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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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(Mark One)
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x
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the fiscal year ended
December 30, 2006
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OR
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period from
to
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Commission file number 0-15867
CADENCE DESIGN SYSTEMS,
INC.
(Exact Name of Registrant as Specified in its Charter)
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Delaware
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77-0148231
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(State or Other Jurisdiction of
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(I.R.S. Employer
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Incorporation or Organization)
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Identification No.)
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2655 Seely Avenue,
Building 5, San Jose, California
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95134
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(Address of Principal Executive
Offices)
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(Zip Code)
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(408) 943-1234
(Registrants Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Names of Each Exchange
on which Registered
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Common Stock, $0.01 par
value per share
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NASDAQ Global Select
Market
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes [ X ] No [ ]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes [ ] No [ X ]
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes
[ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (check one):
Large accelerated filer [ X ] Accelerated filer
[ ] Non-accelerated filer
[ ]
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Act).
Yes [ ] No [ X ]
The aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price
at which the common equity was last sold as of the last business
day of the registrants most recently completed second
fiscal quarter ended July 1, 2006 was $4,910,530,182.
On February 3, 2007, approximately 279,823,852 shares
of the Registrants Common Stock, $0.01 par value,
were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Cadence
Design Systems, Inc. 2007 Annual Meeting are incorporated by
reference into Part III hereof.
CADENCE
DESIGN SYSTEMS, INC.
2006
FORM 10-K
ANNUAL REPORT
Table of Contents
PART I.
This Annual Report on
Form 10-K
and the documents incorporated by reference in this Annual
Report contain forward-looking statements. Certain of such
statements, including, without limitation, statements regarding
the extent and timing of future revenues and expenses and
customer demand, statements regarding the deployment of our
products, statements regarding our reliance on third parties and
other statements using words such as anticipates,
believes, could, estimates,
expects, intends, may,
plans, should, will and
would, and words of similar import and the negatives
thereof, constitute forward-looking statements. These statements
are predictions based upon our current expectations about future
events. Actual results could vary materially as a result of
certain factors, including but not limited to, those expressed
in these statements. We refer you to the Proprietary
Technology, Competition, Risk
Factors, Results of Operations,
Disclosures About Market Risk and Liquidity
and Capital Resources sections contained in this Annual
Report and the risks discussed in our other Securities Exchange
Commission, or SEC, filings, which identify important risks and
uncertainties that could cause actual results to differ
materially from those contained in the forward-looking
statements.
We urge you to consider these factors carefully in evaluating
the forward-looking statements contained in this Annual Report.
All subsequent written or spoken forward-looking statements
attributable to our company or persons acting on our behalf are
expressly qualified in their entirety by these cautionary
statements. The forward-looking statements included in this
Annual Report are made only as of the date of this Annual
Report. We do not intend, and undertake no obligation, to update
these forward-looking statements.
Overview
We develop electronic design automation, or EDA, software and
hardware. We license software, sell or lease hardware technology
and provide design and methodology services throughout the world
to help manage and accelerate electronics product development
processes. Our broad range of products and services are used by
the worlds leading electronics companies to design and
develop complex integrated circuits, or ICs, and personal and
commercial electronics systems. We have approximately 5,200
employees, in approximately 60 sales offices, design centers and
research and development facilities located around the world.
We were formed as a Delaware corporation in April 1987. Our
headquarters is located at 2655 Seely Avenue,
San Jose, California 95134. Our telephone number is
(408) 943-1234.
Our website can be accessed at www.cadence.com. We make
available free of charge copies of our SEC filings and
submissions on the investor relations page of our website at
www.cadence.com as soon as practicable after
electronically filing or furnishing such documents with the SEC.
Our Corporate Governance Guidelines, Code of Business Conduct
and the charters of the Audit Committee, Compensation Committee
and Corporate Governance and Nominating Committee of our Board
of Directors are also posted on the investor relations page of
our website at www.cadence.com. Stockholders may also
request copies of these documents by writing to our Corporate
Secretary at the address above.
Factors
Driving the Electronic Design Automation Industry
Communications, business productivity and consumer electronics
markets drove growth in the electronics industry for most of the
past decade. However, in recent years, the consumer market has
been the fastest growing end market for electronics and the most
influential in setting expectations for rapid change, low cost,
miniaturization and increasing functionality.
Electronic systems companies respond to these demands by
combining subsystems such as radio frequency
wireless communication, or RF, video signal processing, and
embedded computing onto a single silicon chip,
creating a system-on-chip, or SoC, or onto multiple chips in a
single chip package in a format referred to as
system-in-package, or SiP. These trends toward subsystem
integration have required chip makers to find solutions to
challenges previously addressed by system companies, such as
verifying system-level functionality and hardware-software
interoperability.
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SoC designs put many more transistors on each chip, increasing
the need for tight control over power consumption. This is done
not only to increase battery life in portable devices, but also
to minimize energy cost and limit heat generation, which
threaten the reliability of a device. Evolving semiconductor
manufacturing processes with smaller features (transistors and
wires) and lower supply voltages address both of these issues to
some degree, but introduce new challenges of their own.
Contemporary portable electronic devices contain chips in which
individual features can be as small as 65 nanometers
about 6/100,000ths of a millimeter. Because of atomic level
interactions in the transistors, these chips continue to consume
power from the battery even when the device is switched off. To
overcome these issues, specific low power design
techniques must be developed and must be integrated throughout
the design flow, from logic design and verification through
physical implementation.
Variability in the processes used to manufacture silicon chips
has become so pervasive at 65 nanometers and below that
traditional connections between design and manufacturing teams
are insufficient to ensure chip performance and yield.
Integrating detailed models of the manufacturing process into
the chip design environment is desirable so engineers can craft
the design to avoid or overcome these manufacturing process
variations. Similarly, manufacturing teams can optimize their
processes if, along with the design, they are provided with
information about the most critical parts of the chip. However,
sharing information between design and manufacturing processes
is complicated because current data formats used to describe the
chip design differ from data formats used to describe the
manufacturing process and control the manufacturing equipment.
Moreover, design and manufacturing often takes place within two
separate companies one company designs the chip
while another company manufactures it.
These trends pose significant new challenges for the electronics
design processes. Specifically, product performance and size
requirements of the mobile consumer electronics market require
microelectronic systems to be smaller, consume less power and
provide multiple functions all in one SoC or SiP package. This
requires designers to pay close attention to many electrical,
physical and manufacturing effects that were inconsequential in
previous generations of chip designs. The design challenge
becomes more complex with each new generation of electronics,
and providers of EDA solutions must deliver products that
address these technical challenges, while improving the
efficiency and productivity of the design process.
Operating
Segment
Our chief operating decision maker is our President and Chief
Executive Officer, or CEO. Our CEO reviews our consolidated
results within only one operating segment.
Products
Our products are engineered to improve our customers
design productivity and resulting design quality by providing a
comprehensive set of EDA design products. Product revenues
include all fees earned from granting licenses to use our
software, and from sales and leases of our hardware products,
and exclude revenues derived from maintenance and services. We
offer customers three license types for our software: perpetual,
term and subscription. See Software Licensing
Arrangements below for additional discussion of our
license types.
Product revenue was $982.7 million, or 66% of our total
revenue, in 2006, $851.5 million, or 64% of our total
revenue, in 2005 and $729.8 million, or 61% of our total
revenue, in 2004.
Product
Strategy
With the addition of emerging nanometer design considerations to
the already burgeoning set of traditional design tasks, complex
SoC or IC design can no longer be accomplished using a
collection of discrete design tools. What previously consisted
of sequential design activities must be merged and accomplished
nearly simultaneously without time-consuming data translation
steps. We combine our design technologies into
platforms for four major design activities:
functional verification, digital IC design, custom IC design and
system interconnect. The four
Cadence®
design platforms are
Incisive®
functional verification,
Encounter®
digital IC design,
Virtuoso®
custom design and
Allegro®
system interconnect platforms. In addition, we augment these
platform product offerings with a comprehensive set of design
for manufacturing, or DFM, products that service both the
digital and custom IC design flows. These four platforms,
together with our DFM products, comprise our primary product
lines.
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Incisive
Functional Verification Platform
The Incisive functional verification platform enables our
customers to employ enterprise-level verification process
automation, including verification planning, management and
process tracking, with coordination of all verification
activities across teams of specialists and different execution
platforms.
The Incisive platform is tailored for three customer segments:
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Design engineers using traditional hardware description
languages and testing techniques;
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Design teams that are also responsible for verification and need
more automation; and
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Multi-specialist enterprise teams comprised of systems,
software, hardware verification, system validation, and logic
design teams.
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The Incisive platform includes verification process automation
technologies, methodologies, and verification intellectual
property, or IP, for many standard protocols. Products include:
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The Incisive Design Team and Enterprise Manager, which automates
and guides the verification process and then analyzes data, from
planning to closure;
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The Incisive Design Team and Enterprise Simulator, which offers
mixed-language support, dynamic assertion checking,
transaction-level support, HDL analysis and a complete debug
environment;
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The Incisive Formal Verifier, which shortens design and
verification time while improving design quality by providing a
formal means of verifying RTL functional correctness with
assertions, without the need of testbench simulation, and also
provides an effective means of providing predictable, fast RTL
block bring-up and assertion-based verification; and
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The
Palladium®
and
Extreme®
series of emulation and acceleration solutions, which accelerate
the verification process and enable first working silicon with
first working software.
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The Incisive Plan-to-Closure methodology (supported by technical
field experts) is designed to enable the scalable deployment of
best practices and to mitigate our customers language,
technology and methodology adoption risks.
Encounter
Digital IC Design Platform
The Encounter digital IC design platform enables our
customers to implement all aspects of their digital
nanometer-scale designs. It is based on a single user interface
and unified in-memory data model, and is specifically designed
to facilitate the analysis and optimization of chip performance,
power consumption, and silicon area and manufacturability
throughout our customers design processes. The Encounter
platform is comprised of the following core technologies:
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Silicon virtual prototyping for enabling designers to plan the
complete implementation of a chip before committing to a
specific design strategy;
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Global register transfer level, or RTL, and physical synthesis
for creating and physically locating logic on the chip, while
simultaneously optimizing performance, power, cost and yield;
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Signal integrity and yield-aware routing for connecting high
performance physical interconnect between the logic gates;
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Signal integrity and nanometer delay analysis;
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Comprehensive design-for-test capability as well as post-silicon
test diagnostics; and
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Logic equivalence checking and design constraint management
capability for designers to verify that their RTL specification
is equivalent to the final IC layout.
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Unlike traditional front-end/back-end systems, the
Encounter platform does not require customers to perform
time-consuming translations between common tasks such as
placement, power distribution, routing, and timing and crosstalk
analysis. The Encounter platform supports hierarchical designs,
with support for designs containing hundreds of millions of
transistors on a single chip. Since 2005, the Encounter platform
has been offered in three levels: Encounter L, XL and GXL. These
levels are scaled to provide customers with technologies
tailored to specific degrees of design complexity in the
digital IC space.
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Virtuoso
Custom Design Platform
The Virtuoso custom design platform enables design
predictability by ensuring that the circuit design
representation will perform correctly in the final manufactured
chip. With the Virtuoso platform, designers are able to deliver
silicon-accurate analog, custom digital, RF, and mixed-signal
designs, while addressing the growing number of physical effects
in package, power grid, interconnect, devices and substrate
employing a top-down language-based design.
The Virtuoso platform reduces design time by providing:
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Reference flows for analog, mixed-signal, RF and analog-digital
integration focused at the wireless and analog/mixed-signal
markets;
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Automatic analog circuit sizing and optimization (including
yield optimization);
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Multi-mode simulation (digital, analog and RF) using a common
syntax and model, and common equations;
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Fast custom layout technologies;
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Process migration technology;
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Electrical vs. physical effects analysis; and
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Physical design integration and silicon analysis for complex
custom, cell-based and mixed custom designs.
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The
OpenAccesstm
database (described below in Third Party Programs and
Initiatives) is used as a mechanism for integration across
the Virtuoso platform.
With the 2006 introduction of the Virtuoso 6.1.0 platform
we completed our Virtuoso platform product segmentation which
began in 2005. The Virtuoso L, XL and GXL offerings provide
our customers with a diverse set of custom design capabilities
for entry-level design to the most complex DFM-aware designs.
Allegro
System Interconnect Design Platform
The Allegro system interconnect design platform enables design
teams to design high-performance interconnect across the domains
of IC, package and printed circuit board, or PCB, reducing cost
and time to market. The system interconnect between
input-output buffers and across ICs, packages and
PCBs can be optimized through the platforms
co-design methodology, reducing both hardware costs and design
cycles. Designers use the Allegro platforms
constraint-driven methodology and advanced capabilities for
design capture, signal integrity and physical implementation.
Silicon design-in kits speed time to market by allowing IC
companies to shorten new device adoption time and allowing
systems companies to accelerate PCB system design cycles. In
2006, with the release of our SiP products, we have entered an
emerging market designed to accelerate products to market where
designers are looking for alternatives between SoCs and PCBs. In
2006, the Allegro L, XL and GXL products were introduced
along with the XL and GXL offerings for Cadences SiP
products.
The system interconnect product group includes the Allegro
system interconnect platform, the
OrCAD®
product line of PCB design products which are engineered for
individual or small design team productivity and a family of IC
packaging and SiP technologies. The OrCAD product line is
marketed worldwide through a network of alternative channel
partners.
Design
for Manufacturing
The physical layout of each IC requires detailed analysis and
optimization to ensure that the design can be manufactured in
volume while performing as expected. Some of our products that
deliver DFM capabilities for nanometer SoC design include:
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Fire &
Ice®
QX and
Assura®
RCX extraction products, which take the designers physical
representation of an IC and extract the electrical properties of
that design representation to enable further analyses, such as
simulation and timing analysis;
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Products in the
VoltageStorm®
family, which analyze on-chip power distribution for digital,
analog and SoC designs. VoltageStorm detects unanticipated
voltage drop, enabling the customer to correct fatal conditions,
thereby preventing extensive troubleshooting and delay during
initial manufacturing;
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Our physical verification products, including Cadence Physical
Verification System, Assura,
Diva®
and
Dracula®,
which perform manufacturing design rule checks to ensure the
proposed design meets the requirements of the foundrys
manufacturing process rules;
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Mask data preparation tools, such as MaskCompose and QuickView,
which help customer mask shops create mask and reticle layouts
for chips being manufactured in nanometer processes; and
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Design Virtual Interconnect Predictor, which helps customers
understand the impact of chemical-metal planarization, one of
the major steps in the semiconductor manufacturing process, on
their chip performance at advanced silicon geometries.
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Kits
Todays growing silicon complexity creates an array of
design challenges for semiconductor and systems design teams.
Among these challenges is the application of EDA technologies to
overcome design hurdles in certain key markets driving the
semiconductor industry, particularly the wireless and digital
personal entertainment segments. Cadence kits are designed to
allow companies in these sectors to achieve shorter, more
predictable design cycles and greater design productivity by
greatly simplifying the application and integration of EDA
technologies and verification IP to address major design
challenges in these markets: analog-mixed signal, or AMS, RF,
SiP, low power and verification.
Each kit addresses application-specific design issues by
combining a verified methodology and enabling standards-based
IP all applied to a segment representative design
and delivered with application consulting. Following the
introduction of the AMS Methodology and RF Design Methodology
Kits, in 2006 we introduced the RF SiP Methodology Kit and the
Functional Verification Kit for ARM.
Verification
and Application Specific Programming Services
We offer verification and application specific programming, or
ASP, services through
Time-to-Market
Engineering, or TtME, services. Our TtME offering provides
customers with consulting services, project services and/or
complete turnkey services for verification acceleration and
system emulation. QuickCycles allows customers access to our
Palladium simulation acceleration and emulation products on a
pay-as-you-go basis, either on the customer internet site or
remotely over a high-speed, secure network connection.
Third
Party Programs and Initiatives
We recognize that certain of our customers may also use
internally-developed design tools or design tools provided by
other EDA companies, as well as IP available from multiple
suppliers. We support the integration of third party design
products through our OpenAccess Initiative and
Connections®
and OpenChoice programs. OpenAccess is a full-featured EDA
database that supports access and manipulation of its internal
EDA data via a fully documented and freely available programming
interface. This provides an open application program interface
through which applications developed by our customers, by their
other EDA vendors, or by university research groups can all
operate within a single database and with our products. We have
licensed the OpenAccess database to the OpenAccess Coalition,
which is operated by the Silicon Integration Initiative, or Si2,
an organization of EDA, electronic system and semiconductor
industry leaders focused on improving productivity and reducing
cost in creating and producing integrated silicon systems.
The Connections Program provides other EDA companies with access
to our products to ensure that our products work well with those
third party tools. Over 130 EDA providers are members of the
Connections Program. The OpenChoice program was instituted to
enable interoperability and facilitate open collaboration with
leading providers of library, processor, memory core and
verification IP to build, validate and deliver accurate models
optimized for Cadence design and verification solutions. The
program aims to ensure IP quality and provide our customers with
access to optimized IP. A key component of the OpenChoice
program is to assist and support library
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providers in the integration of our design and verification
products and model formats into customer-owned tooling, or COT,
library solutions.
In 2006, we formed the Power Forward Initiative with a group of
22 electronics industry leaders who recognized the urgent need
for an automated, power-aware design infrastructure to
facilitate the production of ICs that consume significantly less
power. The goal of the group is to participate in the refinement
and standardization of the Common Power Format, or CPF. CPF is a
specification language that holistically captures low-power
design intent so that it can be communicated consistently
throughout the IC design process. We have contributed the CPF
specification to Si2, which will manage the standardization,
maintenance and distribution of CPF for the benefit of the
electronics industry.
In addition, we work with vendors of Application Specific
Integrated Circuits, or ASICs, to ensure predictable and smooth
handoff of design data from mutual customers to ASIC
implementation. These programs foster relationships throughout
the silicon design chain with leading IP partners, silicon
manufacturers and library provider partners to support both ASIC
and COT solutions for our customers. They are integral to
providing complete design chain solutions to IC and electronic
systems designers who depend on coordinated offerings from
multiple suppliers.
Maintenance
We provide technical support to our customers to facilitate
their use of our software and hardware products. A high level of
customer service and support is critical to the adoption and
successful use of our products.
We have a global customer support organization and specialized
field application engineering teams located in each of our
operating regions to provide assistance to customers where and
when they need it.
Standard maintenance support includes three major components:
our
Sourcelink®
online support portal, which provides 24 hour access to
real-time technical information on our products; contact center
support (telephone, email and web access to our support
engineers); and software updates (periodic updates with
regression-tested critical fixes and updated functionality
available via CDs or secure internet download).
Maintenance is offered to customers as an integral,
non-cancelable component of our subscription license agreements,
or as a separate agreement subject to annual renewal for our
term and perpetual license customers.
Some of our customers have relocated, or expanded the presence
of their design teams, away from their headquarters or
historical locations to locations in emerging growth regions.
Accordingly, to provide responsive and effective support for
these customers, we expect to continue expanding the presence of
our own support and application engineering teams in these
emerging growth regions.
Maintenance revenue was $366.3 million, or 25% of our total
revenue, in 2006, $351.5 million, or 26% of our total
revenue, in 2005 and $330.7 million, or 28% of our total
revenue, in 2004. We expect that maintenance revenue in 2007
will be generated predominantly from backlog.
Services
We offer a number of fee-based services, including education and
engineering services related to IC design and methodology. These
services may be sold separately or sold and performed in
conjunction with the sale, lease or license of our products.
Services revenue was $134.9 million, or 9% of our total
revenue, in 2006, $126.2 million, or 9% of our total
revenue, in 2005 and $137.0 million, or 11% of our total
revenue, in 2004.
Education
Services
Our education services include Internet, classroom and custom
courses, the content of which ranges from how to use the most
recent features of our EDA products to instruction in the latest
IC design techniques.
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Engineering
Services
We offer engineering services and reusable design technologies
to aid customers with the design of complex ICs. We focus our
offerings primarily on SoC devices, including both ASICs and
Application Specific Standard Parts, and on analog and mixed
signal ICs. The customers for these services primarily consist
of semiconductor and systems companies developing products for
the communications, computing and consumer markets. We offer
engineering capabilities to assist customers from product
concept through volume manufacturing.
We also make our design IP portfolio available to customers as
part of our technology and services solutions. These reusable
design and methodology components enable us to more efficiently
deliver our services, and allow our customers to reduce the
design complexity and time to market for the development of
complex SoCs.
In our design and methodology service practices, we leverage our
cumulative experience and knowledge of design practices across
many customers and different design environments to improve our
own service teams and our customers productivity. We
work with customers using outsourcing, consultative and
collaborative models depending on their projects and needs. Our
Virtual Computer-Aided Design, or VCAD, model enables our
engineering teams at one or more of our locations to virtually
work
side-by-side
with our customers teams located elsewhere during the
course of their design and engineering projects through a secure
private network infrastructure.
Through collaboration with our customers, we are able to design
advanced ICs and gain direct and early visibility to industry
design issues that may not be addressed adequately by
todays EDA solutions. This enables us to accelerate the
development of new software technology and products to meet the
markets current and future design requirements.
Marketing
and Sales
We generally use a direct sales force consisting of sales people
and applications engineers to market our products and provide
maintenance and services to existing and prospective customers.
Applications engineers provide technical pre-sales and
post-sales support for software products. Due to the complexity
of many of our EDA products and the electronic design process in
general, the sales cycle is generally long, requiring three to
six months or more. During the sales cycle, our direct sales
force generally provides technical presentations, product
demonstrations and support for
on-site
customer evaluation of our software. We also use traditional
marketing approaches to promote our products and services,
including advertising, direct mail, telemarketing, trade shows,
public relations and the Internet. As EDA products mature and
become widely understood by the marketplace, we selectively
utilize value added resellers to broaden our reach and reduce
cost of sales. All OrCAD and selected Incisive products are
primarily marketed through these channels. With respect to
international sales, we generally market and support our
products and services through our subsidiaries.
Software
Licensing Arrangements
We sell software using three license types: subscription, term
and perpetual. Customers who prefer to license technology for a
specified, limited period of time will choose either a
subscription or term license, and customers who prefer to have
the right to use the technology continuously without time
restriction will choose a perpetual license. Customers who
desire rights to remix in new technology during the life of the
contract will select a subscription license, which allows them
limited access to unspecified new technology on a
when-and-if-available
basis, as opposed to a term or perpetual license which does not
include remix rights to new technology. Payment terms for
subscription and term licenses generally provide for payments to
be made in installments over the license period and payment
terms for perpetual licenses generally are net 30 days.
Our revenue recognition depends on a number of contract-specific
terms and conditions, including the license type, payment terms,
creditworthiness of the customer and other factors as more fully
described in this Annual Report under the heading Critical
Accounting Estimates under Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations. Revenue associated
with subscription licenses is recognized over multiple periods
during the license term, whereas product revenue associated with
term and perpetual licenses is generally recognized upon the
later of the effective date of the license or delivery of the
product, assuming all
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other criteria for revenue recognition have been met. Although
it can vary from quarter to quarter, approximately two-thirds of
our product revenue was recognized from backlog during each of
the past three years.
Our revenue and results of operations may miss expectations due
to a shortfall in product revenue generated from current
transactions or variance in the actual mix of license types
executed in any given period, and due to other contract-specific
terms and conditions as discussed above. We are subject to
greater credit risk on subscription and term licenses, as
compared to perpetual licenses, due to the installment payment
terms generally associated with those license types. Otherwise,
the particular risks to us of one license type versus another
type do not vary considerably.
From time to time we sell receivables generated by our licenses
with installment payment terms to third party financing
institutions on a non-recourse or limited-recourse basis.
For a further description of our license agreements, revenue
recognition policies and results of operations, please refer to
the discussion under the heading Critical Accounting
Estimates under Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
Research
and Development
Our investment in research and development was
$460.1 million in 2006, $390.7 million in 2005 and
$368.1 million in 2004.
The primary areas of our research and development include SoC
design, the design of silicon devices in the nanometer range,
high-performance IC packaging, SiP and PCB design, system-level
modeling and verification, high-performance logic verification
technology and hardware/software co-verification. Because the
electronics industry combines rapid innovation with rapidly
increasing design and manufacturing complexity, we make
significant investments in enhancing our current products, as
well as creating new products and technologies and integrating
those products and technologies together into segmented
solutions.
Our future performance depends largely on our ability to
maintain and enhance our current product development and
commercialization to meet advancing semiconductor manufacturing
capability and design complexity, develop, acquire or interface
to new products from third parties, and develop solutions that
meet increasingly demanding productivity, quality,
predictability and cost requirements. In addition to our
research and development team, we maintain Cadence Laboratories,
an advanced research group responsible for exploring specific
new technologies, moving those technologies into product
development and maintaining strong industry relationships.
Manufacturing
and Distribution
Our software production consists of configuring the
customers order, outsourcing the recording of the product
electronically or on CD-ROM, and producing customer-unique
access keys that allow customers to use licensed products.
Software and documentation are primarily distributed to
customers by secure electronic delivery. User manuals and other
documentation are generally available by secure electronic
delivery or on CD-ROM, but are occasionally supplied in hard
copy format.
Cadence performs final assembly and test of its hardware
verification, acceleration and emulation products in
San Jose, California. Subcontractors manufacture all major
subassemblies, including all individual PCBs and custom ICs, and
supply them to us for qualification and testing prior to their
incorporation into the assembled product.
Proprietary
Technology
Our success depends, in part, upon our proprietary technology.
We generally rely on patents, copyrights, trademarks, trade
secret laws, licenses and restrictive agreements to establish
and protect our proprietary rights in technology and products.
Many of our products include software or other intellectual
property licensed from third parties. We may have to seek new
licenses or renew existing licenses for this third party
software and other intellectual property in the future. As part
of performing design and methodology services for customers, our
design
8
and methodology services business licenses certain software and
other intellectual property of third parties, including that of
our competitors.
Competition
We compete in the EDA market for products and maintenance
primarily with three companies: Synopsys, Inc., Mentor Graphics
Corporation and Magma Design Automation, Inc. We also compete
with numerous smaller EDA companies, with manufacturers of
electronic devices that have developed or have the capability to
develop their own EDA products, and with numerous electronics
design and consulting companies. We generally compete on the
basis of product quality, product features, integration in a
platform or compatibility with other tools, price, payment terms
and maintenance offerings.
Our maintenance business flows directly from our product
business. The competitive issues associated with our maintenance
business are substantially the same as those for our product
business in that every maintenance contract is the direct result
of a product contract, and once we have entered into a product
contract, maintenance is generally purchased by the customer to
ensure access to bug fixes and service releases, as and when
they are made available, and other continued support.
Certain competitive factors in the design and methodology
services business as described herein differ from those of the
products and maintenance businesses. While we do compete with
other EDA companies in the design and methodology services
business, we compete more with independent design and
methodology service businesses. These companies vary greatly in
focus, geographic location, capability, cost structure and
pricing. In addition, manufacturers of electronic devices may be
reluctant to purchase services from independent vendors, such as
Cadence, because they wish to promote their own internal design
departments. We compete with these companies by focusing on the
design of complex analog and digital ICs. It is our strategy to
use design and methodology services as a differentiator to
further promote our products and maintenance businesses.
Backlog
Our backlog on December 30, 2006 was approximately
$1.9 billion, as compared to $1.8 billion on
December 31, 2005. Backlog consists of revenue to be
recognized in future fiscal periods after December 30, 2006
from:
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Subscription licenses for software products;
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Sale or lease of hardware;
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Maintenance contracts on hardware and software products;
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Orders for hardware and software products sold on perpetual and
term licenses on which customers have delivery dates after
December 30, 2006;
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Licenses with payments that are outside our customary
terms; and
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The undelivered portion of design and methodology services
contracts.
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The substantial majority of our backlog is generated by our
product and maintenance businesses because customer licenses
generally include both product and maintenance components.
Historically, we have not experienced significant cancellations
of our contracts with customers. However, we often reschedule
the required completion dates of design and methodology services
contracts which, at times, defers revenue recognition under
those contracts beyond the original expected completion date.
Changes in customer license types or payment terms also can
impact the timing of revenue recognition.
Revenue
Seasonality
Historically, orders and revenue have been lowest in our first
quarter and highest in our fourth quarter, with a material
decline between the fourth quarter of one year and the first
quarter of the next year. We expect the first quarter will
remain our lowest quarter for orders and revenues; orders and
revenues in other quarters will vary based on the particular
timing and type of licenses entered into with large customers.
9
International
Operations
We have approximately 60 sales offices, design centers and
research and development facilities located around the world. We
consider customer sales and support requirements, the
availability of a skilled workforce, and costs and efficiencies,
among other relative benefits, when determining what operations
to locate internationally. For additional information regarding
our international operations, see the discussion under the
heading The effect of foreign exchange rate
fluctuations and other risks to our international operations may
seriously harm our financial condition in
Item 1A, Risk Factors and Note 21 to our
Consolidated Financial Statements.
Employees
As of December 30, 2006, we employed approximately 5,200
individuals, with approximately 1,900 in sales, services,
marketing, support and manufacturing activities, approximately
2,700 in product research and development and approximately 600
in management, administration and finance. None of our employees
are represented by a labor union, and we have experienced no
work stoppages. We believe that our employee relations are good.
Item 1A. Risk
Factors
Our business faces many risks. Described below are
what we believe to be the material risks that we face. If any of
the events or circumstances described in the following risks
actually occurs, our business, financial condition or results of
operations could suffer.
Risks
Related to Our Business
We are
subject to the cyclical nature of the integrated circuit and
electronics systems industries, and any
downturn in these industries may reduce our
revenue.
Purchases of our products and services are dependent upon the
commencement of new design projects by IC manufacturers and
electronics systems companies. The IC and electronics systems
industries are cyclical and are characterized by constant and
rapid technological change, rapid product obsolescence and price
erosion, evolving standards, short product life cycles and wide
fluctuations in product supply and demand.
The IC and electronics systems industries have experienced
significant downturns, often connected with, or in anticipation
of, maturing product cycles of both these industries and
their customers products and a decline in general economic
conditions. These downturns have been characterized by
diminished product demand, production overcapacity, high
inventory levels and accelerated erosion of average selling
prices. Any economic downturn in the industries we serve could
harm our business, operating results or financial condition.
Our
failure to respond quickly to technological developments could
make our products
uncompetitive and obsolete.
The industries in which we compete experience rapid technology
developments, changes in industry standards, changes in customer
requirements and frequent new product introductions and
improvements. Currently, the industries we serve are
experiencing several revolutionary trends:
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Migration to nanometer design: the size of features such as
wires, transistors and contacts on ICs continuously shrink due
to the ongoing advances in semiconductor manufacturing
processes. Process feature sizes refer to the width of the
transistors and the width and spacing of interconnect on the IC.
Feature size is normally identified by the transistor length,
which is shrinking rapidly to 65 nanometers and smaller. This is
commonly referred to in the semiconductor industry as the
migration to nanometer design. It represents a major challenge
for participants in the semiconductor industry, from IC design
and design automation to design of manufacturing equipment and
the manufacturing process itself. Shrinkage of transistor length
to such proportions is challenging the industry in the
application of more complex physics and chemistry that is needed
to realize advanced silicon devices. For EDA tools, models of
each components electrical properties and behavior become
more complex as do requisite analysis, design and verification
capabilities. Novel design tools and methodologies must be
invented quickly to remain competitive in the design of
electronics in the smallest nanometer ranges.
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The challenges of nanometer design are leading some customers to
work with older, less risky manufacturing processes. This may
reduce their need to upgrade their EDA products and design flows.
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The ability to design
system-on-a-chip
devices, or SoCs, increases the complexity of managing a design
that, at the lowest level, is represented by billions of shapes
on the fabrication mask. In addition, SoCs typically incorporate
microprocessors and digital signal processors that are
programmed with software, requiring simultaneous design of the
IC and the related software embedded on the IC.
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With the availability of seemingly endless gate capacity, there
is an increase in design reuse, or the combining of
off-the-shelf
design IP with custom logic to create ICs. The unavailability of
high-quality design IP that can be reliably incorporated into a
customers design with Cadence IC implementation products
and services could reduce demand for our products and services.
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Increased technological capability of the Field-Programmable
Gate Array, which is a programmable logic chip, creates an
alternative to IC implementation for some electronics companies.
This could reduce demand for Cadences IC implementation
products and services.
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A growing number of low-cost design and methodology services
businesses could reduce the need for some IC companies to invest
in EDA products.
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If we are unable to respond quickly and successfully to these
developments, we may lose our competitive position, and our
products or technologies may become uncompetitive or obsolete.
To compete successfully, we must develop or acquire new products
and improve our existing products and processes on a schedule
that keeps pace with technological developments and the
requirements for products addressing a broad spectrum of
designers and designer expertise in our industries. We must also
be able to support a range of changing computer software,
hardware platforms and customer preferences. We cannot guarantee
that we will be successful in this effort.
We
have experienced varied operating results, and our operating
results for any particular fiscal period are affected by the
timing of significant orders for our software products,
fluctuations in customer preferences for license types and the
timing of revenue recognition under those license
types.
We have experienced, and may continue to experience, varied
operating results. In particular, we have experienced net losses
for some past periods and we may experience net losses in future
periods. Various factors affect our operating results and some
of them are not within our control. Our operating results for
any period are affected by the timing of significant orders for
our software products because a significant number of licenses
for our software products are in excess of $5.0 million.
Our operating results are also affected by the mix of license
types executed in any given period. We license software using
three different license types: subscription, term and perpetual.
Product revenue associated with term and perpetual licenses is
generally recognized at the beginning of the license period,
whereas product revenue associated with subscription licenses is
recognized over multiple periods during the term of the license.
Revenue may also be deferred under term and perpetual licenses
until payments become due and payable from customers with
nonlinear payment terms or as cash is collected from customers
with lower credit ratings. In addition, revenue is impacted by
the timing of license renewals, the extent to which contracts
contain flexible payment terms and the mix of license types
(i.e., perpetual, term or subscription) for existing customers,
which changes could have the effect of accelerating or delaying
the recognition of revenue from the timing of recognition under
the original contract.
We plan operating expense levels primarily based on forecasted
revenue levels. These expenses and the impact of long-term
commitments are relatively fixed in the short term. A shortfall
in revenue could lead to operating results below expectations
because we may not be able to quickly reduce these fixed
expenses in response to these short-term business changes.
You should not view our historical results of operations as
reliable indicators of our future performance. If revenue or
operating results fall short of the levels expected by public
market analysts or investors, the trading price of our common
stock could decline dramatically.
11
Our
future revenue is dependent in part upon our installed customer
base continuing to license or buy additional products,
renew maintenance agreements and purchase additional
services.
Our installed customer base has traditionally generated
additional new license, service and maintenance revenues. In
future periods, customers may not necessarily license or buy
additional products or contract for additional services or
maintenance. Maintenance is generally renewable annually at a
customers option, and there are no mandatory payment
obligations or obligations to license additional software. If
our customers decide not to renew their maintenance agreements
or license additional products or contract for additional
services, or if they reduce the scope of the maintenance
agreements, our revenue could decrease, which could have an
adverse effect on our results of operations.
We may
not receive significant revenue from our current research and
development efforts for several years, if at
all.
Internally developing software products, integrating acquired
software products and integrating intellectual property into
existing platforms is expensive, and these investments often
require a long time to generate returns. Our strategy involves
significant investments in software research and development and
related product opportunities. We believe that we must continue
to dedicate a significant amount of resources to our research
and development efforts to maintain our competitive position.
However, we cannot predict that we will receive significant, if
any, revenue from these investments.
Our
failure to attract, train, motivate and retain key employees may
make us less competitive in our industries and therefore harm
our results of operations.
Our business depends on the efforts and abilities of our
employees. The high cost of training new employees, not fully
utilizing these employees, or losing trained employees to
competing employers could reduce our gross margins and harm our
business or operating results. Competition for highly skilled
employees can be intense, particularly in geographic areas
recognized as high technology centers such as the Silicon Valley
area, where our principal offices are located, and the other
locations where we maintain facilities. If economic conditions
continue to improve and job opportunities in the technology
industry become more plentiful, we may experience increased
employee attrition and increased competition for skilled
employees. To attract, retain and motivate individuals with the
requisite expertise, we may be required to grant large numbers
of stock options or other stock-based incentive awards, which
may be dilutive to existing stockholders and increase
compensation expense. We may also be required to pay key
employees significant base salaries and cash bonuses, which
could harm our operating results.
In addition, the NASDAQ Marketplace Rules require stockholder
approval for new equity compensation plans and significant
amendments to existing plans, including increases in shares
available for issuance under such plans, and prohibit NASDAQ
member organizations from giving a proxy to vote on equity
compensation plans unless the beneficial owner of the shares has
given voting instructions. These regulations could make it more
difficult for us to grant equity compensation to employees in
the future. To the extent that these regulations make it more
difficult or expensive to grant equity compensation to
employees, we may incur increased compensation costs or find it
difficult to attract, retain and motivate employees, which could
materially and adversely affect our business.
We
have acquired and expect to acquire other companies and
businesses and may not realize the expected benefits of these
acquisitions.
We have acquired and expect to acquire other companies and
businesses in the future. While we expect to carefully analyze
each potential acquisition before committing to the transaction,
we may not be able to integrate and manage acquired products and
businesses effectively. In addition, acquisitions involve a
number of risks. If any of the following events occurs after we
acquire another business, it could seriously harm our business,
operating results or financial condition:
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Difficulties in combining previously separate businesses into a
single unit;
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The substantial diversion of managements attention from
day-to-day
business when evaluating and negotiating these transactions and
integrating an acquired business;
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The discovery, after completion of the acquisition, of
liabilities assumed from the acquired business or of assets
acquired for which we cannot realize the anticipated value;
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The failure to realize anticipated benefits such as cost savings
and revenue enhancements;
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The failure to retain key employees of the acquired business;
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Difficulties related to integrating the products of an acquired
business in, for example, distribution, engineering and customer
support areas;
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Unanticipated costs;
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Customer dissatisfaction with existing license agreements with
Cadence which may dissuade them from licensing or buying
products acquired by Cadence after the effective date of the
license; and
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The failure to understand and compete effectively in markets in
which we have limited experience.
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In a number of our previously completed acquisitions, we have
agreed to make future payments, or earnouts, based on the
performance of the businesses we acquired. The performance goals
pursuant to which these future payments may be made generally
relate to achievement by the acquired business of certain
specified bookings, revenue, product proliferation, product
development or employee retention goals during a specified
period following completion of the applicable acquisition.
Future acquisitions may involve issuances of stock as full or
partial payment of the purchase price for the acquired business,
grants of incentive stock or options to employees of the
acquired businesses (which may be dilutive to existing
stockholders), expenditure of substantial cash resources or the
incurrence of material amounts of debt.
The specific performance goal levels and amounts and timing of
contingent purchase price payments vary with each acquisition.
In connection with our acquisitions completed prior to
December 30, 2006, we may be obligated to pay up to an
aggregate of $4.8 million in cash during the next
12 months and an additional $2.0 million in cash in
periods after the next 12 months through August 2008 if
certain performance goals related to one or more of the criteria
mentioned above are achieved in full.
The
competition in our industries is substantial and we may not be
able to continue to successfully compete in our
industries.
The EDA market and the commercial electronics design and
methodology services industries are highly competitive. If we
fail to compete successfully in these industries, it could
seriously harm our business, operating results or financial
condition. To compete in these industries, we must identify and
develop or acquire innovative and cost-competitive EDA products,
integrate them into platforms and market them in a timely
manner. We must also gain industry acceptance for our design and
methodology services and offer better strategic concepts,
technical solutions, prices and response time, or a combination
of these factors, than those of other design companies and the
internal design departments of electronics manufacturers. We
cannot assure you that we will be able to compete successfully
in these industries. Factors that could affect our ability to
succeed include:
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The development by others of competitive EDA products or
platforms and design and methodology services, which could
result in a shift of customer preferences away from our products
and services and significantly decrease revenue;
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Decisions by electronics manufacturers to perform design and
methodology services internally, rather than purchase these
services from outside vendors due to budget constraints or
excess engineering capacity;
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The challenges of developing (or acquiring externally-developed)
technology solutions that are adequate and competitive in
meeting the requirements of next-generation design challenges;
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The significant number of current and potential competitors in
the EDA industry and the low cost of entry;
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Intense competition to attract acquisition targets, which may
make it more difficult for us to acquire companies or
technologies at an acceptable price or at all; and
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The combination of or collaboration among many EDA companies to
deliver more comprehensive offerings than they could
individually.
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We compete in the EDA products market primarily with Synopsys,
Inc., Mentor Graphics Corporation and Magma Design Automation,
Inc. We also compete with numerous smaller EDA companies, with
manufacturers of electronic devices that have developed or have
the capability to develop their own EDA products, and with
numerous electronics design and consulting companies.
Manufacturers of electronic devices may be reluctant to
13
purchase design and methodology services from independent
vendors such as us because they wish to promote their own
internal design departments.
We may
need to change our pricing models to compete
successfully.
The highly competitive markets in which we compete can put
pressure on us to reduce the prices of our products. If our
competitors offer deep discounts on certain products in an
effort to recapture or gain market segment share or to sell
other software or hardware products, we may then need to lower
our prices or offer other favorable terms to compete
successfully. Any such changes would be likely to reduce our
profit margins and could adversely affect our operating results.
Any substantial changes to our prices and pricing policies could
cause sales and software license revenues to decline or be
delayed as our sales force implements and our customers adjust
to the new pricing policies. Some of our competitors may bundle
products for promotional purposes or as a long-term pricing
strategy or provide guarantees of prices and product
implementations. These practices could, over time, significantly
constrain the prices that we can charge for our products. If we
cannot offset price reductions with a corresponding increase in
the number of sales or with lower spending, then the reduced
license revenues resulting from lower prices could have an
adverse effect on our results of operations.
We
rely on our proprietary technology as well as software and other
intellectual property rights licensed to us by third parties,
and we cannot assure you that the precautions taken to protect
our rights will be adequate or that we will continue to be able
to adequately secure such intellectual property rights from
third parties.
Our success depends, in part, upon our proprietary technology.
We generally rely on patents, copyrights, trademarks, trade
secret laws, licenses and restrictive agreements to establish
and protect our proprietary rights in technology and products.
Despite precautions we may take to protect our intellectual
property, third parties have tried in the past, and may try in
the future, to challenge, invalidate or circumvent these
safeguards. The rights granted under our patents or attendant to
our other intellectual property may not provide us with any
competitive advantages and there is no guarantee that patents
will be issued on any of our pending applications and future
patents may not be sufficiently broad to protect our technology.
Furthermore, the laws of foreign countries may not protect our
proprietary rights in those countries to the same extent as
applicable law protects these rights in the United States. Many
of our products include software or other intellectual property
licensed from third parties. We may have to seek new or renew
existing licenses for such software and other intellectual
property in the future. Our design and methodology services
business holds licenses to certain software and other
intellectual property owned by third parties, including that of
our competitors. Our failure to obtain, for our use, software or
other intellectual property licenses or other intellectual
property rights on favorable terms, or the need to engage in
litigation over these licenses or rights, could seriously harm
our business, operating results or financial condition.
We
could lose key technology or suffer serious harm to our business
because of the infringement of our intellectual property rights
by third parties or because of our infringement of the
intellectual property rights of third parties.
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 customers rights. For example, on
November 8, 2006, an individual filed suit against us,
Magma Design Automation, Inc., Dynalith Systems, Inc., Altera
Corp., Mentor Graphics Corp. and Aldec, Inc. in the United
States District Court for the Eastern District of Texas. The
suit alleges that certain products of Cadence and the other
defendants infringe a patent for an electronic simulation and
emulation system owned by the plaintiff. The plaintiff seeks
unspecified damages and attorneys fees and costs. We
dispute the plaintiffs claims and intend to defend the
lawsuit vigorously.
Intellectual property infringement claims, regardless of merit,
could consume valuable management time, result in costly
litigation, or cause product shipment delays, all of which could
seriously harm our business, operating results or financial
condition. In settling these claims, we may be required to enter
into royalty or licensing agreements with the third parties
claiming infringement. These royalty or licensing agreements, if
available, may not have terms favorable to us. Being compelled
to enter into a license agreement with unfavorable
14
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:
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Pay damages (including the potential for treble damages),
license fees or royalties (including royalties for past periods)
to the party claiming infringement;
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Stop licensing products or providing services that use the
challenged intellectual property;
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Obtain a license from the owner of the infringed intellectual
property to sell or use the relevant technology, which license
may not be available on reasonable terms, or at all; or
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Redesign the challenged technology, which could be
time-consuming and costly, or not be accomplished.
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If we were compelled to take any of these actions, our business
or results of operations may suffer.
If our
security measures are breached and an unauthorized party obtains
access to customer data, our information systems may be
perceived as being unsecure and customers may curtail or stop
their use of our products and services.
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.
We may
not be able to effectively implement our restructuring
activities, and our restructuring activities may not result in
the expected benefits, which would negatively impact our future
results of operations.
The EDA market and the commercial electronics design and
methodology services industries are highly competitive and
change quickly. We have responded to increased competition and
changes in the industries in which we compete, in part, by
restructuring our operations and at times reducing the size of
our workforce. Despite our restructuring efforts in prior years,
we may not achieve all of the operating expense reductions and
improvements in operating margins and cash flows anticipated
from those restructuring activities in the periods contemplated.
Our inability to realize these benefits may result in an
inefficient business structure that could negatively impact our
results of operations.
As part of our restructuring activities in prior years, we have
reduced the workforce in certain revenue-generating portions of
our business. These reductions in staffing levels could require
us to forego certain future opportunities due to resource
limitations, which could negatively affect our long-term
revenues.
We cannot assure you that we will not be required to implement
further restructuring activities or reductions in our workforce
based on changes in the markets and industries in which we
compete or that any future restructuring efforts will be
successful.
The
long sales cycle of our products and services makes the timing
of our revenue difficult to predict and may cause our operating
results to fluctuate unexpectedly.
We have a long sales cycle that generally extends at least three
to six months. The length of the sales cycle may cause our
revenue or operating results to vary from quarter to quarter.
The complexity and expense associated with our business
generally require a lengthy customer education, evaluation and
approval process. Consequently, we may incur substantial
expenses and devote significant management effort and expense to
develop potential relationships that do not result in agreements
or revenue and may prevent us from pursuing other opportunities.
15
In addition, sales of our products and services may be delayed
if customers delay approval or commencement of projects because
of:
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The timing of customers competitive evaluation
processes; or
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Customers budgetary constraints and budget cycles.
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Long sales cycles for acceleration and emulation hardware
products subject us to a number of significant risks over which
we have limited control, including insufficient, excess or
obsolete inventory, variations in inventory valuation and
fluctuations in quarterly operating results.
Also, because of the timing of large orders and our
customers buying patterns, we may not learn of bookings
shortfalls, revenue shortfalls, earnings shortfalls or other
failures to meet market expectations until late in a fiscal
quarter. These factors may cause our operating results to
fluctuate unexpectedly.
The
effect of foreign exchange rate fluctuations and other risks to
our international operations may seriously harm our financial
condition.
We have significant operations outside the United States. Our
revenue from international operations as a percentage of total
revenue was approximately 48% in 2006, 54% in 2005 and 50% in
2004. We expect that revenue from our international operations
will continue to account for a significant portion of our total
revenue. We also transact business in various foreign
currencies. Recent economic and political uncertainty and the
volatility of foreign currencies in certain regions, most
notably the Japanese yen, European Union euro, British pound and
Indian rupee have had, and may in the future have, a harmful
effect on our revenue or operating results.
Fluctuations in the rate of exchange between the United States
dollar and the currencies of other countries in which we conduct
business could seriously harm our business, operating results or
financial condition. For example, if there is an increase in the
rate at which a foreign currency exchanges into United States
dollars, it will take more of the foreign currency to equal the
same amount of United States dollars than before the rate
increase. If we price our products and services in the foreign
currency, we will receive fewer United States dollars than we
did before the rate increase went into effect. If we price our
products and services in United States dollars, an increase in
the exchange rate will result in an increase in the price for
our products and services compared to those products of our
competitors that are priced in local currency. This could result
in our prices being uncompetitive in markets where business is
transacted in the local currency.
Exposure to foreign currency transaction risk can arise when
transactions are conducted in a currency different from the
functional currency of one of our subsidiaries. A
subsidiarys 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:
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The adoption or expansion of government trade restrictions;
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Limitations on repatriation of earnings;
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Limitations on the conversion of foreign currencies;
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Reduced protection of intellectual property rights in some
countries;
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Recessions in foreign economies;
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Longer collection periods for receivables and greater difficulty
in collecting accounts receivable;
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Difficulties in managing foreign operations;
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Political and economic instability;
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Unexpected changes in regulatory requirements;
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Tariffs and other trade barriers; and
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United States and other governments licensing requirements
for exports, which may lengthen the sales cycle or restrict or
prohibit the sale or licensing of certain products.
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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
16
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:
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Earnings being lower than anticipated in countries where we are
taxed at lower rates as compared to the United States federal
and state statutory tax rates;
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An increase in expenses not deductible for tax purposes,
including certain stock-based compensation, write-offs of
acquired in-process research and development and impairment of
goodwill;
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Changes in the valuation of our deferred tax assets and
liabilities;
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Changes in tax laws or the interpretation of such tax laws;
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New accounting standards or interpretations of such standards;
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A change in our decision to indefinitely reinvest foreign
earnings outside the United States; or
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Results of tax examinations by the Internal Revenue Service, or
IRS, and state and foreign tax authorities.
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Any significant change in our future effective tax rates could
adversely impact our results of operations for future periods.
We
have received examination reports from the Internal Revenue
Service proposing deficiencies in certain of our tax returns,
and the outcome of current and future tax examinations may have
a material adverse effect on our results of operations and cash
flows.
The IRS and other tax authorities regularly examine our income
tax returns. In November 2003, the IRS completed its field
examination of our federal income tax returns for the tax years
1997 through 1999 and issued a Revenue Agents Report, or
RAR, in which the IRS proposes to assess an aggregate tax
deficiency for the three-year period of approximately
$143.0 million. The most significant of the disputed
adjustments for the tax years 1997 through 1999 relates to
transfer pricing arrangements that we have with a foreign
subsidiary. We have filed a protest to certain of the proposed
adjustments with the Appeals Office of the IRS where the matter
is currently being considered.
In July 2006, the IRS completed its field examination of our
federal income tax returns for the tax years 2000 through 2002
and issued an RAR, in which the IRS proposes to assess an
aggregate tax deficiency for the three-year period of
approximately $324.0 million. In November 2006, the IRS
revised the proposed aggregate tax deficiency for the three-year
period to be approximately $318.0 million. The IRS is
contesting our qualification for deferred recognition of certain
proceeds received from restitution and settlement in connection
with litigation during the period. The proposed tax deficiency
for this item is approximately $152.0 million. The
remaining proposed tax deficiency of approximately
$166.0 million is primarily related to proposed adjustments
to our transfer pricing arrangements that we have with foreign
subsidiaries and to our deductions for foreign trade income. The
IRS took similar positions with respect to our transfer pricing
arrangements in the prior examination period and may make
similar claims against our transfer pricing arrangements in
future examinations. We have filed a timely protest with the IRS
and will seek resolution of the issues through the Appeals
Office of the IRS.
We believe that the proposed IRS adjustments are inconsistent
with applicable tax laws and we are challenging these proposed
adjustments vigorously. The RARs are not final Statutory Notices
of Deficiency but the IRS imposes interest on the proposed
deficiencies until the matters are resolved. Interest is
compounded daily at rates published by the IRS, which rates are
adjusted quarterly and have been between four and ten percent
since 1997.
Significant judgment is required in determining our provision
for income taxes. The calculation of our tax liabilities
involves dealing with uncertainties in the application of
complex tax regulations. In determining the adequacy of our
provision for income taxes, we regularly assess the likelihood
of adverse outcomes resulting from tax examinations including
the RARs for the tax years 1997 through 2002. We provide for tax
liabilities on our Consolidated Balance Sheets unless we
consider it probable that additional taxes will not be due.
However, the ultimate outcome of tax examinations, including the
total amount payable or the timing of any such payments upon
resolution of these issues, cannot be predicted with certainty.
In addition, we cannot assure you that such amount
17
will not be materially different than that which is reflected in
our historical income tax provisions and accruals. Should the
IRS or other tax authorities assess additional taxes as a result
of a current or a future examination, we may be required to
record charges to operations in future periods that could have a
material impact on the results of operations, financial position
or cash flows in the applicable period or periods.
Forecasting
our estimated annual effective tax rate is complex and subject
to uncertainty, and material differences between forecasted and
actual tax rates could have a material impact on our results of
operations.
Forecasts of our income tax position and resultant effective tax
rate are complex and subject to uncertainty because our income
tax position for each year combines the effects of a mix of
profits and losses earned by us and our subsidiaries in tax
jurisdictions with a broad range of income tax rates, as well as
benefits from available deferred tax assets, the impact of
various accounting rules and changes to these rules and costs
resulting from tax audits. To forecast our global tax rate,
pre-tax profits and losses by jurisdiction are estimated and tax
expense by jurisdiction is calculated. If the mix of profits and
losses, our ability to use tax credits, or effective tax rates
by jurisdiction is different than those estimates, our actual
tax rate could be materially different than forecasted, which
could have a material impact on our results of operations.
Failure
to obtain export licenses could harm our business by rendering
us unable to ship products and transfer our technology outside
of the United States.
We must comply with regulations of the United States Department
of Commerce and of certain other countries in shipping our
software products and transferring our technology outside the
United States and to foreign nationals. Although we have not had
any significant difficulty complying with such regulations so
far, any significant future difficulty in complying could harm
our business, operating results or financial condition.
Errors
or defects in our products and services could expose us to
liability and harm our reputation.
Our customers use our products and services in designing and
developing products that involve a high degree of technological
complexity, each of which has its own specifications. Because of
the complexity of the systems and products with which we work,
some of our products and designs can be adequately tested only
when put to full use in the marketplace. As a result, our
customers or their end users may discover errors or defects in
our software or the systems we design, or the products or
systems incorporating our design and intellectual property may
not operate as expected. Errors or defects could result in:
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Loss of customers;
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Loss of market segment share;
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Failure to attract new customers or achieve market acceptance;
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Diversion of development resources to resolve the problem;
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Loss of or delay in revenue;
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Increased service costs; and
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Liability for damages.
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If we
become subject to unfair hiring claims, we could be prevented
from hiring needed employees, incur liability for damages and
incur substantial costs in defending ourselves.
Companies in our industry whose employees accept positions with
competitors frequently claim that these competitors have engaged
in unfair hiring practices or that the employment of these
persons would involve the disclosure or use of trade secrets.
These claims could prevent us from hiring employees or cause us
to incur liability for damages. We could also incur substantial
costs in defending ourselves or our employees against these
claims, regardless of their merits. Defending ourselves from
these claims could also divert the attention of our management
away from our operations.
Our
business is subject to the risk of earthquakes, floods and other
natural catastrophic events.
Our corporate headquarters, including certain of our research
and development operations and certain of our distribution
facilities, is located in the Silicon Valley area of Northern
California, which is a region known to experience seismic
activity. In addition, several of our facilities, including our
corporate headquarters, certain of our
18
research and development operations, and certain of our
distribution operations, are in areas of San Jose,
California that have been identified by the Director of the
Federal Emergency Management Agency, or FEMA, as being located
in a special flood area. The areas at risk are identified as
being in a one hundred year flood plain, using FEMAs Flood
Hazard Boundary Map or the Flood Insurance Rate Map. If
significant seismic or flooding activity were to occur, our
operations may be interrupted, which would adversely impact our
business and results of operations.
We
maintain research and development and other facilities in parts
of the world that are not as politically stable as the United
States, and as a result we may face a higher risk of business
interruption from acts of war or terrorism than businesses
located only or primarily in the United States.
We maintain international research and development and other
facilities, some of which are in parts of the world that are not
as politically stable as the United States. Consequently, we may
face a greater risk of business interruption as a result of
terrorist acts or military conflicts than businesses located
domestically. Furthermore, this potential harm is exacerbated
given that damage to or disruptions at our international
research and development facilities could have an adverse effect
on our ability to develop new or improve existing products as
compared to other businesses which may only have sales offices
or other less critical operations abroad. We are not insured for
losses or interruptions caused by acts of war or terrorism.
Risks
Related to Our Securities and Indebtedness
Our
debt obligations expose us to risks that could adversely affect
our business, operating results or financial condition, and
could prevent us from fulfilling our obligations under such
indebtedness.
We have a substantial level of debt. As of December 30,
2006, we had $758.4 million of outstanding indebtedness as
follows:
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$250.0 million related to our 1.375% Convertible
Senior Notes due 2011, or the 2011 Notes;
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$250.0 million related to our 1.500% Convertible
Senior Notes due 2013, or the 2013 Notes and, together with the
2011 Notes, the Convertible Senior Notes;
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$230.4 million related to our Zero Coupon Zero Yield Senior
Convertible Notes due 2023, or 2023 Notes; and
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$28.0 million related to the term loan incurred by our
wholly-owned Irish subsidiary Castlewilder, or the Term Loan,
which we have guaranteed.
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The level of our indebtedness, among other things, could:
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Make it difficult for us to satisfy our payment obligations on
our debt as described below;
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Make us more vulnerable in the event of a downturn in our
business;
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Reduce funds available for use in our operations;
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Make it difficult for us to incur additional debt or obtain any
necessary financing in the future for working capital, capital
expenditures, debt service, acquisitions or general corporate
purposes;
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Limit our flexibility in planning for or reacting to changes in
our business;
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Make us more vulnerable in the event of an increase in interest
rates if we must incur new debt to satisfy our obligations under
the Convertible Senior Notes, the 2023 Notes or the Term
Loan; or
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Place us at a possible competitive disadvantage relative to less
leveraged competitors and competitors that have greater access
to capital resources.
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If we experience a decline in revenue due to any of the factors
described in this section entitled Risk Factors, or
otherwise, we could have difficulty paying amounts due on our
indebtedness. In the case of the 2023 Notes, although they
mature in 2023, the holders of the 2023 Notes may require us to
repurchase for cash all or any portion of the 2023 Notes on
August 15, 2008 for 100.25% of the principal amount,
August 15, 2013 for 100.00% of the principal amount and
August 15, 2018 for 100.00% of the principal amount. As a
result, although the 2023 Notes mature in 2023, the holders may
require us to repurchase the 2023 Notes at an additional premium
in 2008, which makes it probable that we will be required to
repurchase the 2023 Notes in 2008 if they have not first been
repurchased by us or are not otherwise converted.
19
If we are prohibited from paying our outstanding indebtedness,
we could try to obtain the consent of the lenders under those
arrangements to make such payment, or we could attempt to
refinance the borrowings that contain the restrictions. If we do
not obtain the necessary consents or refinance the borrowings,
we may be unable to satisfy our outstanding indebtedness. Any
such failure would constitute an event of default under our
indebtedness, which could, in turn, constitute a default under
the terms of any other indebtedness then outstanding.
If we are unable to generate sufficient cash flow or otherwise
obtain funds necessary to make required payments, or if we fail
to comply with the various requirements of our indebtedness, we
would be in default, which would permit the holders of our
indebtedness to accelerate the maturity of the indebtedness and
could cause defaults under our other indebtedness as well. Any
default under our indebtedness could have a material adverse
effect on our business, operating results and financial
condition. In addition, a material default on our indebtedness
could suspend our eligibility to register securities using
certain registration statement forms under SEC guidelines that
permit incorporation by reference of substantial information
regarding us, which could potentially hinder our ability to
raise capital through the issuance of our securities and will
increase the costs of such registration to us.
Conversion
of the 2023 Notes or the Convertible Senior Notes will dilute
the ownership interests of existing stockholders.
The terms of the 2023 Notes and the Convertible Senior Notes
permit the holders to convert the 2023 Notes and the Convertible
Senior Notes into shares of our common stock. The 2023 Notes are
convertible into our common stock initially at a conversion
price of $15.65 per share, which would result in an
aggregate of approximately 14.7 million shares of our
common stock being issued upon conversion, subject to adjustment
upon the occurrence of specified events. The terms of the
Convertible Senior Notes stipulate a net share settlement, which
upon conversion of the Convertible Senior Notes requires us to
pay the principal amount in cash and the conversion premium, if
any, in shares of our common stock based on a daily settlement
amount, calculated on a proportionate basis for each day of the
relevant 20
trading-day
observation period. The initial conversion rate for the
Convertible Senior Notes is 47.2813 shares of our common
stock per $1,000 principal amount of Convertible Senior Notes,
equivalent to a conversion price of approximately
$21.15 per share of our common stock. The conversion price
is subject to adjustment in some events but will not be adjusted
for accrued interest, except in limited circumstances. The
conversion of some or all of the 2023 Notes or the Convertible
Senior Notes will dilute the ownership interest of our existing
stockholders. Any sales in the public market of the common stock
issuable upon conversion could adversely affect prevailing
market prices of our common stock.
Prior to the conversion of the 2023 Notes, if the trading price
of our common stock exceeds $22.69 per share over specified
periods, basic net income per share will be diluted. We may
redeem for cash all or any part of the 2023 Notes on or after
August 15, 2008 for 100.00% of the principal amount. The
holders of the 2023 Notes may require us to repurchase for cash
all or any portion of their 2023 Notes on August 15, 2008
for 100.25% of the principal amount, on August 15, 2013 for
100.00% of the principal amount, or on August 15, 2018 for
100.00% of the principal amount, by providing to the paying
agent a written repurchase notice. The repurchase notice must be
delivered during the period commencing 30 business days prior to
the relevant repurchase date and ending on the close of business
on the business day prior to the relevant repurchase date. We
may redeem for cash all or any part of the 2023 Notes on or
after August 15, 2008 for 100.00% of the principal amount,
except for those 2023 Notes that holders have required us to
repurchase on August 15, 2008 or on other repurchase dates,
as described above.
Each $1,000 of principal of the 2023 Notes is initially
convertible into 63.879 shares of our common stock, subject to
adjustment upon the occurrence of specified events. Holders of
the 2023 Notes may convert their 2023 Notes prior to maturity
only if:
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The price of our common stock reaches $22.69 during certain
periods of time specified in the 2023 Notes;
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Specified corporate transactions occur;
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The 2023 Notes have been called for redemption; or
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The trading price of the 2023 Notes falls below a certain
threshold.
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As a result, although the 2023 Notes mature in 2023, the holders
may require us to repurchase their notes at an additional
premium in 2008, which makes it probable that we will be
required to repurchase the 2023 Notes in 2008
20
if they have not first been repurchased by us or are not
otherwise converted. As of December 30, 2006, none of the
conditions allowing holders of the 2023 Notes to convert had
been met.
Each $1,000 of principal of the Convertible Senior Notes is
initially convertible into 47.2813 shares of our common
stock, subject to adjustment upon the occurrence of specified
events. Holders of the Convertible Senior Notes may convert
their notes at their option on any day prior to the close of
business on the scheduled trading day immediately preceding
December 15, 2011 in the case of the 2011 Notes and
December 15, 2013 in the case of the 2013 Notes, in each
case only if:
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The price of our common stock reaches $27.50 during certain
periods of time specified in the Convertible Senior Notes;
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Specified corporate transactions occur; or
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The trading price of the Convertible Senior Notes falls below a
certain threshold.
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On and after November 2, 2011, in the case of the 2011
Notes, and November 1, 2013, in the case of 2013 Notes,
until the close of business on the scheduled trading day
immediately preceding the maturity date of such Convertible
Senior Notes, holders may convert their Convertible Senior Notes
at any time, regardless of the foregoing circumstances. As of
December 30, 2006, none of the conditions allowing holders
of the Convertible Senior Notes to convert had been met.
Although the conversion price of the 2023 Notes is currently
$15.65 per share, the hedge and warrant transactions that
we entered into in connection with the issuance of the 2023
Notes effectively increased the conversion price of the 2023
Notes until various dates in 2008 to approximately
$23.08 per share, which would result in an aggregate
issuance upon conversion prior to August 15, 2008 of
approximately 10.2 million shares of our common stock. We
entered into hedge and warrant transactions to reduce the
potential dilution from the conversion of the 2023 Notes;
however, we cannot guarantee that such hedge and warrant
instruments will fully mitigate the dilution. In addition, the
existence of the 2023 Notes may encourage short selling by
market participants because the conversion of the 2023 Notes
could depress the price of our common stock.
Although the conversion price of the Convertible Senior Notes is
currently $21.15 per share, we entered into hedge and separate
warrant transactions to reduce the potential dilution from the
conversion of the Convertible Senior Notes. However, we cannot
guarantee that such hedges and warrant instruments will fully
mitigate the dilution. In addition, the existence of the
Convertible Senior Notes may encourage short selling by market
participants because the conversion of the Convertible Senior
Notes could depress the price of our common stock.
At the
option of the 2023 Noteholders and the Convertible Senior
Noteholders under certain circumstances, we may be required to
repurchase the 2023 Notes and the Convertible Senior Notes, as
the case may be, in cash or shares of our common
stock.
Under the terms of the 2023 Notes and the Convertible Senior
Notes, we may be required to repurchase the 2023 Notes and the
Convertible Senior Notes following a fundamental
change in our corporate ownership or structure, such as a
change of control in which substantially all of the
consideration does not consist of publicly traded securities,
prior to maturity of the 2023 Notes and the Convertible Senior
Notes, as the case may be. Following a fundamental change, in
certain circumstances, we may choose to pay the repurchase price
of the 2023 Notes in cash, shares of our common stock or a
combination of cash and shares of our common stock. If we choose
to pay all or any part of the repurchase price of the 2023 Notes
in shares of our common stock, this would result in dilution to
the holders of our common stock. The repurchase price for the
Convertible Senior Notes in the event of a fundamental change
must be paid solely in cash. These repayment obligations may
have the effect of discouraging, delaying or preventing a
takeover of our company that may otherwise be beneficial to
investors.
Hedge
and warrant transactions entered into in connection with the
issuance of the Convertible Senior
Notes and the 2023 Notes may
affect the value of our common stock.
We entered into hedge transactions with various financial
institutions, at the time of issuance of the Convertible Senior
Notes and the 2023 Notes, with the objective of reducing the
potential dilutive effect of issuing our common stock upon
conversion of the Convertible Senior Notes and the 2023 Notes.
We also entered into separate warrant transactions with the same
financial institutions. In connection with our hedge and warrant
transactions, these
21
financial institutions purchased our common stock in secondary
market transactions and entered into various
over-the-counter
derivative transactions with respect to our common stock. These
entities or their affiliates are likely to modify their hedge
positions from time to time prior to conversion or maturity of
the Convertible Senior Notes and the 2023 Notes by purchasing
and selling shares of our common stock, other of our securities
or other instruments they may wish to use in connection with
such hedging. Any of these transactions and activities could
adversely affect the value of our common stock and, as a result,
the number of shares and the value of the common stock holders
will receive upon conversion of the Convertible Senior Notes and
the 2023 Notes. In addition, subject to movement in the price of
our common stock, if the hedge transactions settle in our favor,
we could be exposed to credit risk related to the other party
with respect to the payment we are owed from such other party.
Rating
agencies may provide unsolicited ratings on the Convertible
Senior Notes that could reduce the market value or liquidity of
our common stock.
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.
Anti-takeover
defenses in our certificate of incorporation and bylaws and
certain provisions under Delaware law could prevent an
acquisition of our company or limit the price that investors
might be willing to pay for 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:
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Our certificate of incorporation allows our board of directors
to issue, at any time and without stockholder approval,
preferred stock with such terms as it may determine. No shares
of preferred stock are currently outstanding. However, the
rights of holders of any of our preferred stock that may be
issued in the future may be superior to the rights of holders of
our common stock.
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Section 203 of the Delaware General Corporation Law
generally prohibits a Delaware corporation from engaging in any
business combination with a person owning 15% or more of its
voting stock, or who is affiliated with the corporation and
owned 15% or more of its voting stock at any time within three
years prior to the proposed business combination, for a period
of three years from the date the person became a 15% owner,
unless specified conditions are met.
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All or any one of these factors could limit the price that
certain investors would be willing to pay for shares of our
common stock and could delay, prevent or allow our board of
directors to resist an acquisition of our company, even if a
proposed transaction were favored by a majority of our
independent stockholders.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Our headquarters is located in San Jose, California, and we
own the related land and buildings. We also own buildings in
India. As of December 30, 2006, the total square footage of
our owned buildings was approximately 925,000.
In January 2007, we completed the sale of certain of our land
and buildings in San Jose, California, representing 262,500
of our square footage owned as of December 30, 2006.
Concurrently with the sale, we leased back from the purchaser
all available space in the buildings. The lease agreement
includes an initial term of two years, with two options to
extend the lease for six months each.
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We lease additional facilities for our sales offices in the
United States and various foreign countries, and for our
research and development and design and methodology services
facilities worldwide. We sublease certain of these facilities
where space is not fully utilized or has been involved in
restructuring activities.
We believe that these facilities and the undeveloped land we own
adjacent to our current headquarters are adequate for our
current needs and that suitable additional or substitute space
will be available as needed to accommodate any expansion of our
operations.
Item 3.
Legal Proceedings
From time to time, we are involved in various disputes and
litigation matters that arise in the ordinary course of
business. These include disputes and lawsuits related to
intellectual property, mergers and acquisitions, licensing,
contract law, distribution arrangements and employee relations
matters. Periodically, we review the status of each significant
matter and assess its potential financial exposure. If the
potential loss from any claim or legal proceeding is considered
probable and the amount or the range of loss can be estimated,
we accrue a liability for the estimated loss in accordance with
Statement of Financial Accounting Standards, or
SFAS, No. 5, Accounting for Contingencies.
Legal proceedings are subject to uncertainties, and the outcomes
are difficult to predict. Because of such uncertainties,
accruals are based only on the best information available at the
time. As additional information becomes available, we reassess
the potential liability related to pending claims and litigation
matters and may revise estimates.
On November 8, 2006, an individual filed suit against us,
Magma Design Automation, Inc., Dynalith Systems, Inc., Altera
Corp., Mentor Graphics Corp. and Aldec, Inc. in the United
States District Court for the Eastern District of Texas. The
suit alleges that certain products of Cadence and the other
defendants infringe a patent for an electronic simulation and
emulation system owned by the plaintiff. The plaintiff seeks
unspecified damages and attorneys fees and costs. We
dispute the plaintiffs claims and intend to defend the
lawsuit vigorously.
While the outcome of these disputes and litigation matters
cannot be predicted with any certainty, management does not
believe that the outcome of any current matters will have a
material adverse effect on our consolidated financial position
or results of operations.
Item 4.
Submission of Matters to a Vote of Security
Holders
None.
Executive
Officers of the Registrant
The executive officers of Cadence are as follows:
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Name
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Age
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Positions and Offices
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Michael J. Fister
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52
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President, Chief Executive Officer
and Director
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Kevin Bushby
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51
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Executive Vice President,
Worldwide Field Operations
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Moshe Gavrielov
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52
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Executive Vice President and
General Manager, Verification
Division
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James S. Miller, Jr.
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44
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Executive Vice President, Products
and Technologies Organization
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William Porter
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52
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Executive Vice President and Chief
Financial Officer
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R.L. Smith McKeithen
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63
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Senior Vice President, General
Counsel and Secretary
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Executive officers are appointed by the Board of Directors and
serve at the discretion of the Board.
MICHAEL J. FISTER has served as President and Chief Executive
Officer of Cadence since May 2004. Mr. Fister has been a
member of the Cadence Board of Directors since July 2004. Prior
to joining Cadence, from 1987 to 2004, Mr. Fister held
several positions with Intel Corporation, most recently as
Senior Vice President and General Manager for the Enterprise
Platforms Group. Mr. Fister is a director of Autodesk, Inc.
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KEVIN BUSHBY has served as Executive Vice President, Worldwide
Field Operations of Cadence since 2001. From 1995 to 2001,
Mr. Bushby served as Vice President and General Manager,
European Operations of Cadence. Prior to joining Cadence, from
1990 to 1995, Mr. Bushby held several positions with Unisys
Corporation, most recently as Vice President Sales and
Marketing, Client Server Systems Division.
MOSHE GAVRIELOV has served as Executive Vice President and
General Manager, Verification Division of Cadence since April
2005. Mr. Gavrielov has over 25 years of technology
and business management experience, including serving as CEO of
Verisity Ltd. from 1998 to April 2005 before joining Cadence.
Prior to joining Verisity, Mr. Gavrielov served at LSI
Logic from 1988 to 1998 in several executive management
positions. Those positions included Executive Vice President of
the products organization, Senior Vice President of
international markets, General Manager of LSI Logic Europe and
General Manager of the ASIC division.
JAMES S. MILLER, JR. has served as Executive Vice President,
Products and Technologies Organization of Cadence since February
2006. From 2004 to 2006, Mr. Miller served as Senior Vice
President, Development of Cadence. Prior to joining Cadence,
Mr. Miller was at Intel Corporation from 2003 to 2004,
where he was most recently Enterprise Platform Design Manager
for both a multiprocessor platform and server memory technology
for the Enterprise Products Group. From 1999 to 2002,
Mr. Miller was Vice President of Silicon Development at
Silicon Spice, and later Technical Director with Broadcom
Corporation following its acquisition of Silicon Spice. From
1986 to 1998, Mr. Miller was at Intel where he held a
number of leadership roles, including management of the server
and workstation chipset organization and the
Itanium®
processor and
Pentium® II
processor organizations.
WILLIAM PORTER has served as Executive Vice President and Chief
Financial Officer of Cadence since February 2006. From 1999 to
2006, Mr. Porter served as Senior Vice President and Chief
Financial Officer of Cadence. From 1994 to 1999, Mr. Porter
served as Vice President, Corporate Controller and Assistant
Secretary of Cadence. Prior to joining Cadence, Mr. Porter
served as Technical Accounting and Reporting Manager and as
Controller of Cupertino Operations with Apple Computer, Inc.
R.L. SMITH MCKEITHEN has served as Senior Vice President,
General Counsel and Secretary of Cadence since 1998. From 1996
to 1998, Mr. McKeithen served as Vice President, General
Counsel and Secretary of Cadence. Prior to joining Cadence, from
1994 to 1996, Mr. McKeithen served as Vice President,
General Counsel and Secretary of Strategic Mapping, Inc., a
software company. From 1988 to 1994, Mr. McKeithen served
as Vice President, General Counsel and Secretary of Silicon
Graphics, Inc.
24
PART II.
Item 5.
Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the NASDAQ Global Select Market
under the symbol CDNS. We have never declared or paid any cash
dividends on our common stock in the past, and we do not plan to
pay cash dividends in the foreseeable future. As of
February 3, 2007, we had approximately 1,150 registered
stockholders and approximately 58,715 beneficial owners of our
common stock.
The following table sets forth the high and low sales price for
Cadence common stock for each calendar quarter in the two-year
period ended December 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
18.50
|
|
|
$
|
16.53
|
|
Second Quarter
|
|
$
|
19.47
|
|
|
$
|
16.55
|
|
Third Quarter
|
|
$
|
17.41
|
|
|
$
|
15.00
|
|
Fourth Quarter
|
|
$
|
18.85
|
|
|
$
|
16.77
|
|
2005
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
15.00
|
|
|
$
|
12.96
|
|
Second Quarter
|
|
$
|
14.80
|
|
|
$
|
13.50
|
|
Third Quarter
|
|
$
|
16.31
|
|
|
$
|
13.80
|
|
Fourth Quarter
|
|
$
|
18.30
|
|
|
$
|
15.59
|
|
25
The following graph compares the cumulative
5-year total
return to shareholders of Cadence Design Systems, Inc.s
common stock relative to the cumulative total returns of the
S & P 500 Index, the NASDAQ Composite Index and the
S & P Information Technology Index. The graph assumes
that the value of the investment in the companys common
stock and in each of the indexes (including reinvestment of
dividends) was $100 on December 29, 2001 and tracks it
through December 30, 2006.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among
Cadence Design Systems, Inc., The S & P 500 Index,
The NASDAQ Composite Index And The S & P Information
Technology Index
* $100
invested on 12/29/01 in stock or on 12/31/01 in index-incuding
reinvestment of dividends.
Indexes calculated on month-end basis.
Copyright
©
2007, Standard & Poors, a division of The
McGraw-Hill Companies, Inc. All rights reserved.
www.researchdatagroup.com/S&P.htm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29,
|
|
|
December 28,
|
|
|
January 3,
|
|
|
January 1,
|
|
|
December 31,
|
|
|
December 30,
|
|
|
|
2001
|
|
|
2002
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
Cadence Design Systems, Inc.
|
|
|
100.00
|
|
|
|
54.38
|
|
|
|
81.52
|
|
|
|
61.65
|
|
|
|
75.54
|
|
|
|
79.96
|
|
S & P 500
|
|
|
100.00
|
|
|
|
77.90
|
|
|
|
100.24
|
|
|
|
111.15
|
|
|
|
116.61
|
|
|
|
135.03
|
|
NASDAQ Composite
|
|
|
100.00
|
|
|
|
71.97
|
|
|
|
107.18
|
|
|
|
117.07
|
|
|
|
120.50
|
|
|
|
137.02
|
|
S & P Information
Technology
|
|
|
100.00
|
|
|
|
62.59
|
|
|
|
92.14
|
|
|
|
94.50
|
|
|
|
95.44
|
|
|
|
103.47
|
|
26
SALES OF
UNREGISTERED EQUITY SECURITIES
On December 19, 2006, we issued $250.0 million
principal amount of 1.375% Convertible Senior Notes Due 2011, or
the 2011 Notes, and $250.0 million of
1.500% Convertible Senior Notes Due 2013, or the 2013 Notes
and collectively, the Convertible Senior Notes, to three initial
purchasers in a private placement pursuant to Section 4(2)
of the Securities Act for resale to qualified institutional
buyers pursuant to SEC Rule 144A. See the discussion under
the heading Liquidity and Capital Resources
Other Factors Affecting Liquidity and Capital Resources
below for an additional description of the Convertible Senior
Notes, including the aggregate offering price, the aggregate
underwriting discounts and the terms of conversion of the
Convertible Senior Notes.
On December 19, 2006, we also sold warrants to various
parties for the purchase of up to 23.6 million shares of
our common stock at a price of $31.50 per share in a private
placement pursuant to Section 4(2) of the Securities Act.
See the discussion under the heading Liquidity and Capital
Resources Other Factors Affecting Liquidity and
Capital Resources below for an additional description of
the warrants, including the aggregate proceeds received by us
and the terms of conversion of the warrants.
ISSUER
PURCHASES OF EQUITY SECURITIES
In August 2001, our Board of Directors authorized a program to
repurchase shares of our common stock in the open market with a
value of up to $500.0 million in the aggregate, which
amount was exhausted during February 2006. In February 2006, our
Board of Directors authorized a new program to repurchase shares
of our common stock with a value of up to $500.0 million in
the aggregate. In November 2006, our Board of Directors
authorized an additional program to repurchase shares of our
common stock with a value of up to $500.0 million in the
aggregate. The following table sets forth the repurchases we
made during the three months ended December 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Dollar
|
|
|
|
|
|
|
|
|
Value of Shares that
|
|
|
|
|
|
|
Total Number of
|
|
May Yet
|
|
|
|
|
|
|
Shares Purchased
|
|
Be Purchased Under
|
|
|
Total Number
|
|
Average
|
|
as Part of
|
|
Publicly Announced
|
|
|
of Shares
|
|
Price Paid
|
|
Publicly Announced
|
|
Plans or Programs *
|
Period
|
|
Purchased *
|
|
Per Share
|
|
Plans or Programs
|
|
(In millions)
|
|
October 1, 2006
November 4, 2006
|
|
|
2,019,588
|
|
$
|
17.94
|
|
|
1,900,000
|
|
$
|
229.4
|
November 5, 2006
December 2, 2006
|
|
|
4,101,386
|
|
$
|
18.66
|
|
|
4,099,953
|
|
$
|
152.9
|
December 3, 2006
December 30, 2006
|
|
|
7,063,949
|
|
$
|
18.08
|
|
|
6,917,000
|
|
$
|
527.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13,184,923
|
|
$
|
18.24
|
|
|
12,916,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Shares purchased that were not part of our publicly announced
repurchase program represent the surrender of shares of
restricted stock to pay income taxes due upon vesting, and do
not reduce the dollar value that may yet be purchased under our
publicly announced repurchase programs.
|
27
|
|
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, Managements Discussion and Analysis of
Financial Condition and Results of Operations. Historical
results are not necessarily indicative of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five fiscal years ended December 30, 2006
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenue
|
|
$
|
1,483,895
|
|
$
|
1,329,192
|
|
$
|
1,197,480
|
|
|
$
|
1,119,484
|
|
|
$
|
1,287,943
|
|
Income (loss) from operations *
|
|
$
|
224,592
|
|
$
|
118,832
|
|
$
|
104,148
|
|
|
$
|
(21,516
|
)
|
|
$
|
160,579
|
|
Other income (expense), net
|
|
$
|
70,402
|
|
$
|
15,097
|
|
$
|
(11,513
|
)
|
|
$
|
(4,047
|
)
|
|
$
|
(13,756
|
)
|
Net income (loss) *
|
|
$
|
142,592
|
|
$
|
49,343
|
|
$
|
74,474
|
|
|
$
|
(17,566
|
)
|
|
$
|
60,339
|
|
Net income (loss) per
share assuming dilution *
|
|
$
|
0.46
|
|
$
|
0.16
|
|
$
|
0.25
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.23
|
|
Total assets
|
|
$
|
3,442,822
|
|
$
|
3,401,312
|
|
$
|
2,989,839
|
|
|
$
|
2,817,902
|
|
|
$
|
2,426,623
|
|
Convertible notes
|
|
$
|
730,385
|
|
$
|
420,000
|
|
$
|
420,000
|
|
|
$
|
420,000
|
|
|
$
|
----
|
|
Other long-term debt
|
|
$
|
----
|
|
$
|
128,000
|
|
$
|
----
|
|
|
$
|
61
|
|
|
$
|
52,659
|
|
Stockholders equity
|
|
$
|
1,699,291
|
|
$
|
1,844,704
|
|
$
|
1,699,970
|
|
|
$
|
1,572,281
|
|
|
$
|
1,644,030
|
|
|
|
|
|
*
|
We adopted SFAS No. 123R, Share-Based
Payment on January 1, 2006 using the modified
prospective transition method. Using the modified prospective
transition method, we began recognizing compensation expense for
equity-based awards granted on or after January 1, 2006 and
unvested awards granted prior to January 1, 2006.
|
|
|
Item 7.
|
Managements
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.
Certain of such statements, including, without limitation,
statements regarding the extent and timing of future revenues
and expenses and customer demand, statements regarding the
deployment of our products, statements regarding our reliance on
third parties and other statements using words such as
anticipates, believes,
could, estimates, expects,
intends, may, plans,
should, will and would, and
words of similar import and the negatives thereof, constitute
forward-looking statements. These statements are predictions
based upon our current expectations about future events. Actual
results could vary materially as a result of certain factors,
including but not limited to, those expressed in these
statements. We refer you to the Competition,
Proprietary Technology, Risk Factors,
Results of Operations, Disclosures About
Market Risk and Liquidity and Capital
Resources sections contained in this Annual Report and the
risks discussed in our other SEC filings, which identify
important risks and uncertainties that could cause actual
results to differ materially from those contained in the
forward-looking statements.
We urge you to consider these factors carefully in evaluating
the forward-looking statements contained in this Annual Report.
All subsequent written or spoken forward-looking statements
attributable to our company or persons acting on our behalf are
expressly qualified in their entirety by these cautionary
statements. The forward-looking statements included in this
Annual Report are made only as of the date of this Annual
Report. We do not intend, and undertake no obligation, to update
these forward-looking statements.
Overview
We develop electronic design automation, or EDA, software and
hardware. We license software, sell or lease hardware
technology, provide maintenance for our software and hardware
and provide design and methodology services throughout the world
to help manage and accelerate electronics product development
processes. Our broad range of products and services are used by
the worlds leading electronics companies to design and
develop complex integrated circuits, or ICs, and personal and
commercial electronics systems.
28
With the addition of emerging nanometer design considerations to
the already burgeoning set of traditional design tasks, complex
SoC or IC design can no longer be accomplished using a
collection of discrete design tools. What previously consisted
of sequential design activities must be merged and accomplished
nearly simultaneously without time-consuming data translation
steps. We combine our design technologies into
platforms for four major design activities:
functional verification, digital IC design, custom IC design and
system interconnect. The four Cadence design platforms are
Incisive functional verification, Encounter digital IC design,
Virtuoso custom design and Allegro system interconnect
platforms. In addition, we augment these platform product
offerings with a comprehensive set of DFM products that service
both the digital and custom IC design flows. These four
platforms, together with our DFM products, comprise our primary
product lines.
Functional verification was the fastest growing product group of
our business in 2006, driven by our Incisive verification
solutions. We offer a complete solution for verification
management from planning to closure. During 2006, we also
introduced a significant upgrade of our Virtuoso platform. An
early adopter program for this platform helped stimulate demand.
This release is the most significant upgrade to the custom
product line in many years. Finally, in late 2006 we introduced
the Logic Design Team solution, which combines technology from
our Incisive verification and Encounter digital design platforms
to create an integrated, front-end environment for logic
designers.
We have identified certain items that management uses as
performance indicators to manage our business, including
revenue, certain elements of operating expenses and cash flow
from operations, and we describe these items more fully below
under the heading Results of Operations below.
Critical
Accounting Estimates
In preparing our Consolidated Financial Statements, we make
assumptions, judgments and estimates that can have a significant
impact on our revenue, operating income and net income, as well
as on the value of certain assets and liabilities on our
Consolidated Balance Sheets. We base our assumptions, judgments
and estimates on historical experience and various other factors
that we believe to be reasonable under the circumstances. Actual
results could differ materially from these estimates under
different assumptions or conditions. At least quarterly, we
evaluate our assumptions, judgments and estimates and make
changes accordingly. We believe that the assumptions, judgments
and estimates involved in the accounting for revenue
recognition, accounting for income taxes, restructuring charges
and valuation of stock-based awards have the greatest potential
impact on our Consolidated Financial Statements; therefore, we
consider these to be our critical accounting estimates.
Historically, our assumptions, judgments and estimates relative
to our critical accounting estimates have not differed
materially from actual results. For further information on our
significant accounting policies, see Note 2 to our
Consolidated Financial Statements.
Revenue
recognition
We apply the provisions of Statement of Position, or SOP,
97-2,
Software Revenue Recognition, as amended by
SOP 98-9,
Modification of
SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions, to all product revenue transactions where
the software is not incidental. We also apply the provisions of
SFAS No. 13, Accounting for Leases, to all
hardware lease transactions. We recognize revenue when
persuasive evidence of an arrangement exists, the product has
been delivered, the fee is fixed or determinable, collection of
the resulting receivable is probable, and vendor-specific
objective evidence of fair value, or VSOE, exists.
We license software using three different license types:
|
|
|
|
|
Subscription licenses;
|
|
|
Term licenses; and
|
|
|
Perpetual licenses.
|
Subscription licenses Our subscription
license arrangements offer our customers the right to:
|
|
|
|
|
Access and use all software products delivered at the outset of
an arrangement throughout the entire term of the arrangement,
generally two to three years, with no rights to return;
|
29
|
|
|
|
|
Use unspecified additional software products that become
commercially available during the term of the
arrangement; and
|
|
|
Remix among the software products delivered at the outset of the
arrangement, as well as the right to remix into other
unspecified additional software products that may become
available during the term of the arrangement, so long as the
cumulative value of all products in use does not exceed the
total license fee determined at the outset of the arrangement.
These remix rights may be exercisable multiple times during the
term of the arrangement. The right to remix all software
products delivered pursuant to the license agreement is not
considered an exchange or return of software because all
software products have been delivered and the customer has the
continuing right to use them.
|
In general, revenue associated with subscription licenses is
recognized ratably over the term of the license commencing upon
the later of the effective date of the arrangement or delivery
of the software product. Subscription license revenue is
allocated to product and maintenance revenue. The allocation to
maintenance revenue is based on vendor specific objective
evidence, or VSOE, of fair value of the undelivered maintenance
that was established in connection with the sale of our term
licenses.
Term licenses Our term license arrangements
offer our customers the right to:
|
|
|
|
|
Access and use all software products delivered at the outset of
an arrangement throughout the entire term of the arrangement,
generally two to three years, with no rights to return; and
|
|
|
Remix among the software products delivered at the outset of the
arrangement, so long as the cumulative value of all products in
use does not exceed the total license fee determined at the
outset of the arrangement. These remix rights may be exercisable
multiple times during the term of the arrangement.
|
The right to remix all software products delivered pursuant to
the license agreement is not considered an exchange or return of
software because all software products have been delivered and
the customer has the continuing right to use them. In general,
revenue associated with term licenses is recognized upon the
later of the effective date of the arrangement or delivery of
the software product.
Perpetual licenses Our perpetual licenses
consist of software licensed on a perpetual basis with no right
to return or exchange the licensed software. In general, revenue
associated with perpetual licenses is recognized upon the later
of the effective date of the license or delivery of the licensed
product.
Persuasive evidence of an arrangement
Generally, we use a contract signed by the customer as evidence
of an arrangement for subscription and term licenses and
hardware leases. If a contract signed by the customer does not
exist, we have historically used a purchase order as evidence of
an arrangement for perpetual licenses, hardware sales,
maintenance renewals and small fixed-price service projects,
such as training classes and small methodology service
engagements of approximately $10,000 or less. For all other
service engagements, we use a signed professional services
agreement and a statement of work to evidence an arrangement. In
cases where both a signed contract and a purchase order exist,
we consider the signed contract to be the most persuasive
evidence of the arrangement. Sales through our distributors are
evidenced by a master agreement governing the relationship,
together with binding purchase orders from the distributor on a
transaction-by-transaction
basis.
Product delivery Software and the
corresponding access keys are generally delivered to customers
electronically. Electronic delivery occurs when we provide the
customer access to the software. Occasionally, we will deliver
the software on a compact disc with standard transfer terms of
free-on-board,
or F.O.B., shipping point. Our software license agreements
generally do not contain conditions for acceptance. With respect
to hardware, delivery of an entire system is deemed to occur
upon its successful installation. For certain hardware products,
installation is the responsibility of the customer, as the
system is fully functional at the time of shipment. For these
products, delivery is deemed to be complete when the products
are shipped with freight terms of F.O.B. shipping point.
Fee is fixed or determinable We assess
whether a fee is fixed or determinable at the outset of the
arrangement, primarily based on the payment terms associated
with the transaction. We have established a history of
collecting under the original contract without providing
concessions on payments, products or services. For our
installment contracts that do not include a substantial up front
payment, we may only determine that a fee is fixed or
determinable if the arrangement has payment periods that are
equal to or less than the term of the licenses and the
30
payments are collected in equal or nearly equal installments,
when evaluated over the entire term of the arrangement.
Significant judgment is involved in assessing whether a fee is
fixed or determinable. We must also make these judgments when
assessing whether a contract amendment to a term arrangement
(primarily in the context of a license extension or renewal)
constitutes a concession. Our experience has been that we are
able to determine whether a fee is fixed or determinable for
term licenses. While we do not expect that experience to change,
if we no longer were to have a history of collecting under the
original contract without providing concessions on term
licenses, revenue from term licenses would be required to be
recognized when payments under the installment contract become
due and payable. Such a change could have a material impact on
our results of operations.
Collection is probable We assess the
probability of collecting from each customer at the outset of
the arrangement based on a number of factors, including the
customers payment history and its current
creditworthiness. We have concluded that collection is not
probable for license arrangements executed with customers in
certain countries. If in our judgment collection of a fee is not
probable, we defer the revenue until the uncertainty is removed,
which generally means revenue is recognized upon our receipt of
cash payment. Our experience has been that we are able to
estimate whether collection is probable. While we do not expect
that experience to change, if we were to determine that
collection is not probable for any license arrangement,
particularly those with installment payment terms, revenue from
such license would be recognized generally upon the receipt of
cash payment. Such a change could have a material impact on our
results of operations.
Vendor-specific objective evidence of fair
value Our VSOE for certain product elements of
an arrangement is based upon the pricing in comparable
transactions when the element is sold separately. VSOE for
maintenance is generally based upon the customers stated
annual renewal rates. VSOE for services is generally based on
the price charged when the services are sold separately. For
multiple element arrangements, VSOE must exist to allocate the
total fee among all delivered and undelivered elements of a term
or perpetual license arrangement. If VSOE does not exist for all
elements to support the allocation of the total fee among all
delivered and undelivered elements of the arrangement, revenue
is deferred until such evidence does exist for the undelivered
elements, or until all elements are delivered, whichever is
earlier. If VSOE of all undelivered elements exists but VSOE
does not exist for one or more delivered elements, revenue is
recognized using the residual method. Under the residual method,
the VSOE of the undelivered elements is deferred, and the
remaining portion of the arrangement fee is recognized as
revenue as the elements are delivered. Our experience has been
that we are able to estimate VSOE.
Finance fee revenue Finance fees result from
discounting to present value the product revenue derived from
our installment contracts in which the payment terms extend
beyond one year from the effective date of the contract. Finance
fees are recognized using a method that approximates the
effective interest method over the relevant license term and are
classified as product revenue. Finance fee revenue represented
approximately 2% of total revenue for each of the years ended
December 30, 2006, December 31, 2005 and
January 1, 2005. Upon the sale of an installment contract,
we recognize the remaining finance fee revenue associated with
the installment contract.
Services revenue Services revenue consists
primarily of revenue received for performing design and
methodology services. These services are not related to the
functionality of the products licensed. Revenue from service
contracts is recognized either on the time and materials method,
as work is performed, or on the
percentage-of-completion
method. For contracts with fixed or
not-to-exceed
fees, we estimate on a monthly basis the
percentage-of-completion,
which is based on the completion of milestones relating to the
arrangement. We have a history of accurately estimating project
status and the costs necessary to complete projects. A number of
internal and external factors can affect our estimates,
including labor rates, utilization and efficiency variances and
specification and testing requirement changes. If different
conditions were to prevail such that accurate estimates could
not be made, then the use of the completed contract method would
be required and the recognition of all revenue and costs would
be deferred until the project was completed. Such a change could
have a material impact on our results of operations.
31
Accounting
for income taxes
We provide for the effect of income taxes in our Consolidated
Financial Statements in accordance with SFAS No. 109,
Accounting for Income Taxes. Under
SFAS No. 109, income tax expense (benefit) is
recognized for the amount of taxes payable or refundable for the
current year, and for deferred tax assets and liabilities for
the tax consequences of events that have been recognized in an
entitys financial statements or tax returns.
We must make significant assumptions, judgments and estimates to
determine our current provision for income taxes, our deferred
tax assets and liabilities and any valuation allowance to be
recorded against our deferred tax assets. Our judgments,
assumptions and estimates relating to the current provision for
income taxes take into account current tax laws, our
interpretation of current tax laws and possible outcomes of
current and future audits conducted by foreign and domestic tax
authorities. Changes in tax laws or our interpretation of tax
laws and developments in current and future tax audits could
significantly impact the amounts provided for income taxes in
our results of operations, financial position or cash flows. Our
assumptions, judgments and estimates relating to the value of
our net deferred tax assets take into account predictions of the
amount and category of future taxable income from potential
sources including tax planning strategies that would, if
necessary, be implemented to prevent a loss carryforward or tax
credit carryforward from expiring unused. Actual operating
results and the underlying amount and category of income in
future years could render our current assumptions, judgments and
estimates of recoverable net deferred taxes inaccurate, thus
materially affecting our consolidated financial position or
results of operations.
Restructuring
charges
We account for restructuring charges in accordance with SEC
Staff Accounting Bulletin No. 100, Restructuring
and Impairment Charges, as amended. From fiscal 2001
through fiscal 2005, we undertook significant restructuring
initiatives. All restructuring activities initiated prior to
fiscal 2003 were accounted for in accordance with Emerging
Issues Task Force, or EITF,
No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring) and EITF
No. 88-10,
Costs Associated with Lease Modifications or
Terminations. For restructuring activities initiated after
fiscal 2002, we accounted for the leased facilities in
accordance with SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. In
addition, for all periods presented, we accounted for the
asset-related portions of these restructurings in accordance
with SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. For all periods
presented, the severance and benefits charges were accounted for
in accordance with SFAS No. 112, Employers
Accounting for Postemployment Benefits An Amendment
of FASB Statements No. 5 and 43.
These restructuring initiatives have required us to make a
number of estimates and assumptions related to losses on excess
facilities vacated or consolidated, particularly estimating
when, if at all, we will be able to sublet vacated facilities
and, if we do, the sublease terms. Closure and space reduction
costs that are part of our restructuring charges include
payments required under leases, less any applicable estimated
sublease income after the facilities are abandoned, lease buyout
costs and certain contractual costs to maintain facilities
during the abandonment period.
We regularly evaluate the adequacy of our restructuring accrual,
and adjust the balance based on changes in estimates and
assumptions. We may incur future charges for new restructuring
activities as well as changes in estimates to amounts previously
recorded.
Valuation
of stock-based awards
We account for stock-based compensation in accordance with the
fair value recognition provisions of SFAS No. 123R,
Share-Based Payment. Under SFAS No. 123R,
stock-based compensation expense is measured at the grant date
based on the value of the award and is recognized as expense
over the vesting period. Determining the fair value of
stock-based awards at the grant date requires judgment,
including estimating the expected volatility of our stock, the
expected term of stock options, the risk-free interest rate for
the period, expected dividends and expected forfeitures. The
computation of the expected volatility assumption used in the
Black-Scholes pricing model for option grants is based on
implied volatility calculated using an average of the volatility
of publicly traded
32
options for our common stock and our 2023 Notes. We use this
approach to determine volatility because options for our common
stock are actively traded, the market prices of both the traded
options and underlying shares are measured at a similar point in
time to each other and on a date reasonably close to the grant
date of the employee stock options, the traded options have
exercise prices that are both
near-the-money
and close to the exercise price of the employee stock options,
and the remaining maturities of the traded options on which the
estimate is based are at least one year. When establishing the
expected life assumption, we review annual historical employee
exercise behavior with respect to option grants having similar
vesting periods. In addition, judgment is also required in
estimating the amount of stock-based awards that we expect to be
forfeited. We calculate a separate expected forfeiture rate for
both stock options and restricted stock issuances based on
historical trends. The valuation of all options and the expected
forfeiture rates for options and restricted stock are calculated
based on one employee pool as there is no significant difference
in exercise behavior between classes of employees. If actual
results differ significantly from these estimates, stock-based
compensation expense and our results of operations could be
materially affected.
Results
of Operations
We primarily generate revenue from licensing our EDA software,
selling or leasing our hardware technology, providing
maintenance for our software and hardware and providing design
and methodology services. We principally utilize three license
types: subscription, term and perpetual. The different license
types provide a customer with different terms of use for our
products, such as:
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The right to access new technology;
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The duration of the license; and
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Payment terms.
|
Customer decisions regarding these aspects of license
transactions determine the license type, timing of revenue
recognition and potential future business activity. For example,
if a customer chooses a fixed term of use, this will result in
either a subscription or term license. A business implication of
this decision is that, at the expiration of the license period,
the customer must decide whether to continue using the
technology and therefore renew the license agreement. Because
larger customers generally use products from two or more of our
five product groups, rarely will a large customer completely
terminate its relationship with us at expiration of the license.
See the discussion under the heading Critical Accounting
Estimates above for an additional description of license
types and timing of revenue recognition.
A substantial portion of our revenue is recognized over multiple
periods. As a result, we do not believe that pricing volatility
has been a material component of the change in our revenue from
period to period.
The amount of revenue recognized in future periods will depend
on, among other things, the terms and timing of our contract
renewals or additional product sales with existing customers,
the size of such transactions and sales to new customers.
The value and duration of contracts, and consequently product
revenue recognized, is affected by the competitiveness of our
products. Product revenue recognized in any period is also
affected by the extent to which customers purchase subscription,
term or perpetual licenses, and the extent to which contracts
contain flexible payment terms. The timing of revenue
recognition is also affected by changes in the extent to which
existing contracts contain flexible payment terms and by changes
in contractual arrangements (e.g., subscription to term)
with existing customers.
Revenue
and Revenue Mix
We analyze our software and hardware businesses by product
group, combining revenues for both product and maintenance
because of their interrelationship. We have formulated a design
solution strategy that combines our design technologies into
platforms, which are included in the various product
groups described below.
Our product groups are:
Functional Verification: Products in this group,
which include the Incisive functional verification platform, are
used to verify that the high level, logical specification of an
IC design is correct.
33
Digital IC Design: Products in this group, which
include the Encounter digital IC design platform, are used to
accurately convert the high-level, logical specification of a
digital IC into a detailed physical blueprint and then detailed
design information showing how the IC will be physically
implemented. This data is used for creation of the photomasks
used in chip manufacture.
Custom IC Design: Our custom design products, which
include the Virtuoso custom design platform, are used for ICs
that must be designed at the transistor level, including analog,
radio frequency, memories, high performance digital blocks and
standard cell libraries. Detailed design information showing how
an IC will be physically implemented is used for creation of the
photomasks used in chip manufacture.
System Interconnect: This product group consists of
our PCB and IC package design products, including the Allegro
and OrCAD products. The Allegro system interconnect platform
offering focuses on system interconnect design platform, which
enables consistent co-design of ICs, IC packages and PCBs, while
the OrCAD line focuses on cost-effective, entry-level PCB
solutions.
Design for Manufacturing: Included in this product
group are our physical verification and analysis products. These
products are used to analyze and verify that the physical
blueprint of the integrated circuit has been constructed
correctly and can be manufactured successfully.
Revenue
by Year
The following table shows our revenue for the fiscal years 2006,
2005 and 2004 and the percentage change in revenue between years:
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|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
2006
|
|
2005
|
|
2004
|
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2006 vs. 2005
|
|
2005 vs. 2004
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(In millions)
|
|
|
|
|
|
Product
|
|
$
|
982.7
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|
$
|
851.5
|
|
$
|
729.8
|
|
|
15%
|
|
|
17%
|
Services
|
|
|
134.9
|
|
|
126.2
|
|
|
137.0
|
|
|
7%
|
|
|
(8)%
|
Maintenance
|
|
|
366.3
|
|
|
351.5
|
|
|
330.7
|
|
|
4%
|
|
|
6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,483.9
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|
$
|
1,329.2
|
|
$
|
1,197.5
|
|
|
12%
|
|
|
11%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
compared to 2005
Product revenue was higher in 2006, as compared to 2005,
primarily because of increased revenue from licenses for
Functional Verification and Custom IC Design products, partially
offset by a small decrease in revenue from licenses for Design
for Manufacturing products. Functional verification was the
fastest growing platform in 2006. Services revenue increased in
2006 as compared to 2005 due to an increase in utilization and
realization rates for our services personnel.
2005
compared to 2004
Product revenue was higher in 2005, as compared to 2004,
primarily because of increased revenue from licenses for Digital
IC Design, Functional Verification and Custom IC products.
Services revenue was lower in 2005, as compared to 2004, due to
our reduced capacity to satisfy demand for our design services
after having implemented certain restructuring activities.
34
Revenue
by Product Group
The following table shows the percentage of product and related
maintenance revenue contributed by each of our five product
groups, and Services and other in fiscal 2006, 2005 and 2004:
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|
|
|
2006
|
|
2005
|
|
2004
|
|
Functional Verification
|
|
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24%
|
|
|
21%
|
|
|
17%
|
Digital IC Design
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|
|
24%
|
|
|
28%
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|
|
25%
|
Custom IC Design
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|
|
27%
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|
|
25%
|
|
|
27%
|
System Interconnect
|
|
|
9%
|
|
|
8%
|
|
|
9%
|
Design for Manufacturing
|
|
|
7%
|
|
|
9%
|
|
|
9%
|
Services and other
|
|
|
9%
|
|
|
9%
|
|
|
13%
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100%
|
|
|
100%
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
As described under the heading Critical Accounting
Estimates above, certain of our licenses allow customers
the ability to remix among software products. Additionally, we
have licensed a combination of our products to customers with
the actual product selection and number of licensed users to be
determined at a later date. For these arrangements, we estimate
the allocation of the revenue to product groups based upon the
expected usage of our products by these customers. The actual
usage of our products by these customers may differ and
therefore the revenue allocated in the above table may differ.
Although we believe the methodology of allocating revenue to
product groups is reasonable, there can be no assurance that
such allocated amounts reflect the amounts that would result had
the customer individually licensed each specific software
solution at the onset of the arrangement. However, during the
term of the arrangement, we reevaluate the allocation of revenue
based on actual deployment of our products.
The decrease in percentage of Services and other in 2005, as
compared to 2004, is primarily due to $11.0 million of
revenue recognized from the sale of IP in 2004. This sale of IP
in 2004 is included in Services and other in the preceding table
and in Product revenue in the accompanying Consolidated Income
Statements.
Revenue
by Geography
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006 vs. 2005
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2005 vs. 2004
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(In millions)
|
|
|
|
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|
United States
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|
$
|
765.1
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|
$
|
613.2
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|
$
|
598.9
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|
|
25%
|
|
|
2%
|
Other North America
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31.3
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20.3
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|
27.0
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54%
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(25)%
|
Europe
|
|
|
284.4
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|
|
245.0
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261.9
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16%
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(6)%
|
Japan
|
|
|
247.9
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|
|
333.2
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|
191.2
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(26)%
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|
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74%
|
Asia
|
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|
155.2
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|
|
117.5
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|
118.5
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|
|
32%
|
|
|
(1)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,483.9
|
|
$
|
1,329.2
|
|
$
|
1,197.5
|
|
|
12%
|
|
|
11%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
by Geography as a Percentage of Total Revenue
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
United States
|
|
|
52%
|
|
|
46%
|
|
|
50%
|
Other North America
|
|
|
2%
|
|
|
2%
|
|
|
2%
|
Europe
|
|
|
19%
|
|
|
18%
|
|
|
22%
|
Japan
|
|
|
17%
|
|
|
25%
|
|
|
16%
|
Asia
|
|
|
10%
|
|
|
9%
|
|
|
10%
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100%
|
|
|
100%
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
35
The rate of revenue change varies geographically primarily due
to differences in the timing and size of term licenses in those
regions. No single customer accounted for 10% or more of total
revenue in 2006, 2005 or 2004.
Changes in foreign currency exchange rates, primarily due to
fluctuations of the Japanese yen in relation to the United
States dollar, caused our revenue to decrease by
$12.0 million in 2006, as compared to 2005, and to decrease
by $5.7 million in 2005, as compared to 2004. Additional
information about revenue and other financial information by
geography can be found in Note 21 to our Consolidated
Financial Statements.
Stock-based
Compensation Expense Summary
We adopted SFAS No. 123R on January 1, 2006,
which resulted in an increase in stock-based compensation
expense of $64.1 million in 2006 as compared to 2005.
Stock-based compensation expense is reflected throughout our
costs and expenses in fiscal 2006, 2005 and 2004 as follows:
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|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Cost of product
|
|
$
|
0.2
|
|
|
$
|
----
|
|
|
$
|
0.1
|
|
Cost of services
|
|
|
4.0
|
|
|
|
0.6
|
|
|
|
1.4
|
|
Cost of maintenance
|
|
|
2.5
|
|
|
|
0.4
|
|
|
|
0.9
|
|
Marketing and sales
|
|
|
23.9
|
|
|
|
9.1
|
|
|
|
7.5
|
|
Research and development
|
|
|
50.9
|
|
|
|
19.3
|
|
|
|
17.1
|
|
General and administrative
|
|
|
22.5
|
|
|
|
10.5
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total
|
|
$
|
104.0
|
|
|
$
|
39.9
|
|
|
$
|
31.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006 vs. 2005
|
|
|
2005 vs. 2004
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
66.8
|
|
|
$
|
79.7
|
|
|
$
|
82.0
|
|
|
|
(16)%
|
|
|
|
(3)%
|
|
Services
|
|
$
|
96.5
|
|
|
$
|
91.9
|
|
|
$
|
91.0
|
|
|
|
5%
|
|
|
|
1%
|
|
Maintenance
|
|
$
|
63.8
|
|
|
$
|
59.8
|
|
|
$
|
53.1
|
|
|
|
7%
|
|
|
|
13%
|
|
Cost
of Revenue as a Percentage of Related Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Product
|
|
|
7%
|
|
|
|
9%
|
|
|
|
11%
|
|
Services
|
|
|
72%
|
|
|
|
73%
|
|
|
|
66%
|
|
Maintenance
|
|
|
17%
|
|
|
|
17%
|
|
|
|
16%
|
|
Cost of product includes costs associated with the sale or lease
of our hardware and licensing of our software products. Cost of
product primarily includes the cost of employee salary, benefits
and other employee-related costs, including stock-based
compensation expense, amortization of acquired intangibles
directly related to Cadence products, the cost of technical
documentation and royalties payable to third-party vendors. Cost
of product associated with our hardware products also includes
materials, assembly labor and overhead. These additional
manufacturing costs make our cost of hardware product higher, as
a percentage of revenue, than our cost of software product.
A summary of Cost of product in fiscal 2006, 2005 and 2004 is as
follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Product related costs
|
|
$
|
33.6
|
|
|
$
|
29.1
|
|
|
$
|
38.0
|
|
Amortization of acquired
intangibles
|
|
|
33.2
|
|
|
|
50.6
|
|
|
|
44.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of product
|
|
$
|
66.8
|
|
|
$
|
79.7
|
|
|
$
|
82.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
2006
compared to 2005
Cost of product decreased $12.9 million in 2006 as compared
to 2005, primarily due to:
|
|
|
|
|
A decrease of $17.4 million in amortization of acquired
intangibles due to the full amortization of certain acquired
intangibles; partially offset by
|
|
|
An increase of $5.3 million in hardware costs attributable
to increased hardware sales.
|
Cost of product depends primarily upon the extent to which we
acquire intangible assets, acquire licenses and incorporate
third-party technology in our products that are licensed or sold
in any given period, and the actual mix of hardware and software
product sales in any given period. Assuming no changes to our
current portfolio of intangibles, we expect the Amortization of
acquired intangibles component of Cost of product to continue
decreasing as the amortization periods assigned upon the
purchase of certain intangibles are completed.
Cost of services primarily includes employee salary, benefits
and other employee-related costs, costs to maintain the
infrastructure necessary to manage a services organization, and
provisions for contract losses, if any. Cost of services
increased $4.6 million in 2006 as compared to 2005
primarily due to:
|
|
|
|
|
An increase of $3.4 million in stock-based compensation
expense due to our adoption of SFAS No. 123R; and
|
|
|
An increase of $1.2 million in salary, benefits and other
employee-related costs.
|
Cost of maintenance includes the cost of customer services, such
as hot-line and
on-site
support, employee salary, benefits and other employee-related
costs for certain employees, and documentation of maintenance
updates. Cost of maintenance increased $4.0 million in 2006
as compared to 2005 primarily due to:
|
|
|
|
|
An increase of $2.1 million in stock-based compensation due
to our adoption of SFAS No. 123R; and
|
|
|
An increase of $1.0 million in salary, benefits and other
employee-related costs.
|
2005
compared to 2004
Cost of product decreased $2.3 million in 2005, as compared
to 2004, primarily due to:
|
|
|
|
|
A decrease of $13.5 million in the cost of hardware
products sold as a result of sales of products with lower costs;
partially offset by
|
|
|
An increase of $6.6 million in amortization of intangibles
due to an increase in acquired intangibles associated with our
acquisition of Verisity; and
|
|
|
An increase of $1.6 million in royalty expenses.
|
Cost of services increased $0.9 million in 2005, as
compared to 2004, primarily due to:
|
|
|
|
|
An increase of $3.2 million in salary and benefits costs;
partially offset by
|
|
|
A decrease of $1.5 million in other operating
expenses; and
|
|
|
A decrease of $0.8 million in stock-based compensation.
|
Cost of maintenance increased $6.7 million in 2005, as
compared to 2004, primarily due to:
|
|
|
|
|
An increase of $3.7 million in salary and benefit
costs; and
|
|
|
An increase of $3.1 million in amortization of intangible
assets.
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006 vs. 2005
|
|
|
2005 vs. 2004
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
Marketing and sales
|
|
$
|
405.6
|
|
|
$
|
366.2
|
|
|
$
|
333.1
|
|
|
|
11%
|
|
|
|
10%
|
|
Research and development
|
|
|
460.1
|
|
|
|
390.7
|
|
|
|
368.1
|
|
|
|
18%
|
|
|
|
6%
|
|
General and administrative
|
|
|
143.3
|
|
|
|
129.6
|
|
|
|
87.9
|
|
|
|
11%
|
|
|
|
47%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
1,009.0
|
|
|
$
|
886.5
|
|
|
$
|
789.1
|
|
|
|
14%
|
|
|
|
12%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
Operating
Expenses as a Percentage of Total Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Marketing and sales
|
|
|
27%
|
|
|
|
28%
|
|
|
|
28%
|
|
Research and development
|
|
|
31%
|
|
|
|
29%
|
|
|
|
31%
|
|
General and administrative
|
|
|
10%
|
|
|
|
10%
|
|
|
|
7%
|
|
Operating
Expense Summary
2006
compared to 2005
Overall operating expenses increased $122.5 million in
2006, as compared to 2005, primarily due to:
|
|
|
|
|
An increase of $58.4 million in stock-based compensation
expense due to our adoption of SFAS No. 123R; and
|
|
|
An increase of $49.2 million in salary, benefits and other
employee-related costs, primarily due to an increased number of
employees and increases in bonus and commission costs, in part
due to our acquisition of Verisity Ltd., or Verisity, in the
second quarter of 2005.
|
2005
compared to 2004
Operating expenses increased $97.4 million in 2005, as
compared to 2004, primarily due to:
|
|
|
|
|
An increase of $63.3 million in employee salary and benefit
costs, primarily due to our acquisition of Verisity and
increased bonus and commission costs;
|
|
|
An increase of $9.9 million in stock-based compensation
expense due to grants of restricted stock and the assumption of
options in our acquisitions;
|
|
|
An increase of $8.6 million in losses associated with the
sale of installment contract receivables; and
|
|
|
An increase of $7.1 million in costs related to the
retirement of our Executive Chairman and former President and
Chief Executive Officer in 2005; partially offset by
|
|
|
Our restructuring activities, as discussed below.
|
Marketing
and Sales
2006
compared to 2005
Marketing and sales expenses increased $39.4 million in
2006, as compared to 2005, primarily due to:
|
|
|
|
|
An increase of $14.8 million in stock-based compensation
expense due to our adoption of SFAS No. 123R;
|
|
|
An increase of $18.2 million in employee salary,
commissions, benefits and other employee-related costs due to
increased hiring of sales and technical personnel, and higher
commissions earned resulting from an increase in 2006 sales
performance; and
|
|
|
An increase of $7.8 million in marketing programs and
customer-focused conferences due to our new marketing
initiatives and increased travel to visit our customers.
|
2005
compared to 2004
Marketing and sales expenses increased $33.1 million in
2005, as compared to 2004, primarily due to:
|
|
|
|
|
An increase of $29.4 million in employee salary, commission
and benefit costs due to increased hiring of sales and technical
personnel and higher employee bonuses and commissions; and
|
|
|
An increase of $1.6 million in stock-based compensation
expense due to grants of restricted stock and the assumption of
options in our acquisitions; partially offset by
|
|
|
A decrease of $1.9 million in marketing program costs.
|
38
Research
and Development
2006
compared to 2005
Research and development expenses increased $69.4 million
in 2006, as compared to 2005, primarily due to:
|
|
|
|
|
An increase of $31.6 million in stock-based compensation
expense due to our adoption of SFAS No. 123R;
|
|
|
An increase of $28.3 million in employee salary, benefits
and other employee-related costs due to increased staffing to
support product development and higher employee salaries;
|
|
|
An increase of $3.9 million in third-party development
costs; and
|
|
|
An increase of $3.3 million in computer equipment lease
costs and maintenance costs associated with third-party software.
|
2005
compared to 2004
Research and development expense increased $22.6 million in
2005, as compared to 2004, primarily due to:
|
|
|
|
|
An increase of $24.0 million in employee salary and benefit
costs, primarily due to our acquisition of Verisity and
increased staffing to support product development; and
|
|
|
An increase of $2.2 million in stock-based compensation
expense due to grants of restricted stock and the assumption of
options in our acquisitions; partially offset by
|
|
|
A decrease of $3.9 million in depreciation expense.
|
General
and Administrative
2006
compared to 2005
General and administrative expenses increased $13.7 million
in 2006, as compared to 2005, primarily due to:
|
|
|
|
|
An increase of $12.0 million in stock-based compensation
expense due to our adoption of SFAS No. 123R; and
|
|
|
An increase of $9.6 million in losses on the sale of
installment contract receivables due to higher discount rates;
partially offset by
|
|
|
A decrease of $7.1 million in costs related to the
retirement of our Executive Chairman and former President and
Chief Executive Officer in 2005; and
|
|
|
A decrease of $3.6 million in bad debt expense.
|
2005
compared to 2004
General and administrative expense increased $41.7 million
in 2005, as compared to 2004, primarily due to:
|
|
|
|
|
An increase of $9.9 million in employee salary and benefit
costs due to higher employee salaries and increased bonuses;
|
|
|
An increase of $8.6 million in losses on the sale of
installment contract receivables due to an increase in the
number of sales of installment contract receivables;
|
|
|
An increase of $7.1 million in costs related to the
retirement of our Executive Chairman and former President and
Chief Executive Officer in 2005;
|
|
|
An increase of $6.1 million in stock-based compensation
expense due to grants of restricted stock and the assumption of
options in our acquisitions; and
|
|
|
An increase of $5.2 million in legal and consulting
services; partially offset by
|
|
|
A decrease of $1.2 million in professional fees related to
our annual audit and Sarbanes-Oxley Section 404 compliance.
|
39
Amortization
of Acquired Intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Amortization of acquired
intangibles
|
|
$
|
23.1
|
|
|
$
|
47.8
|
|
|
$
|
55.7
|
|
Assuming no changes to our current portfolio of intangibles, we
expect the Amortization of acquired intangibles to continue
decreasing as the amortization periods assigned upon the
purchase of certain intangibles are completed.
2006
compared to 2005
Amortization of acquired intangibles decreased
$24.7 million in 2006, as compared to 2005. Amortization of
acquired intangible assets from prior year acquisitions
decreased $27.5 million during 2006 due to the full
amortization of certain acquired intangibles. This decrease was
partially offset by $2.8 million of amortization of
intangibles acquired during 2006.
2005
compared to 2004
Amortization of acquired intangibles decreased $7.9 million
in 2005, as compared to 2004. Amortization of acquired
intangible assets from prior year acquisitions decreased
$21.0 million during 2005 due to the full amortization of
certain acquired intangibles. This decrease was partially offset
by $13.1 million of amortization of intangibles acquired
during 2005.
Restructuring
and Other Charges
We initiated a separate plan of restructuring in each year from
2001 through 2005 in an effort to operate more efficiently while
improving operating margins and cash flows. The restructuring
plans initiated each year from 2001 through 2005, or the 2001
Restructuring, 2002 Restructuring, 2003 Restructuring, 2004
Restructuring and 2005 Restructuring, respectively, were
intended to decrease costs through workforce reductions and
facility and resource consolidation, in order to improve our
cost structure. The 2001 and 2002 Restructurings primarily
related to our design services business and certain other
business or infrastructure groups throughout the world. The 2003
Restructuring, 2004 Restructuring and 2005 Restructuring were
targeted at reducing costs throughout the company. The 2004
Restructuring has been completed and there was no remaining
balance accrued for this restructuring as of December 30,
2006.
In addition, we have recorded estimated provisions for
termination benefits and outplacement costs, long-term asset
impairments, and other restructuring costs. Each reporting
period, we evaluate the adequacy of the lease loss accrual for
each plan of restructuring. We adjust the lease loss accrual for
changes in real estate markets or other factors that may affect
estimated costs or sublease income. We also consider executed
sublease agreements and adjust the lease loss accrual if
sublease income under the agreement differs from initial
estimates.
During 2005, in conjunction with the workforce reduction in our
European design services business, we completed a sale-leaseback
transaction involving land and a building in Livingston,
Scotland. Proceeds from the sale were $33.6 million and the
total gain on the sale was $3.6 million. We leased back a
portion of the facility for the next two years and another
portion for ten years, with an option to terminate the ten year
lease after five years. We deferred the gain on the sale and are
recognizing the gain ratably over the maximum lease term of ten
years.
40
A summary of restructuring and other charges by plan of
restructuring in fiscal years 2006, 2005 and 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Asset-
|
|
|
Excess
|
|
|
|
|
|
|
|
|
|
Benefits
|
|
|
Related
|
|
|
Facilities
|
|
|
Other
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Plan
|
|
$
|
(0.1
|
)
|
|
$
|
----
|
|
|
$
|
----
|
|
|
$
|
----
|
|
|
$
|
(0.1
|
)
|
2003, 2002 and 2001 Plans
|
|
|
----
|
|
|
|
----
|
|
|
|
(0.7
|
)
|
|
|
----
|
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2006
|
|
$
|
(0.1
|
)
|
|
$
|
----
|
|
|
$
|
(0.7
|
)
|
|
$
|
----
|
|
|
$
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Plan
|
|
$
|
20.8
|
|
|
$
|
2.4
|
|
|
$
|
2.4
|
|
|
$
|
----
|
|
|
$
|
25.6
|
|
2004 Plan
|
|
|
(0.4
|
)
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
(0.4
|
)
|
2003, 2002 and 2001 Plans
|
|
|
----
|
|
|
|
----
|
|
|
|
10.1
|
|
|
|
----
|
|
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2005
|
|
$
|
20.4
|
|
|
$
|
2.4
|
|
|
$
|
12.5
|
|
|
$
|
----
|
|
|
$
|
35.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Plan
|
|
$
|
7.0
|
|
|
$
|
0.2
|
|
|
$
|
----
|
|
|
$
|
9.4
|
|
|
$
|
16.6
|
|
2003, 2002 and 2001 Plans
|
|
|
(1.3
|
)
|
|
|
(4.0
|
)
|
|
|
2.2
|
|
|
|
----
|
|
|
|
(3.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2004
|
|
$
|
5.7
|
|
|
$
|
(3.8
|
)
|
|
$
|
2.2
|
|
|
$
|
9.4
|
|
|
$
|
13.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to the immateriality of the 2003 Restructuring, 2002
Restructuring and 2001 Restructuring, they have been combined in
the above table.
Frequently, asset impairments are based on significant estimates
and assumptions, particularly regarding remaining useful life
and utilization rates. We may incur other charges in the future
if management determines that the useful life or utilization of
certain long-lived assets has been reduced.
The initial facility closure and space reduction costs included
in these restructurings were comprised of payments required
under leases, less any applicable estimated sublease income
after the properties were abandoned, lease buyout costs and
other contractual charges. To estimate the initial lease loss,
which is the loss after our cost recovery efforts from
subleasing all or part of a building, management made certain
assumptions related to the time period over which the relevant
building would remain vacant and sublease terms, including
sublease rates and contractual common area charges.
As of December 30, 2006, our accrued estimate of the lease
loss related to all restructuring activities initiated since
2001 was $31.3 million. This amount may be adjusted in the
future based upon changes in the assumptions used to estimate
the lease loss. Since 2001, we have recorded facilities
consolidation charges, net of credits, of $97.0 million
under the 2001 through 2005 Restructurings related to space
reductions or facility closures of 49 sites. As of
December 30, 2006, 28 of these sites had been vacated and
space reductions had occurred at the remaining 21 sites. We
expect to pay all of the facilities-related restructuring
liabilities for all our restructuring plans prior to 2016.
Because the restructuring charges and related benefits are
derived from managements estimates made during the
formulation of the restructurings, based on then-currently
available information, our restructuring activities may not
achieve the benefits anticipated on the timetable or at the
level contemplated. Demand for our products and services and,
ultimately, our future financial performance, is difficult to
predict with any degree of certainty. Accordingly, additional
actions, including further restructuring of our operations, may
be required in the future.
Our workforce reduction activities related to the 2004
Restructuring and the 2005 Restructuring were completed prior to
December 31, 2005. We recorded a credit during the twelve
months ended December 30,
41
2006 to remove the remaining severance and benefits accrual
related to the 2005 Restructuring. The other activity recorded
in each of the restructuring plans for the year ended
December 30, 2006 relates to payment of remaining lease
obligations net of sublease payments received and changes in
estimate related to lease loss accruals.
We expect to incur an additional $1.0 million to
$2.0 million of future costs in connection with the 2005
Restructuring and an additional $3.0 million to
$5.0 million of future costs in connection with the 2003
Restructuring, primarily for facilities-related charges, which
will be expensed as incurred. The actual amount of additional
costs incurred could vary depending on changes in market
conditions and the timing of these restructuring activities.
Write-off
of Acquired In-Process Research and Development
Upon consummation of an acquisition, we immediately charge to
expense any acquired in-process research and development that
has not yet reached technological feasibility and has no
alternative future use. The value assigned to acquired
in-process research and development is determined by identifying
research projects in areas for which technological feasibility
has not been established. The values are determined by
estimating costs to develop the acquired in-process research and
development into commercially viable products, estimating the
resulting net cash flows from such projects and discounting the
net cash flows back to their present value. The discount rates
utilized include a factor that reflects the uncertainty
surrounding successful development of the acquired in-process
research and development.
The following table summarizes our write-offs of acquired
in-process research and development charges in fiscal 2006, 2005
and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Verisity Ltd.
|
|
$
|
----
|
|
|
$
|
9.4
|
|
|
$
|
----
|
|
Neolinear, Inc.
|
|
|
----
|
|
|
|
----
|
|
|
|
7.0
|
|
Other 2004 acquisition
|
|
|
----
|
|
|
|
----
|
|
|
|
2.0
|
|
Other 2006 acquisition
|
|
|
0.9
|
|
|
|
----
|
|
|
|
----
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total in process research and
development
|
|
$
|
0.9
|
|
|
$
|
9.4
|
|
|
$
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes, as of December 30, 2006,
the status of in-process research and development acquired in
fiscal 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
Expenditures
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
Incurred to
|
|
|
Expenditures
|
|
|
|
|
|
|
|
|
Complete
|
|
|
to Complete
|
|
|
|
|
|
|
|
|
In-Process
|
|
|
In-Process
|
|
|
|
Discount
|
|
Commercial
|
|
|
Research and
|
|
|
Research and
|
|
|
|
Rates
|
|
Feasibility
|
|
|
Development
|
|
|
Development
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Verisity Inc.
|
|
19% to 32%
|
|
|
December 2006
|
|
|
$
|
4.3
|
|
|
$
|
----
|
|
Neolinear, Inc.
|
|
28%
|
|
|
December 2004
|
|
|
|
7.2
|
|
|
|
----
|
|
Other 2004 acquisition
|
|
30%
|
|
|
December 2004
|
|
|
|
0.8
|
|
|
|
----
|
|
Other 2006 acquisition
|
|
33%
|
|
|
January 2007
|
|
|
|
0.3
|
|
|
|
----
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenditures
|
|
|
|
|
|
|
|
$
|
12.6
|
|
|
$
|
----
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
Loss
on Extinguishment of Debt
We recorded a Loss on extinguishment of debt of
$40.8 million during the year ended December 30, 2006,
which includes a premium paid to repurchase a portion of the
2023 Notes of $38.9 million and a write-off of the related
portion of unamortized deferred costs of issuing the 2023 Notes
of $1.9 million.
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Interest expense
|
|
$
|
12.3
|
|
|
$
|
5.4
|
|
|
$
|
6.2
|
|
2006
compared to 2005
Interest expense increased $6.9 million in 2006, as
compared to 2005, primarily due to the increased interest of
$6.4 million related to the Term Loan.
2005
compared to 2004
Interest expense decreased $0.8 million in 2005, as
compared to 2004, primarily due to a decrease of
$0.6 million in imputed interest on acquisition-related
payments that occur over time.
Other
income (expense), net
Other income (expense), net, for fiscal 2006, 2005 and 2004 was
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions)
|
|
|
Interest income
|
|
$
|
39.3
|
|
|
$
|
15.6
|
|
|
$
|
5.6
|
|
Gains on sale of non-marketable
securities
|
|
|
19.9
|
|
|
|
2.5
|
|
|
|
5.7
|
|
Gains on
available-for-sale
securities
|
|
|
6.7
|
|
|
|
9.2
|
|
|
|
6.8
|
|
Gains (losses) on trading
securities in Cadences non-qualified deferred compensation
trust
|
|
|
3.7
|
|
|
|
6.6
|
|
|
|
(5.0
|
)
|
Gains on sale of non-marketable
securities in Cadences non-qualified deferred compensation
trust
|
|
|
2.7
|
|
|
|
----
|
|
|
|
----
|
|
Gains (losses) on foreign exchange
|
|
|
1.9
|
|
|
|
4.5
|
|
|
|
(1.4
|
)
|
Telos termination costs
|
|
|
----
|
|
|
|
(2.6
|
)
|
|
|
----
|
|
Telos management fees
|
|
|
(0.9
|
)
|
|
|
(2.4
|
)
|
|
|
(2.5
|
)
|
Equity loss from investments
|
|
|
(1.2
|
)
|
|
|
(6.5
|
)
|
|
|
(16.9
|
)
|
Write-down of investments
|
|
|
(2.5
|
)
|
|
|
(10.9
|
)
|
|
|
(4.2
|
)
|
Other income (expense)
|
|
|
0.8
|
|
|
|
(0.9
|
)
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
$
|
70.4
|
|
|
$
|
15.1
|
|
|
$
|
(11.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increases in interest income in 2006, as compared to 2005,
and in 2005, as compared to 2004, were due to increases in our
Cash and cash equivalents balances as well as higher interest
rates applicable to those balances.
In January 2006, KhiMetrics, Inc., a cost method investment held
by Telos Venture Partners L.P., a limited partnership in which
we and our 1996 Deferred Compensation Venture Investment Plan
Trust were the sole limited partners, was sold for consideration
of $6.53 per share of common stock. Under the purchase
agreement, 10% of the consideration was held in escrow to pay
the cost of resolving any claims that could have been asserted
against KhiMetrics on or before the first anniversary of the
acquisition. The escrow amount remaining after resolution of
such claims was distributed to the former stockholders of
KhiMetrics in January and February 2007. No gain was recorded on
amounts held in escrow during 2006. In connection with this
sale, we received approximately $20.2 million in cash and
recorded a gain of approximately $17.1 million during the
year ended December 30, 2006.
43
In addition, our 1996 Deferred Compensation Venture Investment
Plan Trust received $2.9 million in cash and recorded a
gain of $2.5 million during the year ended
December 30, 2006.
Provision
for Income Taxes
The provision for income taxes and the effective tax rates in
fiscal 2006, 2005 and 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions, except percentages)
|
|
|
Provision for income taxes
|
|
$
|
99.7
|
|
|
$
|
79.1
|
|
|
$
|
12.0
|
|
Effective tax rate
|
|
|
41%
|
|
|
|
62%
|
|
|
|
14%
|
|
2006
compared to 2005
Our effective tax rate decreased in 2006, as compared to 2005,
primarily due to the $30.1 million of non-recurring
federal, state and foreign income taxes incurred upon our 2005
repatriation of $500.0 million of certain foreign earnings
under the American Jobs Creation Act, which increased the 2005
annual effective tax rate by approximately 23 percentage
points.
2005
compared to 2004
Our effective tax rate increased in 2005, as compared to 2004,
primarily due to the non-recurring income taxes related to our
2005 repatriation of certain foreign earnings, and an increase
in foreign income tax expense from operations in 2005.
Outlook
for 2007
In July 2006, the FASB issued FIN No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109, which
prescribes a new recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN No. 48 is
effective for fiscal year 2007. The cumulative effect of
applying FIN No. 48 will be reported as an adjustment
to the opening balance of retained earnings (or other
appropriate components of equity or net assets on our
Consolidated Balance Sheet) for fiscal year 2007. We are
currently studying the transition effects of adopting
FIN No. 48 and we are not yet able to assess the
impact of FIN No. 48 on our 2007 financial statements
and, therefore, we are not currently able to disclose the
expected effect of its adoption nor our outlook for the fiscal
2007 effective tax rate.
As of December 30, 2006, we had total net deferred tax
assets of approximately $150.1 million. Realization of the
deferred tax assets will depend on generating sufficient taxable
income of the appropriate character prior to the expiration of
certain net operating loss, capital loss and tax credit
carryforwards. Although realization is not assured, we believe
it is more likely than not that the net deferred tax assets will
be realized. The amount of the net deferred tax assets, however,
could be reduced or increased in the near term if actual facts,
including the estimate of future taxable income, differ from
those estimated.
The IRS and other tax authorities regularly examine our income
tax returns. In November 2003, the IRS completed its field
examination of our federal income tax returns for the tax years
1997 through 1999 and issued a Revenue Agents Report, or
RAR, in which the IRS proposes to assess an aggregate tax
deficiency for the three-year period of approximately
$143.0 million. The most significant of the disputed
adjustments for the tax years 1997 through 1999 relates to
transfer pricing arrangements that we have with a foreign
subsidiary. We have filed a protest to certain of the proposed
adjustments with the Appeals Office of the IRS where the matter
is currently being considered.
In July 2006, the IRS completed its field examination of our
federal income tax returns for the tax years 2000 through 2002
and issued an RAR, in which the IRS proposes to assess an
aggregate tax deficiency for the three-year period of
approximately $324.0 million. In November 2006, the IRS
revised the proposed aggregate tax deficiency
44
for the three-year period to be approximately
$318.0 million. The IRS is contesting our qualification for
deferred recognition of certain proceeds received from
restitution and settlement in connection with litigation during
the period. The proposed tax deficiency for this item is
approximately $152.0 million. The remaining proposed tax
deficiency of approximately $166.0 million is primarily
related to proposed adjustments to our transfer pricing
arrangements that we have with foreign subsidiaries and to our
deductions for foreign trade income. The IRS took similar
positions with respect to our transfer pricing arrangements in
the prior examination period and may make similar claims against
our transfer pricing arrangements in future examinations. We
have filed a timely protest with the IRS and will seek
resolution of the issues through the Appeals Office of the IRS.
We believe that the proposed IRS adjustments are inconsistent
with applicable tax laws and we are challenging these proposed
adjustments vigorously. The RARs are not final Statutory Notices
of Deficiency but the IRS imposes interest on the proposed
deficiencies until the matters are resolved. Interest is
compounded daily at rates published by the IRS, which rates are
adjusted quarterly and have been between four and ten percent
since 1997.
Significant judgment is required in determining our provision
for income taxes. The calculation of our tax liabilities
involves dealing with uncertainties in the application of
complex tax regulations. In determining the adequacy of our
provision for income taxes, we regularly assess the likelihood
of adverse outcomes resulting from tax examinations including
the RARs for the tax years 1997 through 2002. We provide for tax
liabilities on our Consolidated Balance Sheets unless we
consider it probable that additional taxes will not be due.
However, the ultimate outcome of tax examinations, including the
total amount payable or the timing of any such payments upon
resolution of these issues, cannot be predicted with certainty.
In addition, we cannot assure you that such amount will not be
materially different than that which is reflected in our
historical income tax provisions and accruals. Should the IRS or
other tax authorities assess additional taxes as a result of a
current or a future examination, we may be required to record
charges to operations in future periods that could have a
material impact on our results of operations, financial position
or cash flows in the applicable period or periods.
Disclosures
About Market Risk
Interest
Rate Risk
Our exposure to market risk for changes in interest rates
relates primarily to our portfolio of Cash and cash equivalents.
While we are exposed to interest rate fluctuations in many of
the worlds leading industrialized countries, our interest
income and expense is most sensitive to fluctuations in the
general level of United States interest rates. In this regard,
changes in United States interest rates affect the interest
earned on our Cash and cash equivalents and costs associated
with foreign currency hedges.
We invest in high quality credit issuers and, by policy, limit
the amount of our credit exposure to any one issuer. As part of
our policy, our first priority is to reduce the risk of
principal loss. Consequently, we seek to preserve our invested
funds by limiting default risk, market risk and reinvestment
risk. We mitigate default risk by investing in only high quality
credit securities that we believe to have low credit risk and by
positioning our portfolio to respond appropriately to a
significant reduction in a credit rating of any investment
issuer or guarantor. The short-term interest-bearing portfolio
of Cash and cash equivalents includes only marketable securities
with active secondary or resale markets to ensure portfolio
liquidity.
45
All highly liquid investments with a maturity of three months or
less at the date of purchase are considered to be cash
equivalents. Investments with maturities greater than
three months are classified as available-for-sale and are
considered to be short-term investments. The carrying value of
our interest-bearing instruments approximated fair value as of
December 30, 2006. The following table presents the
carrying value and related weighted average interest rates for
our interest-bearing instruments, which are all classified as
Cash and cash equivalents on our Consolidated Balance Sheet as
of December 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
Average
|
|
|
Value
|
|
|
|
|
|
Interest Rate
|
|
|
(In millions)
|
|
|
|
|
|
|
|
Interest-Bearing Instruments:
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper fixed
rate
|
|
$
|
848.3
|
|
|
|
|
|
|
5.43%
|
Cash variable rate
|
|
|
46.1
|
|
|
|
|
|
|
2.85%
|
Cash equivalents
variable rate
|
|
|
6.0
|
|
|
|
|
|
|
5.19%
|
Cash equivalents fixed
rate
|
|
|
11.6
|
|
|
|
|
|
|
1.64%
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing instruments
|
|
$
|
912.0
|
|
|
|
|
|
|
5.25%
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Risk
Our operations include transactions in foreign currencies and,
therefore, we benefit from a weaker dollar, and we are adversely
affected by a stronger dollar relative to major currencies
worldwide. The primary effect of foreign currency transactions
on our results of operations from a weakening United States
dollar is an increase in revenue offset by a smaller increase in
expenses. Conversely, the primary effect of foreign currency
transactions on our results of operations from a strengthening
United States dollar is a reduction in revenue offset by a
smaller reduction in expenses.
We enter into foreign currency forward exchange contracts with
financial institutions to protect against currency exchange
risks associated with existing assets and liabilities. A foreign
currency forward exchange contract acts as a hedge by increasing
in value when underlying assets decrease in value or underlying
liabilities increase in value due to changes in foreign exchange
rates. Conversely, a foreign currency forward exchange contract
decreases in value when underlying assets increase in value or
underlying liabilities decrease in value due to changes in
foreign exchange rates. These forward contracts are not
designated as accounting hedges under SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, and, therefore, the unrealized gains and
losses are recognized in Other income, net, in advance of the
actual foreign currency cash flows with the fair value of these
forward contracts being recorded as accrued liabilities or other
assets.
Our policy governing hedges of foreign currency risk does not
allow us to use forward contracts for trading purposes. Our
forward contracts generally have maturities of 90 days or
less. The effectiveness of our hedging program depends on our
ability to estimate future asset and liability exposures. We
enter into currency forward exchange contracts based on
estimated future asset and liability exposures. Recognized gains
and losses with respect to our current hedging activities will
ultimately depend on how accurately we are able to match the
amount of currency forward exchange contracts with actual
underlying asset and liability exposures.
46
The following table provides information, as of
December 30, 2006, about our forward foreign currency
contracts. The information is provided in United States dollar
equivalent amounts. The table presents the notional amounts, at
contract exchange rates, and the weighted average contractual
foreign currency exchange rates expressed as units of the
foreign currency per United States dollar, which in some cases
may not be the market convention for quoting a particular
currency. All of these forward contracts matured prior to
January 12, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
Notional
|
|
|
|
|
|
Contract
|
|
|
Principal
|
|
|
|
|
|
Rate
|
|
|
(In millions)
|
|
|
|
|
|
|
|
Forward Contracts:
|
|
|
|
|
|
|
|
|
|
|
Japanese yen
|
|
$
|
116.9
|
|
|
|
|
|
|
117.08
|
British pound sterling
|
|
|
41.9
|
|
|
|
|
|
|
0.51
|
European Union euro
|
|
|
15.3
|
|
|
|
|
|
|
0.75
|
Indian rupee
|
|
|
10.8
|
|
|
|
|
|
|
44.95
|
Other
|
|
|
19.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
204.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value
|
|
$
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
While we actively monitor our foreign currency risks, there can
be no assurance that our foreign currency hedging activities
will substantially offset the impact of fluctuations in currency
exchange rates on our results of operations, cash flows and
financial position.
Equity
Price Risk
1.375% Convertible
Senior Notes Due 2011 and 1.500% Convertible Senior Notes Due
2013
In December 2006, we issued $250.0 million principal amount
of 1.375% Convertible Senior Notes Due 2011, or the 2011 Notes,
and $250.0 million of 1.500% Convertible Senior Notes
Due 2013, or the 2013 Notes and collectively, the Convertible
Senior Notes, to three initial purchasers in a private placement
pursuant to Section 4(2) of the Securities Act for resale
to qualified institutional buyers pursuant to SEC
Rule 144A. Concurrently with the issuance of the
Convertible Senior Notes, we entered into hedge transactions
with various parties and in separate transactions, sold warrants
to various parties to reduce the potential dilution from the
conversion of the Convertible Senior Notes and to mitigate any
negative effect such conversion may have on the price of our
common stock. For an additional description of the Convertible
Senior Notes, including the hedge and warrants transactions, see
the discussion under the heading Liquidity and Capital
Resources Factors Affecting Liquidity and Capital
Resources below.
Zero
Coupon Zero Yield Senior Convertible Notes due 2023
In August 2003, we issued $420.0 million principal amount
of our 2023 Notes to two initial purchasers in a private
placement pursuant to Section 4(2) of the Securities Act
for resale to qualified institutional buyers pursuant to SEC
Rule 144A. Concurrently with the issuance of the 2023
Notes, we entered into hedge transactions with one of the
initial purchasers and in a separate transaction, sold warrants
to one of the initial purchasers to reduce the potential
dilution from the conversion of the 2023 Notes and to mitigate
any negative effect such conversion may have on the price of our
common stock. For an additional description of the 2023 Notes,
including the hedge and warrants transactions, see the
discussion under the heading Liquidity and Capital
Resources Factors Affecting Liquidity and Capital
Resources below.
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.
47
Under our strategic investment program, from time to time we
make cash investments in companies with technologies that are
potentially strategically important to us.
The fair value of our portfolio of
available-for-sale
marketable equity securities, which are included in Short-term
investments on the accompanying Consolidated Balance Sheets, was
$23.7 million as of December 30, 2006 and
$33.0 million as of December 31, 2005. While we
actively monitor these investments, we do not currently engage
in any hedging activities to reduce or eliminate equity price
risk with respect to these equity investments. Accordingly, we
could lose all or part of our investment portfolio of marketable
equity securities if there is an adverse change in the market
prices of the companies we invest in.
Our investments in non-marketable equity securities would be
negatively affected by an adverse change in equity market
prices, although the impact cannot be directly quantified. Such
a change, or any negative change in the financial performance or
prospects of the companies whose non-marketable securities we
own, would harm the ability of these companies to raise
additional capital and the likelihood of our being able to
realize any gains or return of our investments through liquidity
events such as initial public offerings, acquisitions and
private sales. These types of investments involve a high degree
of risk, and there can be no assurance that any company we
invest in will grow or will be successful or that we will be
able to liquidate a particular investment when desired.
Accordingly, we could lose all or part of our investment.
Our investments in non-marketable equity securities had a
carrying amount of $31.4 million as of December 30,
2006 and $37.9 million as of December 31, 2005. If we
determine that an
other-than-temporary
decline in fair value exists for a non-marketable equity
security, we write down the investment to its fair value and
record the related write-down as an investment loss in our
Consolidated Income Statements.
Liquidity
and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the years ended
|
|
|
December 30,
|
|
|
%
|
|
December 31,
|
|
%
|
|
January 1,
|
|
|
2006
|
|
|
Change
|
|
2005
|
|
Change
|
|
2005
|
|
|
(In millions, except percentages)
|
Cash, cash equivalents and
short-term investments
|
|
$
|
958.4
|
|
|
|
7%
|
|
$
|
894.6
|
|
|
51%
|
|
$
|
593.0
|
Net working capital
|
|
$
|
763.9
|
|
|
|
14%
|
|
$
|
670.5
|
|
|
29%
|
|
$
|
521.0
|
Cash provided by operating
activities
|
|
$
|
421.2
|
|
|
|
(1)%
|
|
$
|
426.3
|
|
|
14%
|
|
$
|
372.5
|
Cash used for investing activities
|
|
$
|
(111.8
|
)
|
|
|
(50)%
|
|
$
|
(222.7)
|
|
|
4%
|
|
$
|
(215.0)
|
Cash provided by (used for)
financing activities
|
|
$
|
(233.9
|
)
|
|
|
(214)%
|
|
$
|
205.3
|
|
|
(1,073)%
|
|
$
|
(21.1)
|
Cash,
cash equivalents and short-term investments
As of December 30, 2006, our principal sources of liquidity
consisted of $958.4 million of Cash and cash equivalents
and short-term investments, as compared to $894.6 million
as of December 31, 2005 and $593.0 million as of
January 1, 2005. The primary sources of our cash in 2006
and 2005 were:
|
|
|
|
|
Customer payments under software licenses and from the sale or
lease of our hardware products;
|
|
|
Customer payments for design and methodology services;
|
|
|
Borrowings under the Term Loan;
|
|
|
Proceeds from the sale of receivables and proceeds from the
exercise of stock options;
|
|
|
Proceeds from the issuance of the Convertible Senior Notes in
2006;
|
|
|
Proceeds from the separate warrant sale transactions entered
into in connection with the issuance of the Convertible Senior
Notes in 2006;
|
|
|
Proceeds from the termination of a portion of the hedge
transactions originally entered into in connection with the
issuance of our 2023 Notes; and
|
|
|
Common stock purchases under our employee stock purchase plans.
|
48
Our primary uses of cash in 2006 and 2005 consisted of:
|
|
|
|
|
Payments relating to payroll, product, services and other
operating expenses;
|
|
|
Payments of taxes;
|
|
|
Purchases of property, plant and equipment;
|
|
|
Payments of long-term debt and repurchases of a portion of the
2023 Notes;
|
|
|
Payments made to purchase the hedges in connection with our
issuance of the Convertible Senior Notes;
|
|
|
Payments made to terminate a portion of the warrant transactions
originally entered in connection with the issuance of our 2023
notes;
|
|
|
Purchases of treasury stock; and
|
|
|
Payments related to business acquisitions.
|
Net
working capital
Net working capital increased $93.4 million as of
December 30, 2006, as compared to December 31, 2005,
primarily due to:
|
|
|
|
|
An increase of $73.0 million in Cash and cash equivalents;
|
|
|
A decrease of $40.8 million in Accounts payable and accrued
liabilities;
|
|
|
A decrease of $13.0 million in Current portion of deferred
revenue; partially offset by
|
|
|
A decrease of $43.6 million in Accounts receivable,
net; and
|
|
|
A decrease of $9.2 million in Short-term investments.
|
Net working capital increased $149.5 million as of
December 31, 2005, as compared to January 1, 2005,
primarily due to:
|
|
|
|
|
An increase of $301.6 million in Cash and cash equivalents
and short-term investments; partially offset by
|
|
|
A decrease of $102.0 million in Accounts receivable, net;
|
|
|
An increase of $22.6 million in Accounts payable and
accrued liabilities; and
|
|
|
An increase of $32.0 million in Current portion of
long-term debt.
|
Cash
flows from operating activities
Cash flows from operating activities are provided by net income,
adjusted for certain non-cash charges, as well as changes in the
balance of certain assets and liabilities. Our cash flows from
operating activities are significantly influenced by the payment
terms set forth in our license agreements and by sales of our
receivables.
We have entered into agreements whereby we may transfer accounts
receivable to certain financing institutions on a non-recourse
or limited-recourse basis. These transfers are recorded as sales
and accounted for in accordance with SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. During 2006, we
transferred accounts receivable, net of the losses on the sale
of the receivables, totaling $180.6 million, which
approximated fair value, to financing institutions on a
non-recourse basis, as compared to $192.1 million in 2005
and $30.1 million in 2004.
2006
compared to 2005
Net cash provided by operating activities decreased by
$5.1 million in 2006, as compared to 2005. The decrease was
primarily due to:
|
|
|
|
|
An increase of $71.8 million in payments of Accounts
payable and accrued liabilities;
|
49
|
|
|
|
|
A decrease of $68.3 million in cash received from the
collection of Receivables and Installment contract
receivables; and
|
|
|
A decrease of $37.6 million in Depreciation and
amortization; partially offset by
|
|
|
An increase of $93.2 million in net income;
|
|
|
An increase of $40.8 million in Loss on extinguishment of
debt; and
|
|
|
An increase of $64.1 million in Stock-based compensation.
|
2005
compared to 2004
Net cash provided by operating activities increased by
$53.8 million in 2005, as compared to 2004. The increase
was primarily due to:
|
|
|
|
|
An increase of $162.0 million in Proceeds from the sale of
receivables; and
|
|
|
A decrease of $18.3 million in payments of Accounts payable
and accrued liabilities; partially offset by
|
|
|
A decrease of $25.1 million in net income;
|
|
|
A decrease of $71.9 million in cash received from
collection of Receivables and Installment contract
receivables; and
|
|
|
An increase of $14.8 million in Other assets.
|
Cash
flows from investing activities
Our primary investing activities consisted of:
|
|
|
|
|
Purchases and proceeds from the sale of property, plant and
equipment;
|
|
|
Purchases and proceeds from short-term investments;
|
|
|
Acquiring businesses, assets and intangibles; and
|
|
|
Investing in venture capital partnerships and equity investments.
|
In January 2006, KhiMetrics, Inc., a cost method investment held
by Telos Venture Partners L.P., a limited partnership in which
we and our 1996 Deferred Compensation Venture Investment Plan
Trust were the sole limited partners, was sold for consideration
of $6.53 per share of common stock. Under the purchase
agreement, 10% of the consideration was held in escrow to pay
the cost of resolving any claims that could have been asserted
against KhiMetrics on or before the first anniversary of the
acquisition. The escrow amount remaining after resolution of
such claims was distributed to the former stockholders of
KhiMetrics in January and February 2007. No gain was recorded on
amounts held in escrow during 2006. In connection with this
sale, we received approximately $20.2 million in cash and
recorded a gain of approximately $17.1 million during the
year ended December 30, 2006. In addition, our 1996
Deferred Compensation Venture Investment Plan Trust received
$2.9 million in cash and recorded a gain of
$2.5 million during the year ended December 30, 2006.
2006
compared to 2005
Net cash used for investing activities decreased by
$110.9 million in 2006, as compared to 2005. The decrease
was primarily due to:
|
|
|
|
|
A decrease of $180.8 million in Purchases of short-term
investments; and
|
|
|
A decrease of $231.4 million in Cash paid in business
combinations, net of cash acquired and acquisition of
intangibles; partially offset by
|
|
|
A decrease of $289.2 million in Proceeds from the sale of
short-term investments; and
|
|
|
A decrease of $33.3 million in Proceeds from the sale of
property, plant and equipment.
|
2005
compared to 2004
Net cash used for investing activities increased by
$7.7 million in 2005, as compared to 2004. The increase was
primarily due to:
|
|
|
|
|
An increase of $182.0 million in Cash paid in business
combinations and asset acquisitions, net of cash acquired;
partially offset by
|
50
|
|
|
|
|
An increase of $141.2 million in Proceeds from the sale of
short-term investments, net of Purchases of short-term
investments; and
|
|
|
An increase of $30.0 million in Proceeds from the sale of
property, plant and equipment.
|
Cash
flows from financing activities
Financing cash flows consisted primarily of net proceeds from
the issuance of the Convertible Senior Notes in 2006, including
payments for the hedge transactions and the proceeds from the
separate warrant transactions, payments on the Term Loan in
2006, proceeds received from the Term Loan in 2005, the
repurchase of treasury stock and the issuance of stock under
certain employee plans in both 2006 and 2005.
2006
compared to 2005
Net cash used for financing activities was $233.9 million
in 2006, as compared to net cash provided by financing
activities of $205.3 million in 2005, a decrease of
$439.2 million. The decrease was primarily due to:
|
|
|
|
|
An increase of $393.0 million in Purchases of treasury
stock;
|
|
|
The repurchase of $228.5 million of the 2023 Notes;
|
|
|
A decrease of $160.0 million in Proceeds from Term Loan;
|
|
|
An increase of $131.9 million in Principal payments on
long-term debt, primarily the Term Loan; and
|
|
|
An increase of $119.8 million in Purchase of call options,
or hedges, in connection with the Convertible Senior Notes;
partially offset by
|
|
|
An increase of $500.0 million in Proceeds from issuance of
the Convertible Senior Notes;
|
|
|
An increase of $55.9 million in Proceeds from sale of call
options, or hedges, in connection with the 2023 Notes; and
|
|
|
An increase of $39.4 million in Proceeds from sale of
common stock warrants in connection with the Convertible Senior
Notes.
|
2005
compared to 2004
Net cash provided by financing activities was
$205.3 million in 2005, as compared to net cash used for
financing activities of $21.1 million in 2004, an increase
of $226.4 million. The increase of cash provided by
financing activities was primarily due to:
|
|
|
|
|
An increase of $160.0 million in Proceeds from the Term
Loan; and
|
|
|
An increase of $71.2 million in Proceeds from issuances of
common stock; partially offset by
|
|
|
An increase of $7.0 million in Purchases of treasury stock.
|
Other
Factors Affecting Liquidity and Capital Resources
Income
Taxes
We provide for United States income taxes on the earnings of
foreign subsidiaries unless the earnings are considered
permanently invested outside of the United States. As of
December 30, 2006, the cumulative amount of earnings upon
which United States income taxes have not been provided was
approximately $274.0 million. As of December 30, 2006,
the unrecognized deferred tax liability for these earnings was
approximately $84.0 million.
The IRS and other tax authorities regularly examine our income
tax returns. In November 2003, the IRS completed its field
examination of our federal income tax returns for the tax years
1997 through 1999 and issued a Revenue Agents Report, or
RAR, in which the IRS proposes to assess an aggregate tax
deficiency for the three-year period of approximately
$143.0 million. In July 2006, the IRS completed its field
examination of our federal income tax returns for the tax years
2000 through 2002 and issued an RAR, in which the IRS proposes
to assess an aggregate tax deficiency for the three-year period
of approximately $324.0 million. In November 2006, the IRS
revised the proposed aggregate tax deficiency for the three-year
period to be approximately $318.0 million.
We believe that the proposed IRS adjustments are inconsistent
with applicable tax laws and we are challenging these proposed
adjustments vigorously. The RARs are not final Statutory Notices
of Deficiency but the IRS imposes
51
interest on the proposed deficiencies until the matters are
resolved. Interest is compounded daily at rates published by the
IRS, which rates are adjusted quarterly and have been between
four and ten percent since 1997.
For an additional description of the IRS examinations for the
years 1997 through 1999 and 2000 through 2002, see the
discussion under the heading Provision for Income
Taxes above.
Term
Loan
In December 2005, our Irish subsidiary, Castlewilder, entered
into a syndicated term facility agreement, or Credit Agreement,
with Banc of America Securities LLC as lead arranger, and Bank
of America, N.A., as Administrative Agent. The Credit Agreement
provides for a three-year $160.0 million unsecured term
loan, or Term Loan. Under the terms of the Credit Agreement,
Castlewilder, at its election, may prepay the loan, in whole or
in part, with no prepayment fee. During the year ended
December 30, 2006, Castlewilder made quarterly principal
payments of $32.0 million, plus additional prepayments of
$100.0 million of the principal amount due under the loan,
thereby reducing principal payments due under the Term Loan in
2007 and 2008. As of December 30, 2006, scheduled principal
payments on the Term Loan due during 2007 are $28.0 million.
1.375% Convertible
Senior Notes Due 2011 and 1.500% Convertible Senior Notes
Due 2013
In December 2006, we issued $250.0 million principal amount
of 1.375% Convertible Senior Notes Due 2011, or the 2011 Notes,
and $250.0 million of 1.500% Convertible Senior Notes
Due 2013, or the 2013 Notes, and collectively, the Convertible
Senior Notes, to three initial purchasers in a private placement
pursuant to Section 4(2) of the Securities Act for resale
to qualified institutional buyers pursuant to SEC
Rule 144A. We received net proceeds of approximately
$487.0 million after transaction fees of approximately
$13.0 million, including $12.0 million of underwriting
discounts, that were recorded in Other long-term assets on the
Consolidated Balance Sheet as of December 30, 2006 and are
being amortized to interest expense over the term of the
Convertible Senior Notes. A portion of the net proceeds totaling
$228.5 million was used to purchase $189.6 million
principal amount of our Zero Coupon Zero Yield Senior
Convertible Notes due 2023, or the 2023 Notes.
Holders may convert their Convertible Senior Notes prior to
maturity upon the occurrence of one of the following events:
|
|
|
|
|
The price of our common stock reaches $27.50 during certain
periods of time specified in the Convertible Senior Notes;
|
|
|
Specified corporate transactions occur; or
|
|
|
The trading price of the Convertible Senior Notes falls below a
certain threshold.
|
On and after November 2, 2011, in the case of the 2011
Notes, and November 1, 2013, in the case of 2013 Notes,
until the close of business on the scheduled trading day
immediately preceding the maturity date, holders may convert
their Convertible Senior Notes at any time, regardless of the
foregoing circumstances. We may not redeem the Convertible
Senior Notes prior to maturity.
The initial conversion rate for the Convertible Senior Notes is
47.2813 shares of our common stock per $1,000 principal
amount of Convertible Senior Notes, equivalent to a conversion
price of approximately $21.15 per share of our common
stock. Upon conversion, a holder will receive the sum of the
daily settlement amounts, calculated on a proportionate basis
for each day, during a specified observation period following
the conversion date. The daily settlement amount during each
date of the observation period consists of:
|
|
|
|
|
Cash up to the principal amount of the note; and
|
|
|
Our common stock to the extent that the conversion value exceeds
the amount of cash paid upon conversion of the Convertible
Senior Notes.
|
In addition, if a fundamental change occurs prior to maturity,
we will, in certain cases, increase the conversion rate by an
amount up to $8.27 per share, for a holder that elects to
convert its Convertible Senior Notes in connection with such
fundamental change, which amount will be paid entirely in cash.
A fundamental change is any transaction or event (whether by
means of an exchange offer, liquidation, tender offer,
consolidation, merger, combination, reclassification,
recapitalization or otherwise) in connection with which more
than 50% of our common stock is
52
exchanged for, converted into, acquired for or constitutes
solely the right to receive, consideration which is not at least
90% shares of common stock, or depositary receipts representing
such shares, that are:
|
|
|
|
|
Listed on, or immediately after the transaction or event will be
listed on, a United States national securities exchange; or
|
|
|
Approved, or immediately after the transaction or event will be
approved, for quotation on a United States system of automated
dissemination of quotations of securities prices similar to the
NASDAQ National Market prior to its designation as a national
securities exchange.
|
As of December 30, 2006, none of the conditions allowing
the holders of the Convertible Senior Notes to convert had been
met.
Interest on the Convertible Senior Notes began accruing in
December 2006 and is payable semi-annually each
December 15th and June 15th.
Concurrently with the issuance of the Convertible Senior Notes,
we entered into hedge transactions with various parties whereby
we have the option to purchase up to 23.6 million shares of
our common stock at a price of $21.15 per share, subject to
adjustment. These options expire on December 15, 2011, in
the case of the 2011 Notes, and December 15, 2013, in the
case of the 2013 Notes, and must be settled in net shares. The
aggregate cost of these hedge transactions was
$119.8 million and has been recorded as a reduction to
stockholders equity in accordance with EITF
No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock. The estimated fair value of the hedges acquired in
connection with the issuance of the Convertible Senior Notes was
$118.3 million as of December 30, 2006. Subsequent
changes in the fair value of these hedges will not be recognized
as long as the instruments remain classified as equity.
In separate transactions, we also sold warrants to various
parties for the purchase of up to 23.6 million shares of
our common stock at a price of $31.50 per share in a private
placement pursuant to Section 4(2) of the Securities Act.
The warrants expire on various dates from February 2012 through
April 2012 in the case of the 2011 Notes, and February 2014
through April 2014 in the case of the 2013 Notes, and must be
settled in net shares. We received $39.4 million in cash
proceeds from the sale of these warrants, which has been
recorded as a reduction to stockholders equity in
accordance with EITF
No. 00-19.
The estimated fair value of the warrants sold in connection with
the issuance of the Convertible Senior Notes was
$42.6 million as of December 30, 2006. Subsequent
changes in the fair value of these warrants will not be
recognized as long as the instruments remain classified as
equity. The warrants will be included in diluted earnings per
share, or EPS, to the extent the impact is not considered
anti-dilutive.
Zero
Coupon Zero Yield Senior Convertible Notes due 2023
In August 2003, we issued $420.0 million principal amount
of our 2023 Notes to two initial purchasers in a private
placement pursuant to Section 4(2) of the Securities Act
for resale to qualified institutional buyers pursuant to SEC
Rule 144A. We received net proceeds of $406.4 million
after transaction fees of $13.6 million that were recorded
in Other long-term assets and are being amortized to interest
expense using the straight-line method over five years, which is
the duration of the first redemption period. The 2023 Notes were
issued by us at par and bear no interest. The 2023 Notes are
convertible into our common stock initially at a conversion
price of $15.65 per share, which would result in an
aggregate of 26.8 million shares issued upon conversion,
subject to adjustment upon the occurrence of specified events.
In connection with the issuance of the Convertible Senior Notes
in December 2006, we repurchased $189.6 million principal
amount of the 2023 Notes, reducing the aggregate number of
shares to be issued upon conversion to 14.7 million.
We may redeem for cash all or any part of the 2023 Notes on or
after August 15, 2008 for 100.00% of the principal amount.
The holders of the 2023 Notes may require us to repurchase for
cash all or any portion of their 2023 Notes on August 15,
2008 for 100.25% of the principal amount, on August 15,
2013 for 100.00% of the principal amount or on August 15,
2018 for 100.00% of the principal amount, by providing to the
paying agent a written repurchase notice. The repurchase notice
must be delivered during the period commencing 30 business days
prior to the relevant repurchase date and ending on the close of
business on the business day prior to the relevant repurchase
date. In addition, we may redeem for cash all or any part of the
2023 Notes on or after August 15, 2008
53
for 100.00% of the principal amount, except for those 2023 Notes
that holders have required us to repurchase on August 15,
2008 or on other repurchase dates, as described above.
Each $1,000 of principal of the 2023 Notes will initially be
convertible into 63.8790 shares of our common stock,
subject to adjustment upon the occurrence of specified events.
Holders of the 2023 Notes may convert their 2023 Notes prior to
maturity only if:
|
|
|
|
|
The price of our common stock reaches $22.69 during certain
periods of time specified in the 2023 Notes;
|
|
|
Specified corporate transactions occur;
|
|
|
The 2023 Notes have been called for redemption; or
|
|
|
The trading price of the 2023 Notes falls below a certain
threshold.
|
In the event of a fundamental change in our corporate ownership
or structure, the holders may require us to repurchase all or
any portion of their 2023 Notes for 100.00% of the principal
amount. Upon a fundamental change in our corporate ownership or
structure, in certain circumstances we may choose to pay the
repurchase price in cash, shares of our common stock or a
combination of cash and shares of our common stock. As of
December 30, 2006, none of the conditions allowing the
holders of the 2023 Notes to convert had been met.
In connection with the issuance of the Convertible Senior Notes
in December 2006, a portion of the proceeds were used to
purchase in the open market 2023 Notes with a principal balance
of $189.6 million for a total purchase price of
$228.5 million. In connection with this purchase, we
incurred expenses of $40.8 million for the early
extinguishment of debt. The loss on early extinguishment of debt
included the call premium on the purchased 2023 Notes and the
write-off of a portion of the unamortized deferred debt issuance
costs.
Concurrently with the issuance of the 2023 Notes, we entered
into hedge transactions with a financial institution whereby we
originally acquired options to purchase up to 26.8 million
shares of our common stock at a price of $15.65 per share.
These options expire on August 15, 2008 and must be settled
in net shares. The cost of the hedge transactions to us was
$134.6 million. In connection with the purchase of a portion of
the 2023 Notes in December 2006, we also sold 12.1 million
of the hedges that were originally purchased in connection with
the 2023 Notes and received proceeds of $55.9 million.
In addition, we sold warrants for our common stock to a
financial institution for the purchase of up to
26.8 million shares of our common stock at a price of
$23.08 per share. The warrants expire on various dates from
February 2008 through May 2008 and must be settled in net
shares. We received $56.4 million in cash proceeds from the
sale of these warrants. In connection with the purchase of a
portion of the 2023 Notes in December 2006, we also purchased
12.1 million of the warrants for our common stock that were
originally issued in connection with the 2023 Notes at a cost of
$10.2 million. The remaining outstanding warrants will be
included in diluted EPS to the extent the impact is not
considered anti-dilutive.
As of December 30, 2006, the estimated fair value of the
remaining hedges acquired in connection with the issuance of the
2023 Notes was $68.3 million and the estimated fair value
of the remaining warrants sold in connection with the issuance
of the 2023 Notes was $12.0 million. Subsequent changes in
the fair value of these hedge and warrant transactions will not
be recognized as long as the instruments remain classified as
equity.
Sale-leaseback
Agreement
In January 2007, we completed the sale of certain land and
buildings in San Jose, California for a sale price of
$46.5 million. Concurrently with the sale, we leased back
from the purchaser approximately 262,500 square feet of
office space, which represents all available space in the
buildings. The lease agreement includes an initial term of two
years, with two options to extend the lease for six months each.
We have committed to lease payments related to this lease of
$2.2 million in 2007, $2.4 million in 2008 and
$0.2 million in 2009.
We received cash payment for the full sale price in January
2007. During the lease term, we intend to construct an
additional building located on our San Jose, California
campus to replace the buildings we sold in this transaction. We
expect to use approximately $22.0 million in cash during
2007 to begin construction on this new building.
54
Contractual
Obligations and Off Balance Sheet Arrangements
A summary of our contractual obligations as of December 30,
2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
Less
|
|
|
|
|
|
More
|
|
|
Total
|
|
Than 1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
Than 5 Years
|
|
|
(In millions)
|
|
Operating lease obligations
|
|
$
|
135.4
|
|
$
|
33.9
|
|
$
|
44.9
|
|
$
|
19.9
|
|
$
|
36.7
|
Purchase obligations
|
|
|
20.7
|
|
|
19.6
|
|
|
1.1
|
|
|
----
|
|
|
----
|
Term loan
|
|
|
28.0
|
|
|
28.0
|
|
|
----
|
|
|
----
|
|
|
----
|
Convertible notes
|
|
|
730.4
|
|
|
----
|
|
|
230.4
|
|
|
250.0
|
|
|
250.0
|
Contractual interest payments
|
|
|
44.2
|
|
|
7.9
|
|
|
14.4
|
|
|
14.4
|
|
|
7.5
|
Other long-term contractual
obligations
|
|
|
278.9
|
|
|
----
|
|
|
268.7
|
|
|
10.2
|
|
|
----
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,237.6
|
|
$
|
89.4
|
|
$
|
559.5
|
|
$
|
294.5
|
|
$
|
294.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 30, 2006, the primary component of Other
long-term contractual obligations of $278.9 million related
to income tax and acquisition related liabilities.
We expect that current cash and short-term investment balances
and cash flows that are generated from operations will be
sufficient to meet our working capital and other capital
requirements for at least the next 12 months.
As of December 30, 2006, we did not have any significant
off-balance sheet arrangements, as defined in
Item 303(a)(4)(ii) of SEC
Regulation S-K.
New
Accounting Standards
In July 2006, the FASB issued FIN No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109, which
prescribes a new recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN No. 48 amends
SFAS No. 5, Accounting for Contingencies,
to eliminate its applicability to income taxes.
FIN No. 48 is effective for fiscal years beginning
after December 15, 2006. The cumulative effect of applying
FIN No. 48 will be reported as an adjustment to the
opening balance of retained earnings (or other appropriate
components of equity or net assets on our Consolidated Balance
Sheet) for fiscal 2007. We are currently studying the transition
effects of adopting FIN No. 48 and we are not yet able
to assess the impact of FIN No. 48 on our financial
statements and, therefore, we are currently not able to disclose
the expected effect of adoption.
In September 2006, the SEC issued Staff Accounting Bulletin, or
SAB, No. 108, Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year
Financial Statements, which provides interpretive guidance
on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year
misstatement. SAB No. 108 is effective for us for the
year ended December 30, 2006. The implementation of
SAB No. 108 did not have a material effect on our
consolidated financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, which defines fair value,
establishes guidelines for measuring fair value and expands
disclosures regarding fair value measurements.
SFAS No. 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance
found in various prior accounting pronouncements.
SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007. Earlier adoption is permitted,
provided the company has not yet issued financial statements,
including for interim periods, for that fiscal year. We are
currently evaluating the impact of SFAS No. 157, but
do
55
not expect the adoption of SFAS No. 157 to have a
material impact on our consolidated financial position, results
of operations or cash flows.
Item 7A.
Quantitative and Qualitative Disclosures About Market
Risk
The information required by Item 7A is incorporated by
reference from the section of this Annual Report on
Form 10-K
entitled Disclosures About Market Risk found in
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Item 8.
Financial Statements and Supplementary Data
The financial statements required by Item 8 are submitted
as a separate section of this Annual Report on
Form 10-K.
See Item 15, Exhibits and Financial Statement
Schedules.
Summary
Quarterly Data Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
4th
|
|
|
3rd
|
|
|
2nd
|
|
|
1st
|
|
|
4th
|
|
|
3rd
|
|
|
2nd
|
|
|
1st
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenue
|
|
$
|
431,020
|
|
|
$
|
366,148
|
|
|
$
|
358,513
|
|
|
$
|
328,214
|
|
|
$
|
378,363
|
|
|
$
|
337,381
|
|
|
$
|
320,911
|
|
|
$
|
292,537
|
|
Cost of revenue *
|
|
$
|
53,921
|
|
|
$
|
52,735
|
|
|
$
|
59,846
|
|
|
$
|
60,597
|
|
|
$
|
54,588
|
|
|
$
|
57,272
|
|
|
$
|
60,031
|
|
|
$
|
59,517
|
|
Net income * +
|
|
$
|
48,365
|
|
|
$
|
42,060
|
|
|
$
|
30,388
|
|
|
$
|
21,779
|
|
|
$
|
26,566
|
|
|
$
|
21,271
|
|
|
$
|
483
|
|
|
$
|
1,023
|
|
Net income per share
basic * +
|
|
$
|
0.18
|
|
|
$
|
0.15
|
|
|
$
|
0.11
|
|
|
$
|
0.08
|
|
|
$
|
0.09
|
|
|
$
|
0.08
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Net income per share
diluted * +
|
|
$
|
0.16
|
|
|
$
|
0.14
|
|
|
$
|
0.10
|
|
|
$
|
0.07
|
|
|
$
|
0.08
|
|
|
$
|
0.07
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
*
|
We adopted SFAS No. 123R on January 1, 2006 using
the modified prospective transition method. Using the modified
prospective transition method, we began recognizing compensation
expense for equity-based awards granted on or after
January 1, 2006 and unvested awards granted prior to
January 1, 2006.
|
|
|
|
|
+
|
We recorded a Loss on extinguishment of debt of
$40.8 million during the quarter ended December 30,
2006, which includes a premium paid to repurchase a portion of
the 2023 Notes of $38.9 million and a write-off of the
related portion of unamortized deferred costs of issuing the
2023 Notes of $1.9 million.
|
Item 9.
Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
We carried out an evaluation required by
Rule 13a-15
of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, under the supervision and with the participation
of our management, including the Chief Executive Officer, or
CEO, and the Chief Financial Officer, or CFO, of the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of December 30, 2006.
The evaluation of our disclosure controls and procedures
included a review of our processes and implementation and the
effect on the information generated for use in this Annual
Report on
Form 10-K.
In the course of this evaluation, we sought to identify any
significant deficiencies or material weaknesses in our
disclosure controls and procedures, to determine whether we had
identified any acts of fraud involving personnel who have a
significant role in our disclosure controls and procedures, and
to confirm that any necessary corrective action, including
process improvements, was taken. This type of evaluation is done
every fiscal quarter so that our conclusions concerning the
effectiveness of these controls can be reported in our periodic
reports filed with the SEC. The overall goals of these
evaluation activities are to monitor our disclosure controls and
procedures and to make modifications as necessary. We intend to
maintain these disclosure controls and procedures, modifying
them as circumstances warrant.
56
Based on their evaluation as of December 30, 2006, our CEO
and CFO have concluded that our disclosure controls and
procedures were effective to provide reasonable assurance that
the information required to be disclosed by us in our reports
filed or submitted under the Exchange Act (i) is recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms and (ii) is
accumulated and communicated to our management, including the
CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure.
Changes
in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting during the quarter ended December 30, 2006 that
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Inherent
Limitations on Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that
our disclosure controls and procedures or our internal control
over financial reporting will prevent or detect all error and
all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and
instances of fraud, if any, within Cadence have been detected.
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rule 13a-15(f)
under the Exchange Act). Our management assessed the
effectiveness of our internal control over financial reporting
as of December 30, 2006. In making this assessment, our
management used the criteria established in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Our
management has concluded that, as of December 30, 2006, our
internal control over financial reporting is effective based on
these criteria. Our independent registered public accounting
firm, KPMG LLP, has issued an audit report on our assessment of
our internal control over financial reporting, which is included
herein.
Item 9B.
Other Information
None.
57
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
Cadences definitive proxy statement for its 2007 Annual
Meeting of Stockholders.
The executive officers of Cadence are listed at the end of
Part I of this Annual Report on
Form 10-K.
The information required by Item 10 as to Cadences
code of ethics is incorporated herein by reference from the
section entitled Corporate Governance Code of
Business Conduct in Cadences definitive proxy
statement for its 2007 Annual Meeting of Stockholders.
The information required by Item 10 as to the director
nomination process and Cadences Audit Committee is
incorporated by reference from the section entitled
Cadences Board of Directors Committees
of the Board of Directors in Cadences definitive
proxy statement for its 2007 Annual Meeting of Stockholders.
Item 11.
Executive Compensation
The information required by Item 11 is incorporated herein
by reference from the sections entitled Cadences
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 Cadences definitive
proxy statement for its 2007 Annual Meeting of Stockholders.
Item 12.
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
The information required by Item 12 is incorporated herein
by reference from the sections entitled Security Ownership
of Certain Beneficial Owners and Management and
Equity Compensation Plan Information in
Cadences definitive proxy statement for its 2007 Annual
Meeting of Stockholders.
Item 13.
Certain Relationships and Related Transactions and Director
Independence
The information required by Item 13 is incorporated herein
by reference from the sections entitled Certain
Transactions and Cadences Board of
Directors Director Independence in
Cadences definitive proxy statement for its 2007 Annual
Meeting of Stockholders.
Item 14.
Principal Accountant Fees and Services
The information required by Item 14 is incorporated herein
by reference from the section entitled Fees Billed to
Cadence by KPMG LLP During Fiscal 2006 and 2005 in
Cadences definitive proxy statement for its 2007 Annual
Meeting of Stockholders.
58
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Cadence Design Systems, Inc.:
We have audited the accompanying consolidated balance sheets of
Cadence Design Systems, Inc. and subsidiaries (the Company) as
of December 30, 2006 and December 31, 2005, and the
related consolidated statements of income, stockholders
equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 30, 2006. In
connection with our audit of the consolidated financial
statements, we also have audited the accompanying financial
statement schedule. These consolidated financial statements and
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Cadence Design Systems, Inc. and subsidiaries as of
December 30, 2006 and December 31, 2005, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 30, 2006, in
conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth
therein.
As discussed in Note 2 to the consolidated financial
statements, effective January 1, 2006, the Company adopted
the provisions of Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 30, 2006, based on the
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated February 23, 2007 expressed an unqualified opinion on
managements assessment of, and the effective operation of,
internal control over financial reporting.
/s/ KPMG LLP
Mountain View, California
February 23, 2007
60
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Cadence Design Systems, Inc.:
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control
over Financial Reporting appearing under Item 9A,
that Cadence Design Systems, Inc. and subsidiaries (the Company)
maintained effective internal control over financial reporting
as of December 30, 2006, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is
to express an opinion on managements assessment and an
opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys 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 companys
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
companys assets that could have a material effect on the
consolidated financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Cadence Design
Systems, Inc. and subsidiaries maintained effective internal
control over financial reporting as of December 30, 2006,
is fairly stated, in all material respects, based on criteria
established in Internal Control Integrated
Framework issued by the COSO. Also, in our opinion, Cadence
Design Systems, Inc. maintained, in all material respects,
effective internal control over financial reporting as of
December 30, 2006, based on the criteria established in
Internal Control Integrated Framework issued
by the COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Cadence Design System, Inc. and
subsidiaries as of December 30, 2006 and December 31,
2005, and the related consolidated statements of income,
stockholders equity and comprehensive income, and cash
flows for each of the years in the three-year period ended
December 30, 2006, and our report dated February 23,
2007 expressed an unqualified opinion on those consolidated
financial statements.
/s/ KPMG LLP
Mountain View, California
February 23, 2007
61
CADENCE
DESIGN SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
December 30, 2006 and December 31, 2005
(In thousands, except per share amounts)
ASSETS
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
934,342
|
|
|
$
|
861,315
|
|
Short-term investments
|
|
|
24,089
|
|
|
|
33,276
|
|
Receivables, net of allowances of
$3,804 and $10,979, respectively
|
|
|
238,438
|
|
|
|
282,073
|
|
Inventories
|
|
|
37,179
|
|
|
|
28,902
|
|
Prepaid expenses and other
|
|
|
77,957
|
|
|
|
70,736
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,312,005
|
|
|
|
1,276,302
|
|
Property, plant and equipment, net
|
|
|
354,575
|
|
|
|
356,945
|
|
Goodwill
|
|
|
1,267,579
|
|
|
|
1,232,926
|
|
Acquired intangibles, net
|
|
|
112,738
|
|
|
|
153,847
|
|
Installment contract receivables
|
|
|
149,584
|
|
|
|
102,748
|
|
Other assets
|
|
|
246,341
|
|
|
|
278,544
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
3,442,822
|
|
|
$
|
3,401,312
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
28,000
|
|
|
$
|
32,000
|
|
Accounts payable and accrued
liabilities
|
|
|
259,790
|
|
|
|
300,586
|
|
Current portion of deferred revenue
|
|
|
260,275
|
|
|
|
273,265
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
548,065
|
|
|
|
605,851
|
|
|
|
|
|
|
|
|
|
|
Long-Term Liabilities:
|
|
|
|
|
|
|
|
|
Long-term portion of deferred
revenue
|
|
|
95,018
|
|
|
|
51,864
|
|
Convertible notes
|
|
|
730,385
|
|
|
|
420,000
|
|
Long-term debt
|
|
|
----
|
|
|
|
128,000
|
|
Other long-term liabilities
|
|
|
370,063
|
|
|
|
350,893
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
1,195,466
|
|
|
|
950,757
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Preferred stock
$0.01 par value; authorized 400 shares, none issued or
outstanding
|
|
|
----
|
|
|
|
----
|
|
Common stock
$0.01 par value; authorized 600,000 shares; issued and
outstanding shares: 274,912 as of December 30, 2006;
287,634 as of December 31, 2005
|
|
|
1,398,899
|
|
|
|
1,299,800
|
|
Treasury stock, at cost;
31,006 shares as of December 30, 2006;
4,811 shares as of December 31, 2005
|
|
|
(544,855
|
)
|
|
|
(79,064
|
)
|
Deferred stock compensation
|
|
|
----
|
|
|
|
(90,076
|
)
|
Retained earnings
|
|
|
832,763
|
|
|
|
690,171
|
|
Accumulated other comprehensive
income
|
|
|
12,484
|
|
|
|
23,873
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,699,291
|
|
|
|
1,844,704
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders Equity
|
|
$
|
3,442,822
|
|
|
$
|
3,401,312
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
62
CADENCE
DESIGN SYSTEMS, INC.
CONSOLIDATED INCOME STATEMENTS
For the three fiscal years ended December 30, 2006
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
982,673
|
|
|
$
|
851,496
|
|
|
$
|
729,783
|
|
Services
|
|
|
134,895
|
|
|
|
126,169
|
|
|
|
137,046
|
|
Maintenance
|
|
|
366,327
|
|
|
|
351,527
|
|
|
|
330,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,483,895
|
|
|
|
1,329,192
|
|
|
|
1,197,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
|
|
66,769
|
|
|
|
79,721
|
|
|
|
82,011
|
|
Cost of services
|
|
|
96,497
|
|
|
|
91,893
|
|
|
|
91,001
|
|
Cost of maintenance
|
|
|
63,833
|
|
|
|
59,794
|
|
|
|
53,054
|
|
Marketing and sales
|
|
|
405,579
|
|
|
|
366,164
|
|
|
|
333,059
|
|
Research and development
|
|
|
460,064
|
|
|
|
390,740
|
|
|
|
368,078
|
|
General and administrative
|
|
|
143,317
|
|
|
|
129,552
|
|
|
|
87,887
|
|
Amortization of acquired
intangibles
|
|
|
23,141
|
|
|
|
47,762
|
|
|
|
55,700
|
|
Restructuring and other charges
|
|
|
(797
|
)
|
|
|
35,334
|
|
|
|
13,542
|
|
Write-off of acquired in-process
technology
|
|
|
900
|
|
|
|
9,400
|
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
1,259,303
|
|
|
|
1,210,360
|
|
|
|
1,093,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
224,592
|
|
|
|
118,832
|
|
|
|
104,148
|
|
Loss on extinguishment of debt
|
|
|
(40,768
|
)
|
|
|
----
|
|
|
|
----
|
|
Interest expense
|
|
|
(12,348
|
)
|
|
|
(5,446
|
)
|
|
|
(6,198
|
)
|
Other income (expense), net
|
|
|
70,402
|
|
|
|
15,097
|
|
|
|
(11,513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income
taxes and cumulative effect of change in accounting principle
|
|
|
241,878
|
|
|
|
128,483
|
|
|
|
86,437
|
|
Provision for income taxes
|
|
|
99,704
|
|
|
|
79,140
|
|
|
|
11,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative
effect of change in accounting principle
|
|
|
142,174
|
|
|
|
49,343
|
|
|
|
74,474
|
|
Cumulative effect of change in
accounting principle, net of tax
|
|
|
418
|
|
|
|
----
|
|
|
|
----
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
142,592
|
|
|
$
|
49,343
|
|
|
$
|
74,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share before
cumulative effect of change in accounting principle:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.51
|
|
|
$
|
0.18
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.46
|
|
|
$
|
0.16
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share after
cumulative effect of change in accounting principle:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.51
|
|
|
$
|
0.18
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.46
|
|
|
$
|
0.16
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding basic
|
|
|
279,354
|
|
|
|
278,520
|
|
|
|
271,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding diluted
|
|
|
312,457
|
|
|
|
314,383
|
|
|
|
305,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
63
CADENCE
DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME
For the three fiscal years ended December 30, 2006
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par Value
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
and Capital
|
|
|
|
|
|
Deferred
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Outstanding
|
|
|
in Excess
|
|
|
Treasury
|
|
|
Stock
|
|
|
Retained
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
of Par
|
|
|
Stock
|
|
|
Compensation
|
|
|
Earnings
|
|
Income
|
|
|
Equity
|
|
|
BALANCE, JANUARY 3, 2004
|
|
|
270,147
|
|
|
$
|
1,144,284
|
|
|
$
|
(110,094
|
)
|
|
$
|
(48,856
|
)
|
|
$
|
566,354
|
|
$
|
20,593
|
|
|
$
|
1,572,281
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
74,474
|
|
|
----
|
|
|
|
74,474
|
|
Changes in unrealized holding loss
on marketable securities, net of reclassification adjustment
(Note 2) and taxes
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
(517
|
)
|
|
|
(517
|
)
|
Foreign currency translation gain
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
11,327
|
|
|
|
11,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
(7,031
|
)
|
|
|
----
|
|
|
|
(94,105
|
)
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
(94,105
|
)
|
Issuance of common stock and
re-issuance of treasury stock under equity incentive plans, net
of forfeitures
|
|
|
12,331
|
|
|
|
(73,604
|
)
|
|
|
151,776
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
78,172
|
|
Stock received for payment of
employee taxes on vesting of restricted stock
|
|
|
(205
|
)
|
|
|
----
|
|
|
|
(2,854
|
)
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
(2,854
|
)
|
Tax benefits from employee stock
transactions
|
|
|
----
|
|
|
|
7,108
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
7,108
|
|
Tax benefits from call options
|
|
|
----
|
|
|
|
7,742
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
7,742
|
|
Stock issued in connection with
acquisitions
|
|
|
1,263
|
|
|
|
14,934
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
14,934
|
|
Deferred stock compensation, net of
forfeitures
|
|
|
----
|
|
|
|
44,347
|
|
|
|
----
|
|
|
|
(44,347
|
)
|
|
|
----
|
|
|
----
|
|
|
|
----
|
|
Amortization of deferred stock
compensation
|
|
|
----
|
|
|
|
1,682
|
|
|
|
----
|
|
|
|
29,726
|
|
|
|
----
|
|
|
----
|
|
|
|
31,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, JANUARY 1, 2005
|
|
|
276,505
|
|
|
|
1,146,493
|
|
|
|
(55,277
|
)
|
|
|
(63,477
|
)
|
|
|
640,828
|
|
|
31,403
|
|
|
|
1,699,970
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
49,343
|
|
|
----
|
|
|
|
49,343
|
|
Changes in unrealized holding gain
on marketable securities, net of reclassification adjustment
(Note 2) and taxes
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
1,020
|
|
|
|
1,020
|
|
Foreign currency translation loss
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
(8,550
|
)
|
|
|
(8,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
(6,150
|
)
|
|
|
----
|
|
|
|
(101,070
|
)
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
(101,070
|
)
|
Issuance of common stock and
re-issuance of treasury stock under equity incentive plans, net
of forfeitures
|
|
|
17,647
|
|
|
|
61,454
|
|
|
|
87,981
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
149,435
|
|
Stock received for payment of
employee taxes on vesting of restricted stock
|
|
|
(651
|
)
|
|
|
----
|
|
|
|
(10,698
|
)
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
(10,698
|
)
|
Tax benefits from employee stock
transactions
|
|
|
----
|
|
|
|
11,715
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
11,715
|
|
Tax benefits from call options
|
|
|
----
|
|
|
|
6,167
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
6,167
|
|
Stock issued in connection with
acquisitions
|
|
|
283
|
|
|
|
11,883
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
11,883
|
|
Deferred stock compensation, net of
forfeitures
|
|
|
----
|
|
|
|
62,793
|
|
|
|
----
|
|
|
|
(62,793
|
)
|
|
|
----
|
|
|
----
|
|
|
|
----
|
|
Amortization of deferred stock
compensation
|
|
|
----
|
|
|
|
(705
|
)
|
|
|
----
|
|
|
|
36,194
|
|
|
|
----
|
|
|
----
|
|
|
|
35,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2005
|
|
|
287,634
|
|
|
$
|
1,299,800
|
|
|
$
|
(79,064
|
)
|
|
$
|
(90,076
|
)
|
|
$
|
690,171
|
|
$
|
23,873
|
|
|
$
|
1,844,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
64
CADENCE
DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME
For the three fiscal years ended December 30, 2006
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par Value
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
and Capital
|
|
|
|
|
|
Deferred
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Outstanding
|
|
|
in Excess
|
|
|
Treasury
|
|
|
Stock
|
|
|
Retained
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
of Par
|
|
|
Stock
|
|
|
Compensation
|
|
|
Earnings
|
|
Income
|
|
|
Equity
|
|
|
BALANCE, DECEMBER 31, 2005
|
|
|
287,634
|
|
|
$
|
1,299,800
|
|
|
$
|
(79,064
|
)
|
|
$
|
(90,076
|
)
|
|
$
|
690,171
|
|
$
|
23,873
|
|
|
$
|
1,844,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
142,592
|
|
|
----
|
|
|
|
142,592
|
|
Changes in unrealized holding gain
on marketable securities, net of reclassification adjustment
(Note 2) and taxes
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
(6,527
|
)
|
|
|
(6,527
|
)
|
Foreign currency translation loss
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
(4,862
|
)
|
|
|
(4,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
(27,917
|
)
|
|
|
----
|
|
|
|
(494,088
|
)
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
(494,088
|
)
|
Issuance of common stock and
re-issuance of treasury stock under equity incentive plans, net
of forfeitures
|
|
|
16,006
|
|
|
|
119,479
|
|
|
|
41,791
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
161,270
|
|
Stock received for payment of
employee taxes on vesting of restricted stock
|
|
|
(821
|
)
|
|
|
----
|
|
|
|
(13,494
|
)
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
(13,494
|
)
|
Purchase of call options in
connection with convertible notes due 2011 and 2013 (Note 6)
|
|
|
----
|
|
|
|
(119,750
|
)
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
(119,750
|
)
|
Proceeds from sale of call options
in connection with convertible notes due 2023 (Note 6)
|
|
|
----
|
|
|
|
55,864
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
55,864
|
|
Proceeds from sale of common stock
warrants in connection with convertible notes due 2011 and 2013
(Note 6)
|
|
|
----
|
|
|
|
39,400
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
39,400
|
|
Purchase of common stock warrants
in connection with convertible notes due 2023 (Note 6)
|
|
|
----
|
|
|
|
(10,201
|
)
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
(10,201
|
)
|
Tax benefits from employee stock
transactions
|
|
|
----
|
|
|
|
14,741
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
14,741
|
|
Tax expense from call options
|
|
|
----
|
|
|
|
(6,159
|
)
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
(6,159
|
)
|
Stock issued in connection with
acquisitions
|
|
|
10
|
|
|
|
2,594
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
2,594
|
|
Stock-based compensation expense
|
|
|
----
|
|
|
|
93,207
|
|
|
|
----
|
|
|
|
----
|
|
|
|
----
|
|
|
----
|
|
|
|
93,207
|
|
Elimination of unamortized deferred
stock compensation
|
|
|
----
|
|
|
|
(90,076
|
)
|
|
|
----
|
|
|
|
90,076
|
|
|
|
----
|
|
|
----
|
|
|
|
----
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 30, 2006
|
|
|
274,912
|
|
|
$
|
1,398,899
|
|
|
$
|
(544,855
|
)
|
|
$
|
----
|
|
|
$
|
832,763
|
|
$
|
12,484
|
|
|
$
|
1,699,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
65
CADENCE
DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three fiscal years ended December 30, 2006
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash and Cash Equivalents at
Beginning of Year
|
|
$
|
861,315
|
|
|
$
|
448,517
|
|
|
$
|
309,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
142,592
|
|
|
|
49,343
|
|
|
|
74,474
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in
accounting principle
|
|
|
(418
|
)
|
|
|
----
|
|
|
|
----
|
|
Depreciation and amortization
|
|
|
147,117
|
|
|
|
184,717
|
|
|
|
179,205
|
|
Loss on extinguishment of debt
|
|
|
40,768
|
|
|
|
----
|
|
|
|
----
|
|
Stock-based compensation
|
|
|
103,986
|
|
|
|
39,902
|
|
|
|
31,408
|
|
Equity in loss from investments, net
|
|
|
1,200
|
|
|
|
6,492
|
|
|
|
16,944
|
|
Gain on investments, net
|
|
|
(32,903
|
)
|
|
|
(18,297
|
)
|
|
|
(7,492
|
)
|
Write-down of investment securities
|
|
|
2,467
|
|
|
|
10,934
|
|
|
|
4,236
|
|
Write-off of acquired in-process
technology
|
|
|
900
|
|
|
|
9,400
|
|
|
|
9,000
|
|
Non-cash restructuring and other
charges
|
|
|
194
|
|
|
|
2,352
|
|
|
|
4,142
|
|
Tax benefits from employee stock
transactions
|
|
|
----
|
|
|
|
11,715
|
|
|
|
7,108
|
|
Tax benefit (expense) from call
options
|
|
|
(6,159
|
)
|
|
|
6,167
|
|
|
|
7,742
|
|
Deferred income taxes
|
|
|
29,535
|
|
|
|
(22,968
|
)
|
|
|
(15,695
|
)
|
Proceeds from the sale of
receivables, net
|
|
|
180,580
|
|
|
|
192,079
|
|
|
|
30,070
|
|
Provisions (recoveries) for losses
(gains) on trade accounts receivable and sales returns
|
|
|
(6,777
|
)
|
|
|
(1,755
|
)
|
|
|
447
|
|
Other non-cash items
|
|
|
4,630
|
|
|
|
5,569
|
|
|
|
(5,406
|
)
|
Changes in operating assets and
liabilities, net of effect of acquired businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
92,977
|
|
|
|
54,928
|
|
|
|
(49,361
|
)
|
Installment contract receivables
|
|
|
(261,983
|
)
|
|
|
(155,648
|
)
|
|
|
20,556
|
|
Inventories
|
|
|
(10,872
|
)
|
|
|
(7,588
|
)
|
|
|
(3,555
|
)
|
Prepaid expenses and other
|
|
|
6,128
|
|
|
|
(8,094
|
)
|
|
|
(3,410
|
)
|
Other assets
|
|
|
749
|
|
|
|
1,640
|
|
|
|
16,417
|
|
Accounts payable and accrued
liabilities
|
|
|
(51,462
|
)
|
|
|
20,330
|
|
|
|
2,001
|
|
Deferred revenue
|
|
|
24,444
|
|
|
|
32,616
|
|
|
|
34,878
|
|
Other long-term liabilities
|
|
|
13,523
|
|
|
|
12,449
|
|
|
|
18,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
421,216
|
|
|
|
426,283
|
|
|
|
372,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of
available-for-sale
securities
|
|
|
7,637
|
|
|
|
14,921
|
|
|
|
8,301
|
|
Proceeds from sale of short-term
investments
|
|
|
----
|
|
|
|
289,225
|
|
|
|
516,935
|
|
Purchases of short-term investments
|
|
|
(147
|
)
|
|
|
(180,975
|
)
|
|
|
(549,835
|
)
|
Proceeds from the sale of long-term
investments
|
|
|
26,054
|
|
|
|
6,075
|
|
|
|
9,900
|
|
Proceeds from the sale of property,
plant and equipment
|
|
|
317
|
|
|
|
33,625
|
|
|
|
3,625
|
|
Purchases of property, plant and
equipment
|
|
|
(67,636
|
)
|
|
|
(71,656
|
)
|
|
|
(61,779
|
)
|
Purchases of software licenses
|
|
|
(8,409
|
)
|
|
|
(2,600
|
)
|
|
|
(4,157
|
)
|
Investment in venture capital
partnerships and equity investments
|
|
|
(3,800
|
)
|
|
|
(14,184
|
)
|
|
|
(22,773
|
)
|
Cash paid in business combinations
and asset acquisitions, net of cash acquired, and
acquisitions of intangibles
|
|
|
(65,778
|
)
|
|
|
(297,128
|
)
|
|
|
(115,170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing
activities
|
|
|
(111,762
|
)
|
|
|
(222,697
|
)
|
|
|
(214,953
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from term loan
|
|
|
----
|
|
|
|
160,000
|
|
|
|
----
|
|
Principal payments on term loan and
long-term debt
|
|
|
(132,000
|
)
|
|
|
(62
|
)
|
|
|
(370
|
)
|
Proceeds from issuance of
convertible notes due 2011 and 2013
|
|
|
500,000
|
|
|
|
----
|
|
|
|
----
|
|
Payment of convertible notes due
2023
|
|
|
(228,480
|
)
|
|
|
----
|
|
|
|
----
|
|
Payment of convertible notes
issuance costs
|
|
|
(12,032
|
)
|
|
|
----
|
|
|
|
(1,920
|
)
|
Purchase of call options in
connection with convertible notes due 2011 and 2013
|
|
|
(119,750
|
)
|
|
|
----
|
|
|
|
----
|
|
Proceeds from sale of call options
in connection with convertible notes due 2023
|
|
|
55,864
|
|
|
|
----
|
|
|
|
----
|
|
Proceeds from sale of common stock
warrants in connection with convertible notes due 2011 and 2013
|
|
|
39,400
|
|
|
|
----
|
|
|
|
----
|
|
Purchase of common stock warrants
in connection with convertible notes due 2023
|
|
|
(10,201
|
)
|
|
|
----
|
|
|
|
----
|
|
Tax benefit from employee stock
transactions
|
|
|
10,712
|
|
|
|
----
|
|
|
|
----
|
|
Proceeds from issuance of common
stock
|
|
|
156,648
|
|
|
|
146,481
|
|
|
|
75,318
|
|
Purchases of treasury stock
|
|
|
(494,088
|
)
|
|
|
(101,070
|
)
|
|
|
(94,105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for)
financing activities
|
|
|
(233,927
|
)
|
|
|
205,349
|
|
|
|
(21,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
(2,500
|
)
|
|
|
3,863
|
|
|
|
2,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in Cash and cash
equivalents
|
|
|
73,027
|
|
|
|
412,798
|
|
|
|
139,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of
Year
|
|
$
|
934,342
|
|
|
$
|
861,315
|
|
|
$
|
448,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
66
CADENCE
DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 30, 2006
NOTE 1. CADENCE
Cadence Design Systems, Inc., or Cadence, licenses electronic
design automation, or EDA, software, sells or leases hardware
technology and intellectual property and provides design and
methodology services throughout the world to help manage and
accelerate electronic product development processes.
Cadences broad range of products and services are used by
electronics companies to design and develop complex integrated
circuits, or ICs, and personal and commercial electronic systems.
NOTE 2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation and Basis of Presentation
Cadences fiscal year end is the Saturday closest to
December 31. Fiscal 2006, 2005 and 2004 were
52-week
years. The consolidated financial statements include the
accounts of Cadence and its subsidiaries after elimination of
intercompany accounts and transactions. All consolidated
subsidiaries are wholly-owned by Cadence.
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash,
Cash Equivalents and Short-Term Investments
Cadence considers all highly liquid debt instruments, which
could include commercial paper, European Union euro time
deposits, repurchase agreements and certificates of deposit,
with remaining maturities of three months or less at the time of
purchase to be cash equivalents. Investments with maturities
greater than three months and less than one year are classified
as short-term investments.
Foreign
Currency Translation
Cadence transacts business in various foreign currencies. In
general, the functional currency of a foreign operation is the
local countrys currency except for Cadences
principal Irish, Israeli, Hungarian and Dutch subsidiaries,
whose functional currency is the United States dollar.
Non-functional currency monetary balances are re-measured into
the functional currency of the subsidiary with any related gain
or loss recorded in Other income (expense), net, in the
accompanying Consolidated Income Statements. Assets and
liabilities of operations outside the United States, for which
the functional currency is the local currency, are translated
into United States dollars using fiscal year-end exchange rates.
Revenue and expenses are translated at the average exchange
rates in effect during each fiscal month during the year. The
effects of foreign currency translation adjustments are included
in Stockholders Equity as a component of Accumulated other
comprehensive income in the accompanying Consolidated Balance
Sheets.
Derivative
Financial Instruments
Cadence accounts for its foreign currency exchange contracts in
accordance with Statement of Financial Accounting Standards, or
SFAS, No. 133, Accounting for Derivative Instruments
and Hedging Activities. Cadence enters 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
67
contract decreases in value when underlying assets increase in
value or underlying liabilities decrease in value due to changes
in foreign exchange rates. The forward contracts are not
designated as accounting hedges under SFAS No. 133
and, therefore, the unrealized gains and losses are recognized
in Other income (expense), net, in advance of the actual foreign
currency cash flows with the fair value of these forward
contracts being recorded as accrued liabilities or other assets.
Cadence does not use forward contracts for trading purposes.
Cadences forward contracts generally have maturities of
90 days or less. Recognized gains or losses with respect to
our current hedging activities will ultimately depend on how
accurately Cadence is able to match the amount of currency
forward exchange contracts with underlying asset and liability
exposures.
Allowance
for Doubtful Accounts
Cadence makes judgments as to its ability to collect outstanding
receivables and provide allowances for the portion of
receivables when collection becomes doubtful. Provisions are
made based upon a specific review of all significant outstanding
invoices and are recorded in operating expenses. For those
invoices not specifically reviewed, provisions are made based on
Cadences historical bad debt experience. In determining
these percentages, Cadence analyzes its historical collection
experience and current economic trends. If the historical data
Cadence uses to calculate the allowance provided for doubtful
accounts does not reflect the future ability to collect
outstanding receivables, additional provisions may be needed
which could cause future results of operations to be materially
affected.
Allowance
for Sales Returns
Provisions for sales returns primarily relate to service
arrangements and are recorded as a reduction to revenue. These
provisions are made based on historical experience.
Inventories are stated at the lower of cost (using the
first-in,
first-out method) or market value. Cadences inventories
include high technology parts and components for complex
computer systems that emulate the performance and operation of
computer IC and electronic systems. These parts and components
may be specialized in nature or subject to rapid technological
obsolescence. While Cadence has programs to minimize the
required inventories on hand and considers technological
obsolescence when estimating required reserves to reduce
recorded amounts to market values, it is reasonably possible
that such estimates could change in the near term.
Cadences practice is to reserve for inventory in excess of
12-month
demand.
Property,
Plant and Equipment
Property, plant and equipment is stated at historical cost.
Depreciation and amortization are generally provided over the
estimated useful lives, using the straight-line method, as
follows:
|
|
|
Computer equipment and related
software
|
|
3-8 years
|
Buildings
|
|
10-32 years
|
Leasehold and building improvements
|
|
Shorter of the lease term or the
estimated useful life
|
Furniture and fixtures
|
|
3-5 years
|
Equipment
|
|
3-5 years
|
Cadence capitalizes the costs of software developed for internal
use in compliance with Statement of Position, or SOP,
98-1
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use and with Emerging Issues Task
Force, or EITF, Issue
00-2
Accounting for Web Site Development Costs.
Capitalization of software developed for internal use and web
site development costs begins at the application development
phase of the project. Capitalization of software developed for
internal use and web site development costs ends, and
amortization begins, when the computer software is substantially
complete and ready for its intended use. Amortization is
recorded on a straight-line basis over the estimated useful life
of the software. Cadence capitalized $24.3 million in 2006,
$32.6 million in 2005 and $21.4 million in 2004.
68
Cadence recorded depreciation and amortization expense in the
amount of $72.0 million in 2006, $68.8 million in 2005
and $68.7 million in 2004 for property, plant and equipment.
Software
Development Costs
Cadence accounts for software development costs in accordance
with SFAS No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise
Marketed. Software development costs are capitalized
beginning when a products technological feasibility has
been established by completion of a working model of the product
and amortization begins when a product is available for general
release to customers. The period between the achievement of
technological feasibility and the general release of
Cadences products has typically been of short duration.
Internally-generated software development costs have not been
material.
Cadence capitalized $7.3 million of purchased software
during 2006, $0.5 million of purchased software during 2005
and $10.3 million of purchased software during 2004.
Cadence has deemed the purchased software to have an alternative
future use in accordance with SFAS No. 86. Therefore,
Cadence begins amortization of purchased software when the
technology is available for general release to customers.
Amortization expense for purchased software was
$4.2 million in 2006, $4.4 million in 2005 and
$2.2 million in 2004.
Acquired
Intangibles, including Goodwill
Acquired intangibles, which include purchased technology and
other intangible assets, are stated at cost less accumulated
amortization and are reviewed for impairment whenever events or
circumstances indicate that an impairment may exist. In
accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, goodwill and purchased intangibles with
indefinite useful lives are not amortized but are reviewed for
impairment at least annually or when events or changes in
circumstances indicate that Cadence will not be able to recover
the assets carrying amount. Acquired intangibles with
definite lives are amortized on a straight-line basis over the
remaining estimated economic life of the underlying products and
technologies (original lives assigned are one to ten years).
During the third quarters of 2006, 2005 and 2004, Cadence
completed its annual impairment analysis of goodwill. Based on
the results of these impairment reviews, Cadence has determined
that no indicators of impairment existed for its one reporting
unit in 2006 and 2005, and two reporting units in 2004 and,
accordingly, no impairment charge was recognized during 2006,
2005 or 2004.
Cadences long-lived assets consist of property, plant and
equipment and other acquired intangibles, excluding goodwill.
Cadence reviews its long-lived assets for impairment in
accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. For assets to
be held and used, Cadence initiates its review whenever events
or changes in circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable. Recoverability of an
asset is measured by comparison of its carrying amount to the
expected future undiscounted cash flows that the asset is
expected to generate. If it is determined that an asset is not
recoverable, an impairment loss is recorded in the amount by
which the carrying amount of the asset exceeds its fair value.
During 2006, there were no significant impairments of long-lived
assets. During 2005, Cadence abandoned certain assets and
recorded a charge of $2.4 million, which is included in
Restructuring and other charges in the accompanying Consolidated
Income Statements. During 2004, Cadence abandoned certain assets
and recorded a charge of $9.4 million on long-lived assets,
which charge is included in Restructuring and other charges in
the accompanying Consolidated Income Statements.
Marketable
and Non-Marketable Securities
Management considers all of its investments in marketable
securities as
available-for-sale.
Available-for-sale
securities are stated at fair value, with the unrealized gains
and losses presented net of tax and reported as a separate
component of Stockholders equity. Realized gains and
losses are determined using the specific identification method.
Gains are recognized when realized and are recorded in the
Consolidated Income Statements as Other income (expense), net.
Losses are recognized as realized or when Cadence has determined
that an
other-than-temporary
decline in fair value has occurred.
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It is Cadences policy to review the fair value of these
marketable securities on a regular basis to determine whether
its investments in these companies are
other-than-temporarily
impaired. This evaluation includes, but is not limited to,
reviewing each companys cash position, financing needs,
earnings or revenue outlook, operational performance, management
or ownership changes and competition. If Cadence believes the
carrying value of an investment is in excess of its fair value,
and this difference is
other-than-temporary,
it is Cadences policy to write down the investment to
reduce its carrying value to fair value.
Non-Marketable
Securities
Cadences non-marketable securities include investments in
privately-held companies and companies that are publicly-traded
but as to which there are trading restrictions on the shares
Cadence owns. To determine the fair value of publicly-traded
securities with trading restrictions, Cadence considers the
current market price of the security and the specific
characteristics of the restrictions. To determine the fair value
of privately-held investments, Cadence uses the most recent
round of financing or estimates of current fair value using
traditional valuation techniques. It is Cadences policy to
review the fair value of these investments on a regular basis to
determine whether the investments in these companies are
other-than-temporarily
impaired. This evaluation includes, but is not limited to,
reviewing each companys cash position, financing needs,
earnings or revenue outlook, operational performance, management
or ownership changes and competition. In the case of
privately-held companies, this evaluation is based on
information that Cadence requests from these companies. This
information is not subject to the same disclosure regulations as
United States publicly-traded companies, and as such, the basis
for these evaluations is subject to the timing and the accuracy
of the data received from these companies. If Cadence believes
the carrying value of an investment is in excess of fair value,
and this difference is
other-than-temporary,
it is Cadences policy to write down the investment to fair
value.
Equity
Method Investments
Cadence applies the guidance in Accounting Principles Board
Opinion, or APB, No. 18, The Equity Method of
Accounting for Investments in Common Stock, as amended,
and EITF
No. 02-14,
Whether an Investor Should Apply the Equity Method of
Accounting to Investments Other Than Common Stock, to
classify investments as equity method investments. These
investments are held in the form of voting preferred stock or
convertible debt of privately-held companies. If Cadence
determines that it has the ability to exercise significant
influence over the investee and the investment is in the form of
in-substance common stock, the investment is accounted for under
the equity method.
In applying the equity method of accounting, Cadence applies
approach (a) of EITF
No. 99-10,
Percentage Used to Determine the Amount of Equity Method
Losses. Accordingly, the portion of equity method loss or
income recorded by Cadence is based on its percentage ownership
of each investees preferred stock or convertible debt
available to absorb losses or with contractual rights to income.
Its level of participation in future financings of its equity
method investees may impact Cadences proportional share in
future income or losses. Cadence records its interest in equity
method gains and losses in the quarter following incurrence
because it is not practicable to obtain investee financial
statements prior to the issuance of Cadences Consolidated
Financial Statements.
Cost
Method Investments
Investments accounted for by Cadence under the cost method of
accounting are carried at historical cost and Cadence
periodically evaluates the fair value of each investment to
determine if an
other-than-temporary
decline in value has occurred.
Nonqualified
Deferred Compensation Trust
Executive Officers and Directors may elect to defer compensation
payable to them under Cadences 1994 Nonqualified Deferred
Compensation Plan, or the NQDC. Deferred compensation payments
are held in accounts with values indexed to the performance of
selected mutual funds or money market accounts. In accordance
with EITF
No. 97-14,
Accounting for Deferred Compensation Arrangements Where
Amounts Earned Are Held in a Rabbi Trust and Invested,
Cadence consolidates the NQDC trust accounts in its Consolidated
Financial Statements.
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The selected mutual funds or money market accounts held in the
NQDC trust are classified as trading securities in accordance
with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Trading
securities are stated at fair value, with the unrealized gains
and losses recognized in the Consolidated Income Statements as
Other income (expense), net. These trading securities are
classified as Other assets on the Consolidated Balance Sheets
because the securities are not available for Cadences use
in its operations.
Cadences obligation with respect to the NQDC trust is
recorded in Other long-term liabilities on its Consolidated
Balance Sheets. Increases and decreases in the NQDC liability
are recorded as compensation expense in the Consolidated Income
Statements.
Deferred revenue arises when customers pay for products
and/or
services in advance of revenue recognition. Cadences
deferred revenue consists primarily of unearned revenue on
maintenance and product licenses for which revenue is recognized
in installments over the duration of the license. Maintenance on
perpetual licenses is generally renewed annually, billed in full
in advance, and the corresponding revenue is recognized over the
ensuing
12-month
maintenance term. The fees under product licenses for which
revenue is not recognized immediately and for maintenance in
connection with term and subscription licenses are generally
billed quarterly in advance and the related revenue is
recognized over multiple periods over the ensuing license period.
Other comprehensive income includes foreign currency translation
gains and losses and unrealized gains and losses on marketable
securities that are
available-for-sale
that have been excluded from net income and reflected instead in
stockholders equity. Cadence has reported the components
of comprehensive income in its Consolidated Statements of
Stockholders Equity. Cadence reclassified
$6.7 million in 2006, net of $2.7 million of tax,
$9.2 million in 2005, net of $3.7 million of tax, and
$6.8 million in 2004, net of $2.7 million of tax, from
unrealized holding gains and losses on marketable securities to
realized gains included in Other income (expense), net, in the
accompanying Consolidated Income Statements. The tax expense
(benefit) for gross unrealized holding gains (losses) in
marketable equity securities was $(4.4) million in 2006,
$(1.2) million in 2005 and $(16.4) million in 2004.
Cadence applies the provisions of SOP, 97-2, Software
Revenue Recognition, as amended by
SOP 98-9,
Modification of
SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions, to all product revenue transactions where
the software is not incidental. Cadence also applies the
provisions of SFAS No. 13, Accounting for
Leases, to all hardware lease transactions. Cadence
recognizes revenue when persuasive evidence of an arrangement
exists, the product has been delivered, the fee is fixed or
determinable, collection of the resulting receivable is
probable, and vendor-specific objective evidence of fair value,
or VSOE, exists.
Cadence licenses software using three different license types:
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Subscription licenses;
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Term licenses; and
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Perpetual licenses.
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Subscription licenses Cadences
subscription license arrangements offer customers the right to:
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Access and use all software products delivered at the outset of
an arrangement throughout the entire term of the arrangement,
generally two to three years, with no rights to return;
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Use unspecified additional software products that become
commercially available during the term of the
arrangement; and
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Remix among the software products delivered at the outset of the
arrangement, as well as the right to remix into other
unspecified additional software products that may become
available during the term of the arrangement, so long as the
cumulative value of all products in use does not exceed the
total license fee determined at the outset of the arrangement.
These remix rights may be exercisable multiple times
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during the term of the arrangement. The right to remix all
software products delivered pursuant to the license agreement is
not considered an exchange or return of software because all
software products have been delivered and the customer has the
continuing right to use them.
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In general, revenue associated with subscription licenses is
recognized ratably over the term of the license commencing upon
the later of the effective date of the arrangement or delivery
of the software product. Subscription license revenue is
allocated to product and maintenance revenue. The allocation to
maintenance revenue is based on vendor specific objective
evidence, or VSOE, of fair value of the undelivered maintenance
that was established in connection with the sale of our term
licenses.
Term licenses Cadences term license
arrangements offer customers the right to:
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Access and use all software products delivered at the outset of
an arrangement throughout the entire term of the arrangement,
generally two to three years, with no rights to return; and
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Remix among the software products delivered at the outset of the
arrangement, so long as the cumulative value of all products in
use does not exceed the total license fee determined at the
outset of the arrangement. These remix rights may be exercisable
multiple times during the term of the arrangement.
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The right to remix all software products delivered pursuant to
the license agreement is not considered an exchange or return of
software because all software products have been delivered and
the customer has the continuing right to use them. In general,
revenue associated with term licenses is recognized upon the
later of the effective date of the arrangement or delivery of
the software product.
Perpetual licenses Cadences perpetual
licenses consist of software licensed on a perpetual basis with
no right to return or exchange the licensed software. In
general, revenue associated with perpetual licenses is
recognized upon the later of the effective date of the license
or delivery of the licensed product.
Persuasive evidence of an arrangement
Generally, Cadence uses a contract signed by the customer as
evidence of an arrangement for subscription and term licenses
and hardware leases. If a contract signed by the customer does
not exist, Cadence has historically used a purchase order as
evidence of an arrangement for perpetual licenses, hardware
sales, maintenance renewals and small fixed-price service
projects, such as training classes and small methodology service
engagements of approximately $10,000 or less. For all other
service engagements, Cadence uses a signed professional services
agreement and a statement of work to evidence an arrangement. In
cases where both a signed contract and a purchase order exist,
Cadence considers the signed contract to be the most persuasive
evidence of the arrangement. Sales through Cadences
distributors are evidenced by a master agreement governing the
relationship, together with binding purchase orders from the
distributor on a
transaction-by-transaction
basis.
Product delivery Software and the
corresponding access keys are generally delivered to customers
electronically. Electronic delivery occurs when Cadence provides
the customer access to the software. Occasionally, Cadence will
deliver the software on a compact disc with standard transfer
terms of
free-on-board,
or F.O.B., shipping point. Cadences software license
agreements generally do not contain conditions for acceptance.
With respect to hardware, delivery of an entire system is deemed
to occur upon its successful installation. For certain hardware
products, installation is the responsibility of the customer, as
the system is fully functional at the time of shipment. For
these products, delivery is deemed to be complete when the
products are shipped with freight terms of F.O.B. shipping point.
Fee is fixed or determinable Cadence assesses
whether a fee is fixed or determinable at the outset of the
arrangement, primarily based on the payment terms associated
with the transaction. Cadence has established a history of
collecting under the original contract without providing
concessions on payments, products or services. For installment
contracts that do not include a substantial up front payment,
Cadence may only determine that a fee is fixed or determinable
if the arrangement has payment periods that are equal to or less
than the term of the licenses and the payments are collected in
equal or nearly equal installments, when evaluated over the
entire term of the arrangement.
Significant judgment is involved in assessing whether a fee is
fixed or determinable. Cadence must also make these judgments
when assessing whether a contract amendment to a term
arrangement (primarily in the context of a
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license extension or renewal) constitutes a concession.
Cadences experience has been that it is able to determine
whether a fee is fixed or determinable for term licenses. While
Cadence does not expect that experience to change, if Cadence no
longer were to have a history of collecting under the original
contract without providing concessions on term licenses, revenue
from term licenses would be required to be recognized when
payments under the installment contract become due and payable.
Such a change could have a material impact on Cadences
results of operations.
Collection is probable Cadence assesses the
probability of collecting from each customer at the outset of
the arrangement based on a number of factors, including the
customers payment history and its current
creditworthiness. Cadence has concluded that collection is not
probable for license arrangements executed with customers in
certain countries. If in Cadences judgment collection of a
fee is not probable, Cadence defers the revenue until the
uncertainty is removed, which generally means revenue is
recognized upon receipt of cash payment. Cadences
experience has been that it is able to estimate whether
collection is probable. While Cadence does not expect that
experience to change, if Cadence were to determine that
collection is not probable for any license arrangement,
particularly those with installment payment terms, revenue from
such license would be recognized generally upon the receipt of
cash payment. Such a change could have a material impact on
Cadences results of operations.
Vendor-specific objective evidence of fair
value Cadences VSOE for certain product
elements of an arrangement is based upon the pricing in
comparable transactions when the element is sold separately.
VSOE for maintenance is generally based upon the customers
stated annual renewal rates. VSOE for services is generally
based on the price charged when the services are sold
separately. For multiple element arrangements, VSOE must exist
to allocate the total fee among all delivered and undelivered
elements of a term or perpetual license arrangement. If VSOE
does not exist for all elements to support the allocation of the
total fee among all delivered and undelivered elements of the
arrangement, revenue is deferred until such evidence does exist
for the undelivered elements, or until all elements are
delivered, whichever is earlier. If VSOE of all undelivered
elements exists but VSOE does not exist for one or more
delivered elements, revenue is recognized using the residual
method. Under the residual method, the VSOE of the undelivered
elements is deferred, and the remaining portion of the
arrangement fee is recognized as revenue as the elements are
delivered. Cadences experience has been that it is able to
estimate VSOE.
Finance fee revenue Finance fees result from
discounting to present value the product revenue derived from
installment contracts in which the payment terms extend beyond
one year from the effective date of the contract. Finance fees
are recognized using a method that approximates the effective
interest method over the relevant license term and are
classified as product revenue. Finance fee revenue represented
approximately 2% of total revenue for each of the years ended
December 30, 2006, December 31, 2005 and
January 1, 2005. Upon the sale of an installment contract,
Cadence recognizes the remaining finance fee revenue associated
with the installment contract.
Services revenue Services revenue consists
primarily of revenue received for performing design and
methodology services. These services are not related to the
functionality of the products licensed. Revenue from service
contracts is recognized either on the time and materials method,
as work is performed, or on the
percentage-of-completion
method. For contracts with fixed or
not-to-exceed
fees, Cadence estimates on a monthly basis the
percentage-of-completion,
which is based on the completion of milestones relating to the
arrangement. Cadence has a history of accurately estimating
project status and the costs necessary to complete projects. A
number of internal and external factors can affect these
estimates, including labor rates, utilization and efficiency
variances and specification and testing requirement changes. If
different conditions were to prevail such that accurate
estimates could not be made, then the use of the completed
contract method would be required and the recognition of all
revenue and costs would be deferred until the project was
completed. Such a change could have a material impact on
Cadences results of operations.
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Accounting
for Income Taxes
Cadence uses the asset and liability method to account for
income taxes. Under this method, Cadence is required to estimate
its income taxes in each of the jurisdictions in which it
operates. This process involves estimating actual current tax
liabilities together with assessing temporary differences
resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Cadence
then assesses the likelihood that deferred tax assets will be
recovered from future taxable income, and to the extent it
believes that recovery is not likely, Cadence must establish a
valuation allowance. To the extent Cadence establishes a
valuation allowance for deferred tax assets or increases this
allowance, Cadence may need to include an expense within the tax
provision of its Consolidated Income Statement.
Significant management judgment is required in determining the
provision for income taxes, deferred tax assets and liabilities
and any valuation allowance recorded against net deferred tax
assets. The valuation allowance is based on estimates of taxable
income for each jurisdiction in which Cadence operates for the
period over which deferred tax assets will be recoverable. In
the event that actual results differ from these estimates or
Cadence adjusts these estimates in future periods, Cadence may
need to establish an additional valuation allowance, which could
materially affect its consolidated financial position or results
of operations.
Cadence accounts for restructuring charges in accordance with
SEC Staff Accounting Bulletin No. 100,
Restructuring and Impairment Charges, as amended.
From fiscal 2001 through fiscal 2005, Cadence undertook
significant restructuring initiatives. The individual components
of the restructuring activities initiated prior to fiscal 2003
were accounted for in accordance with EITF
No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring), and EITF
No. 88-10,
Costs Associated with Lease Modifications or
Terminations.
For restructuring activities initiated after fiscal 2002,
Cadence accounted for the leased facilities in accordance with
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. For all periods
presented, Cadence accounted for the asset-related portions of
these restructurings in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. In addition, for all periods presented, the
severance and benefits charges were accounted for in accordance
with SFAS No. 112, Employers Accounting
for Postemployment Benefits An Amendment of FASB
Statements No. 5 and 43.
In connection with these restructuring initiatives, cadence has
made a number of estimates and assumptions related to losses on
excess facilities vacated or consolidated, particularly the
timing of subleases and sublease terms. Closure and space
reduction costs included in the restructuring charges include
payments required under leases less any applicable estimated
sublease income after the facilities are abandoned, lease buyout
costs and certain contractual costs to maintain facilities
during the period after abandonment.
In addition, Cadence has recorded estimated provisions for
termination benefits and outplacement costs, long-term asset
impairments, and other restructuring costs. Cadence regularly
evaluates the adequacy of its restructuring accrual, and adjusts
the balance based on changes in estimates and assumptions.
Cadence may incur future charges for new restructuring
activities as well as for changes in estimates to amounts
previously recorded.
Cadence adopted SFAS No. 123R Share-Based
Payment, on January 1, 2006 using the modified
prospective transition method. SFAS No. 123R requires
companies to recognize the cost of employee services received in
exchange for awards of equity instruments based upon the fair
value of those awards on the grant date. Using the modified
prospective transition method of adopting
SFAS No. 123R, Cadence began recognizing compensation
expense for equity-based awards granted on or after
January 1, 2006 and unvested awards granted prior to
January 1,
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2006. Prior period stock-based compensation expense recognized
under APB No. 25 Accounting for Stock Issued to
Employees has been reclassified to conform to the current
year presentation.
Under SFAS No. 123R, stock-based compensation expense
is measured at the grant date based on the value of the option
or restricted stock and is recognized as expense, less expected
forfeitures, over the requisite service period, which is
generally the vesting period. The fair value of each option
grant and each purchase right granted under Cadences
Employee Stock Purchase Program, or ESPP, is estimated on the
date of grant using the Black-Scholes option pricing model. The
fair value of each restricted stock issuance is determined using
the fair value of Cadences common stock on the grant date.
Cadence recognizes stock-based compensation expense on the
straight-line method for options and restricted stock that only
contain a service condition and on the graded-vesting method for
options and restricted stock that contain both a service and
performance condition. See Note 4 for additional
information on performance-based restricted stock awards.
Determining the fair value of stock-based awards at the grant
date requires judgment, including estimating:
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The expected volatility of our stock;
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The expected term of stock options;
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The risk-free interest rate for the period;
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Expected dividends; and
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Expected forfeitures.
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The computation of the expected volatility assumption used in
the Black-Scholes pricing model for option grants is based on
implied volatility calculated using an average of the volatility
of publicly traded options for Cadence common stock and the 2023
Notes. Cadence uses this approach to determine volatility
because:
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Options for Cadences common stock are actively traded;
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The market prices of both the traded options and underlying
shares are measured at a similar point in time to each other and
on a date reasonably close to the grant date of the employee
stock options;
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The traded options have exercise prices that are both
near-the-money
and close to the exercise price of the employee stock
options; and
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The remaining maturities of the traded options on which the
estimate is based are at least one year.
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When establishing the expected life assumption, Cadence reviews
annual historical employee exercise behavior with respect to
option grants having similar vesting periods. The risk-free
interest rate for the period within the expected term of the
option is based on the yield of United States Treasury notes in
effect at the time of grant. Cadence has not historically paid
dividends, thus the expected dividends used in the calculation
are zero.
Judgment is also required in estimating the amount of
stock-based awards that Cadence expects to be forfeited. Cadence
calculates a separate expected forfeiture rate for both stock
options and restricted stock issuances based on historical
trends.
The valuation of all options, including the expected life of
stock options, and the expected forfeiture rates for options and
restricted stock, are calculated based on one employee pool as
there is no significant difference in exercise behavior between
classes of employees.
In November 2005, the Financial Accounting Standards Board, or
FASB, issued Financial Statement Position, or FSP, on
SFAS No. 123R-3,
Transition Election Related to Accounting for Tax Effects
of Share-Based Payment Awards. Effective upon issuance,
FSP
No. 123R-3
provides for an alternative transition method for calculating
the tax effects of stock-based compensation expense pursuant to
SFAS No. 123R. The alternative transition method
provides simplified approaches to establish the beginning
balance of a tax benefit pool comprised of the additional
paid-in capital, or APIC, related to the tax effects of employee
stock-based compensation expense, and to determine the
subsequent impact on the APIC tax benefit pool and the statement
of cash flows of stock-based awards that were outstanding upon
the adoption of SFAS No. 123R. Upon adoption of
SFAS No. 123R, Cadence made the election to calculate
the tax effects of stock-based compensation expense using the
alternative transition method pursuant to FSP
No. 123R-3
and computed the beginning balance of the APIC tax benefit pool
by applying the simplified method, which resulted in an APIC tax
benefit pool windfall position. Accordingly, upon adoption of
SFAS No. 123R, Cadence had cumulative excess tax
benefits from stock-based compensation available in APIC
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that could be used to offset an equal amount of future tax
shortfalls (i.e., when the amount of the tax deductible
stock-based compensation is less than the related stock-based
compensation cost).
Concentrations
of Credit Risk
Financial instruments, including derivative financial
instruments, that may potentially subject Cadence to
concentrations of credit risk, consist principally of cash and
cash equivalents, short-term investments, long-term investments,
accounts receivable and forward contracts. Concentration of
credit risk related to accounts receivable is limited, due to
the varied customers comprising Cadences customer base and
their dispersion across geographical locations. Credit exposure
related to the forward contracts is limited to the realized and
unrealized gains on these contracts. Cadence issued options and
warrants to hedge potential dilution of its convertible notes,
as described more fully in Note 6. Changes in the fair
value of these hedge and warrant transactions are not marked to
market and are not recognized in Cadences Consolidated
Income Statement as long as the instruments remain classified as
equity. All financial instruments are executed with financial
institutions having strong credit ratings, which minimizes risk
of loss due to nonpayment.
Fair
Value of Financial Instruments
The fair value of Cadences cash and cash equivalents,
short-term investments, receivables, accounts payable and
foreign currency forward exchange contracts approximate their
carrying value due to the short-term nature of these
instruments. The fair market values of Cadences long-term
investments, term loan and installment contract receivables
approximate their carrying values based upon current market
rates of interest. The fair value of Cadences convertible
notes is influenced by interest rates and Cadences stock
price and stock price volatility and is determined by market
trading. Based on closing market prices on December 30,
2006, the total fair market value of Cadences Convertible
Senior Notes was $505.1 million and the total fair market
value of Cadences 2023 Notes was $273.4 million. See
Note 6 for the fair value of Cadences convertible
note hedges and warrants.
Cadence uses operating leases in its operations. For leases that
contain rent escalations or rent concessions, Cadence records
the total rent payable during the lease term on a straight-line
basis over the term of the lease. Cadence records the difference
between the rents paid and the straight-line rent as a deferred
rent liability in the accompanying Consolidated Balance Sheets.
Cadence expenses the costs of advertising as incurred.
Advertising expense was approximately $10.5 million in
2006, $9.0 million in 2005, and $11.6 million in 2004,
and is included in Marketing and sales in the accompanying
Consolidated Income Statements.
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin, or SAB, No. 108,
Considering the Effects of Prior Year Misstatements When
Quantifying Misstatements in Current Year Financial
Statements, which provides interpretive guidance on how
the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year
misstatement. SAB No. 108 is effective for Cadence for
the year ended December 30, 2006. The implementation of
SAB No. 108 did not have a material effect on
Cadences consolidated financial position or results of
operations.
NOTE 3. STOCK
COMPENSATION PLANS
Cadences 2000 Nonstatutory Equity Incentive Plan, or the
2000 Plan, 1997 Nonstatutory Stock Incentive Plan, or 1997 Plan,
and 1993 Nonstatutory Stock Incentive Plan, or 1993 Plan (the
2000 Plan, the 1997 Plan and the 1993 Plan are referred to
collectively as the Nonstatutory Stock Incentive Plans), provide
for the issuance of non-
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qualified options, incentive stock, stock bonuses and rights to
acquire restricted stock to Cadence employees and consultants
who are not executive officers, directors or beneficial owners
of 10% or more of Cadence common stock. The number of shares
available for issuance under the 2000 Plan is 50,000,000, under
the 1997 Plan is 30,000,000 and under the 1993 Plan is
24,750,000. Options granted under the Nonstatutory Stock
Incentive Plans have an exercise price not less than the fair
market value of the stock on the date of grant. Options granted
to new employees become exercisable over a period of up to four
years, generally with one-fourth of the shares vesting one year
from the vesting commencement date, and the remaining shares
vesting in 36 equal monthly installments thereafter. Options
granted to current employees become exercisable over a period of
up to four years, generally vesting in 48 equal monthly
installments. Options granted under the Nonstatutory Stock
Incentive Plans prior to October 1, 2006 generally expire
ten years from the date of grant. Options granted under the
Nonstatutory Stock Incentive Plans after October 1, 2006
generally expire seven years from the date of grant. Awards of
incentive stock granted under the Nonstatutory Stock Incentive
Plans vest at times and in installments approved by the Board of
Directors or its Compensation Committee, on the basis of
continued employment, passage of time
and/or
performance criteria.
Cadences 1987 Stock Incentive Plan, or the 1987 Plan,
provides for the issuance of either incentive or non-qualified
options and incentive stock. The number of shares available for
issuance under the 1987 Plan is 71,370,100 shares, of which
only 3,000,000 shares may be issued pursuant to incentive
stock awards. Options granted under the 1987 Plan have an
exercise price not less than fair market value of the stock on
the date of grant and become exercisable over periods of up to