federal net operating losses that can be utilized to
offset taxable income in prior years, that is partially offset
by current year interest expense related to unrecognized tax
benefits of $13.3 million, and an increase in unrecognized
tax benefits, penalties and interest related to prior year tax
positions of $14.5 million. With the exception of the
fiscal 2009 United States federal net operating loss that can be
utilized in prior years, we recorded a valuation allowance that
offset the tax benefit from other fiscal 2009 United States
losses and tax credits.
The $14.5 million increase in unrecognized tax benefits,
penalties and interest during fiscal 2009 included
$7.3 million of unrecognized tax benefits, penalties and
interest that should have been recognized during multiple
periods between fiscal 2004 through fiscal 2008. The effects on
our fiscal 2009 results and our Consolidated Financial
Statements for prior periods are not considered material.
We had a fiscal 2008 provision for income taxes, primarily due
to the significant fiscal 2008 tax expenses related to the
impairment of non-deductible goodwill, the increase in our
valuation allowance against our deferred tax assets, and our
decision to repatriate previously untaxed foreign earnings.
During fiscal 2008, we recognized the impairment of
$1,059.7 million of United States goodwill that was
non-deductible. We also increased the valuation allowance
against our deferred tax assets by $326.0 million because
of the uncertainty regarding their ultimate realization. In
making this judgment, we considered the fiscal 2008 loss that
resulted in a cumulative three-year loss and other factors.
Finally, given the challenges in the global capital markets
during fiscal 2008, we decided that $317.2 million of
previously untaxed earnings from foreign subsidiaries would not
be indefinitely reinvested outside of the United States. As a
result, we accrued a tax expense of $101.1 million during
fiscal 2008 to provide for the federal, state and foreign income
taxes on these repatriations.
Our effective tax rate was negative for fiscal 2008, as compared
to the positive effective tax rate for fiscal 2007, primarily
due to the fiscal 2008 Loss before provision for income taxes
and the fiscal 2008 tax expenses related to the impairment of
non-deductible goodwill, the increase in our valuation allowance
against our deferred tax assets, and our decision to repatriate
previously untaxed foreign earnings. The fiscal 2007 effective
tax rate reflects the $27.8 million tax benefit from the
fiscal 2007 effective settlement of the IRS Exam for the
1997-1999
tax years.
We expect our effective tax rate for fiscal 2010 to be negative.
Our expectation excludes the impact of possible effective
settlements of tax examinations that may occur during fiscal
2010. The effective tax rate is negative because we expect to
record a loss before provision for income taxes during fiscal
2010 and because we expect to have tax expense on the income of
certain foreign subsidiaries and interest expense on our
unrecognized tax benefits. In addition, we currently anticipate
recording a valuation allowance that will offset the potential
tax benefit of certain tax loss and credit carryforwards
generated during fiscal 2010.
We intend to indefinitely reinvest approximately
$79.0 million of undistributed earnings of our foreign
subsidiaries as of January 2, 2010, to meet the working
capital and long-term capital needs of our foreign subsidiaries.
The unrecognized deferred tax liability for these indefinitely
reinvested foreign earnings was approximately $35.3 million
as of January 2, 2010.
We regularly review our deferred tax assets for recoverability
and establish a valuation allowance if it is more likely than
not that some portion or all of the deferred tax assets will not
be realized. We concluded that a valuation
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allowance of $383.2 million was required as of
January 2, 2010. This represents an increase in valuation
allowance of $52.0 million in comparison with the year
ended January 3, 2009. If, in the future, we determine that
these deferred tax assets are more likely than not to be
realized, a release of all or part of the related valuation
allowance could result in a material income tax benefit in the
period such determination is made.
The IRS and other tax authorities regularly examine our income
tax returns and we have received RARs indicating that the IRS
has proposed to assess certain tax deficiencies. For further
discussion regarding our Income taxes, including the calculation
of our valuation allowance, our deferred tax assets, and the
status of the IRS examinations, see Note 4 to our
Consolidated Financial Statements.
As of January 2, 2010, our principal sources of liquidity
consisted of $571.3 million of Cash and cash equivalents
and Short-term investments, as compared to $572.1 million
as of January 3, 2009 and $1,078.1 million as of
December 29, 2007.
Our primary sources of cash during fiscal 2009 and fiscal 2008
were:
Our primary uses of cash during fiscal 2009 and fiscal 2008 were:
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, other capital and
liquidity requirements for at least the next 12 months.
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Net working capital increased $63.0 million as of
January 2, 2010, as compared to January 3, 2009, and
decreased $353.6 million as of January 3, 2009, as
compared to December 29, 2007, due to the following:
Net cash provided by operating activities decreased
$44.7 million during fiscal 2009, as compared to fiscal
2008, and $332.1 million during fiscal 2008, as compared to
fiscal 2007, due to the following:
Cash flows from operating activities include Net income (loss),
adjusted for certain non-cash charges, as well as changes in the
balances of certain assets and liabilities. Our cash flows from
operating activities are significantly influenced by business
levels, the payment terms set forth in our license agreements
and by sales of our receivables. As a result of the challenging
economic environment, our customers, who are primarily
concentrated in the semiconductor sector, have experienced and
may continue to experience adverse changes in their business and
as a result, may delay purchasing our products and services or
delay or default on their payment obligations. Approximately
half of our total Receivables, net and Installment contract
receivables, net as of January 2, 2010 relate to ten of our
customers. If our customers are not successful in generating
sufficient cash or are precluded from securing financing, they
may not be able to pay, or may delay payment of, accounts
receivable that are owed to us, although these obligations are
generally not cancelable. Our customers’ inability to
fulfill payment obligations may adversely affect our cash flow.
Additionally, our customers may seek to renegotiate pre-existing
contractual commitments. Though we have not yet experienced a
material level of defaults, any material payment default by our
customers or significant reductions in existing contractual
commitments would have a material adverse effect on our
financial condition and operating results.
We have entered into agreements whereby we may transfer accounts
receivable to certain financial institutions on a non-recourse
or limited-recourse basis. During fiscal 2009, we transferred
accounts receivable to financial institutions on a non-recourse
basis, totaling $5.8 million, net of the losses on the sale
of the receivables, as compared to $52.2 million during
fiscal 2008 and $215.4 million during fiscal 2007. The
change in our license mix
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has resulted in an increased number of subscription licenses
and, therefore, a decrease in the sale of receivables to
financial institutions. For additional information regarding our
sales of receivables, see Note 17 to our Consolidated
Financial Statements.
During fiscal 2008 and the second quarter of fiscal 2009, we
initiated restructuring plans to decrease costs by reducing our
workforce and by consolidating facilities and we expect ongoing
annual savings of approximately $180.0 million related to
these restructuring activities and other expense reductions. In
January 2010, we announced additional restructuring activities
that we initiated during the fourth quarter of fiscal 2009. We
expect that substantially all of the estimated annual operating
expense savings associated with the restructuring activities
announced in January 2010 will be offset by increased spending
in connection with developing and enhancing our product
technologies.
As of January 2, 2010, we had made payments in connection
with these restructuring plans in the amount of
$59.1 million and we expect to pay an additional amount of
$20.8 million. We expect substantially all termination
benefits related to these restructuring plans to be paid by
January 1, 2011.
Our primary investing activities during fiscal 2009 and fiscal
2008 consisted of:
Net cash used for investing activities decreased
$76.4 million during fiscal 2009, as compared to fiscal
2008, and increased $18.5 million during fiscal 2008, as
compared to fiscal 2007, due to the following:
In January 2007, we completed the sale of certain land and
buildings in San Jose, California for a sales price of
$46.5 million in cash. Concurrently with the sale, we
leased back from the purchaser all available space in the
buildings. During the lease term, we constructed an additional
building on our San Jose, California campus to replace the
buildings we sold in this transaction. The decrease in cash
payments for Property, plant and equipment during fiscal 2009,
as compared to fiscal 2008, is primarily due to the completion
of this new building in January 2009.
During fiscal 2008, we purchased approximately 4.3 million
shares of Mentor Graphics common stock for $62.4 million in
connection with our proposed acquisition of Mentor Graphics.
After the announcement of our withdrawal of the proposed
acquisition of Mentor Graphics we sold our entire equity
interest in Mentor Graphics for $53.0 million.
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In connection with our acquisitions completed before
January 2, 2010, we may be obligated to pay up to an
aggregate of $15.9 million in cash during the next
32 months if certain defined performance goals are achieved
in full, of which $8.1 million would be included as
compensation expense in our Consolidated Statements of
Operations.
We expect to continue our investing activities, including
purchasing property, plant and equipment, purchasing intangible
assets, purchasing software licenses, business combinations, and
making long-term equity investments.
Financing cash flows during fiscal 2009 consisted primarily of
the issuance of common stock under certain employee plans.
Net cash provided by financing activities was $21.0 million
during fiscal 2009, as compared to net cash used in financing
activities of $443.4 million during fiscal 2008, and
$170.1 million during fiscal 2007. The changes in our
financing cash flows are due to the following:
The decrease in Proceeds from the issuance of common stock
during fiscal 2009, as compared to fiscal 2008, is primarily due
to decreased purchase limits under our ESPP, which became
effective during fiscal 2009. We did not repurchase any of our
common stock during fiscal 2009. As of January 2, 2010, we
had $854.4 million remaining under the stock repurchase
programs authorized by our Board of Directors.
During fiscal 2008, we repurchased $230.2 million principal
amount of the 2023 Notes upon election of the holders of the
2023 Notes pursuant to the terms thereof, for total
consideration of $230.8 million.
We record a gain or loss on re-issuance of treasury stock based
on the total proceeds received in the transaction. During fiscal
2009, we recorded losses on the re-issuance of treasury stock of
$213.4 million as a component of Retained earnings
(Accumulated deficit).
Income Taxes
We provide for United States income taxes on earnings of our
foreign subsidiaries unless the earnings are considered
indefinitely invested outside the United States. As of
January 2, 2010, we had recognized a deferred tax liability
of $34.7 million related to $67.9 million of earnings
from certain foreign subsidiaries that are not considered
indefinitely reinvested outside the United States and for which
we have previously made a provision for income tax. We
repatriated $50.0 million of the $67.9 million during
January 2010 and expect to repatriate $12.9 million of the
remainder during fiscal 2010. We estimate that the fiscal 2010
repatriations will result in fiscal 2010 cash tax payments of
approximately $2.2 million.
We intend to indefinitely reinvest approximately
$79.0 million of undistributed earnings of our foreign
subsidiaries as of January 2, 2010, to meet the working
capital and long-term capital needs of our foreign
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subsidiaries. The unrecognized deferred tax liability for these
indefinitely reinvested foreign earnings was approximately
$35.3 million as of January 2, 2010.
The IRS and other tax authorities regularly examine our income
tax returns and we have received RARs pursuant to which the IRS
has proposed to assess certain tax deficiencies. For additional
description of our IRS Examinations, see Note 4 to our
Consolidated Financial Statements.
As of January 2, 2010, we had current income tax liabilities
related to unrecognized tax benefits of $3.9 million. As of
January 2, 2010, we had long-term income tax liabilities
related to unrecognized tax benefits of $313.6 million. For
additional information on the income tax liabilities related to
unrecognized tax benefits, see the discussion under the heading
“Contractual Obligations.”
1.375% Convertible Senior Notes Due December 2011 and
1.500% Convertible Senior Notes Due December 2013
In December 2006, we issued $250.0 million principal amount
of our 2011 Notes and $250.0 million of our 2013 Notes.
Concurrently with the issuance of the Convertible Senior Notes,
we entered into hedge transactions with various parties and, in
separate transactions, sold warrants to purchase our common
stock 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. The 2011 Notes mature on December 15, 2011
and the 2013 Notes mature on December 15, 2013, and the
principal amounts will be paid in cash at maturity. For
additional description of the Convertible Senior Notes,
including the hedge and warrants transactions, see Note 3
to our Consolidated Financial Statements.
A summary of our contractual obligations as of January 2,
2010 is as follows:
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With respect to purchase obligations that are cancelable by us,
the table includes the amount that would have been payable if we
had canceled the obligation as of January 2, 2010 or the
earliest cancellation date.
In connection with our acquisitions completed before
January 2, 2010, we may be obligated to pay up to an
aggregate of $15.9 million in cash during the next
32 months if certain defined performance goals are achieved
in full.
As of January 2, 2010, we did not have any significant
off-balance sheet arrangements, as defined in
Item 303(a)(4)(ii) of SEC
Regulation S-K.
In October 2009, the FASB issued new accounting standards for
multiple-deliverable arrangements and for revenue arrangements
that include both tangible products and software elements.
The new standards for multiple-deliverable arrangements enable
vendors to account for products or services (deliverables)
separately rather than as a combined unit. This guidance
establishes a selling price hierarchy for determining the
selling price of a deliverable based on:
(a) vendor-specific objective evidence;
(b) third-party evidence; or (c) estimates. This
guidance also eliminates the residual method of allocation and
requires that arrangement consideration be allocated at the
inception of the arrangement to all deliverables using the
relative selling price method. In addition, this guidance
significantly expands required disclosures related to a
vendor’s multiple-deliverable revenue arrangements.
Under the new standards for revenue arrangements that include
both tangible products and software elements, tangible products
containing software components and non-software components that
function together to deliver the tangible product’s
essential functionality are excluded from the pre-existing
software revenue guidance. In addition, hardware components of a
tangible product containing software components are always
excluded from the pre-existing software revenue guidance.
We are currently evaluating the application to our revenue
arrangements of the two new accounting standards described
above. The impact of these new standards may result in revenue
being recognized for certain sales of hardware and
nonsoftware-related deliverables separate from the software
deliverables within a multiple element arrangement. Both of
these new standards are effective prospectively for revenue
arrangements entered into or materially modified during fiscal
years beginning on or after June 15, 2010, with the option
to provide retrospective presentation for prior years, with
early adoption permitted. We plan to adopt these two new
accounting standards during our first quarter of fiscal 2011.
In June 2009, the FASB issued new accounting standards for
determining whether to consolidate a variable interest entity.
These new standards amend the evaluation criteria to identify
the primary beneficiary of a variable interest entity and
require ongoing reassessment of whether an enterprise is the
primary beneficiary of the variable interest entity. The
provisions of the new standards are effective for annual
reporting periods beginning after November 15, 2009 and
interim periods within those fiscal years. These standards will
be effective for us beginning in the first quarter of fiscal
2010. We are currently evaluating the impact that these new
standards will have on our Consolidated Financial Statements.
Item 7A.
Quantitative and Qualitative Disclosures About Market
Risk
Most of our revenue, expenses and material business activity are
transacted in the United States dollar. However, certain of our
operations include transactions in foreign currencies and,
therefore, we benefit from a weaker dollar, and in certain
countries where we invoice customers in the local currency, 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
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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 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 current 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.
The following table provides information, as of January 2,
2010, 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 during January 2010.
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.
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 the costs associated
with foreign currency hedges.
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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.
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 January 2, 2010. 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 January 2, 2010.
1.375% Convertible Senior Notes Due December 2011 and
1.500% Convertible Senior Notes Due December 2013
In December 2006, we issued $250.0 million principal amount
of our 2011 Notes and $250.0 million of our 2013 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
additional description of the Convertible Senior Notes,
including the hedge and warrants transactions, see Note 3
to our Consolidated Financial Statements.
Investments
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. Under our
strategic investment program, from time to time we make cash
investments in companies with technologies that are potentially
strategically important to us. See Note 6 to our
Consolidated Financial Statements for additional details of
these investments.
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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 our Chief Executive Officer, or
CEO, and our Chief Financial Officer, or CFO, of the
effectiveness of the design and operation
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of our disclosure controls and procedures (as defined in
Rules 13-15(e)
and
15d-15(e)
under the Exchange Act) as of January 2, 2010.
The evaluation of our disclosure controls and procedures
included a review of our processes 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
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.
Based on their evaluation as of January 2, 2010, 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 is recorded,
processed, summarized and reported within the time periods
specified in the SEC’s rules and forms and 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 January 2, 2010 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. Internal control over financial reporting, no matter
how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of internal control
are met. Further, the design of internal control must reflect
the fact that there are resource constraints, and the benefits
of the control must be considered relative to their costs. While
our disclosure controls and procedures and internal control over
financial reporting are designed to provide reasonable assurance
of their effectiveness, 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 January 2, 2010. 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 January 2, 2010, our
internal control over financial reporting is effective based on
these criteria. Our independent registered public accounting
firm, KPMG LLP, has issued an attestation report on our internal
control over financial reporting, which is included in
Item 15, “Exhibits and Financial Statement
Schedules.”
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 2010 Annual
Meeting of Stockholders. The executive officers of Cadence are
listed at the end of Item 1 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 2010 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 2010 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 2010 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 2010 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 2010 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 2009 and 2008” in
Cadence’s definitive proxy statement for its 2010 Annual
Meeting of Stockholders.
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PART IV.
Item 15. Exhibits
and Financial Statement Schedules
Cadence, the Cadence logo, Allegro, Connections, Encounter,
Incisive, OrCAD, Palladium, SpeedBridge, Virtuoso and Xtreme are
registered trademarks of Cadence Design Systems, Inc. Other
service marks, trademarks and tradenames referred to in this
Annual Report on
Form 10-K
are the property of their respective owners.
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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 January 2, 2010 and January 3, 2009, and the
related consolidated statements of operations,
stockholders’ equity and comprehensive income (loss), and
cash flows for each of the years in the three-year period ended
January 2, 2010. In connection with our audits of the
consolidated financial statements, we also have audited the
financial statement schedule, as set forth under
Item 15(a)(2). 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
January 2, 2010 and January 3, 2009, and the results
of their operations and their cash flows for each of the years
in the three-year period ended January 2, 2010, 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 3 to the consolidated financial
statements, the Company changed its method of accounting for its
Convertible Senior Notes due to the retrospective adoption of
new accounting requirements issued by the Financial Accounting
Standards Board (FASB), as of January 4, 2009. Also, as
discussed in note 4 to the consolidated financial
statements, the Company changed its method of accounting for
uncertainty in income taxes due to the adoption of new
accounting requirements issued by the FASB, as of
December 31, 2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Cadence Design Systems, Inc.’s internal control over
financial reporting as of January 2, 2010, based on
criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated February 26, 2010 expressed an unqualified opinion on
the effectiveness of the Company’s internal control over
financial reporting.
/s/ KPMG LLP
Mountain View, California February 26, 2010
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The Board of Directors and Stockholders
Cadence Design Systems, Inc.:
We have audited Cadence Design Systems, Inc. and
subsidiaries’ (the Company) internal control over financial
reporting as of January 2, 2010, 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, included in the accompanying
Management’s Report on Internal Control over Financial
Reporting included in Item 9A. Our responsibility is to
express an opinion on 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, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included 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
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, Cadence Design Systems, Inc. and subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of January 2, 2010, based on
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 Systems, Inc. and
subsidiaries as of January 2, 2010 and January 3,
2009, and the related consolidated statements of operations,
stockholders’ equity and comprehensive income (loss), and
cash flows for each of the years in the three-year period ended
January 2, 2010, and our report dated February 26,
2010 expressed an unqualified opinion on those consolidated
financial statements and the accompanying financial statement
schedule.
/s/ KPMG LLP
Mountain View, California February 26, 2010
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CADENCE
DESIGN SYSTEMS, INC
CONSOLIDATED BALANCE SHEETS
January 2,
2010 and January 3, 2009
(In thousands, except par value)
ASSETS
The accompanying notes are an integral part of these
consolidated financial statements.
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CADENCE
DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the
three fiscal years ended January 2, 2010
(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 (LOSS) For the three fiscal years ended January 2, 2010 (In thousands)
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