Company Quick10K Filing
Quick10K
Cadence Design Systems
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$48.03 282 $13,550
10-Q 2018-09-29 Quarter: 2018-09-29
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-30 Annual: 2017-12-30
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-07-01 Quarter: 2017-07-01
10-Q 2017-04-01 Quarter: 2017-04-01
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-10-01 Quarter: 2016-10-01
10-Q 2016-07-02 Quarter: 2016-07-02
10-Q 2016-04-02 Quarter: 2016-04-02
10-K 2016-01-02 Annual: 2016-01-02
8-K 2019-02-05 Officers, Amend Bylaw, Exhibits
8-K 2018-10-22 Earnings, Exhibits
8-K 2018-07-23 Earnings, Exhibits
8-K 2018-05-03 Shareholder Vote
8-K 2018-04-23 Earnings, Exhibits
8-K 2018-03-15 Officers
8-K 2018-02-07 Shareholder Rights, Amend Bylaw, Exhibits
8-K 2018-01-31 Earnings, Exhibits
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INST Instructure
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IDN Intellicheck
CDNS 2018-09-29
Part I. Financial Information
Item 1. Financial Statements
Note 1. Basis of Presentation and Summary of Significant Accounting Policies
Note 2. Debt
Note 3. Cash, Cash Equivalents and Investments
Note 4. Receivables, Net
Note 5. Revenue
Note 6. Income Taxes
Note 7. Stock-Based Compensation
Note 8. Goodwill and Acquired Intangibles
Note 9. Restructuring and Other Charges
Note 10. Net Income per Share
Note 11. Stock Repurchase Program
Note 12. Fair Value
Note 13. Contingencies
Note 14. Accumulated Other Comprehensive Loss
Note 15. Segment Reporting
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.01 ex3101cdns09292018.htm
EX-31.02 ex3102cdns09292018.htm
EX-32.01 ex3201cdns09292018.htm
EX-32.02 ex3202cdns09292018.htm

Cadence Design Systems Earnings 2018-09-29

CDNS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a10-qcdns09292018.htm 10-Q Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________ 
FORM 10-Q
_____________________________________  
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2018
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 000-15867
_____________________________________ 
cdnslogo17.jpg
CADENCE DESIGN SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
_____________________________________ 
Delaware
 
00-0000000
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
2655 Seely Avenue, Building 5, San Jose, California
 
95134
(Address of Principal Executive Offices)
 
(Zip Code)
(408) 943-1234
Registrant’s Telephone Number, including Area Code
_____________________________________ 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
 
Accelerated filer
o
 
Smaller reporting company
o
 
 
 
 
 
Non-accelerated filer
o
 
 
 
 
Emerging growth company
o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
On September 29, 2018, approximately 282,142,000 shares of the registrant’s common stock, $0.01 par value, were outstanding.



CADENCE DESIGN SYSTEMS, INC.
INDEX
 
 
 
Page
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 











PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
 
As of
 
September 29,
2018
 
December 30,
2017
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
544,585

 
$
688,087

Short-term investments
5,446

 
4,455

Receivables, net
240,836

 
190,426

Inventories
30,535

 
33,209

Prepaid expenses and other
66,979

 
63,811

Total current assets
888,381

 
979,988

Property, plant and equipment, net of accumulated depreciation of $685,212 and $658,377, respectively
248,165

 
251,342

Goodwill
661,341

 
666,009

Acquired intangibles, net
238,385

 
278,835

Long-term receivables
4,395

 
12,239

Other assets
232,540

 
230,301

Total assets
$
2,273,207

 
$
2,418,714

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Revolving credit facility
$

 
$
85,000

Accounts payable and accrued liabilities
212,153

 
221,101

Current portion of deferred revenue
329,168

 
336,297

Total current liabilities
541,321

 
642,398

Long-term liabilities:
 
 
 
Long-term portion of deferred revenue
49,343

 
61,513

Long-term debt
345,113

 
644,369

Other long-term liabilities
80,013

 
81,232

Total long-term liabilities
474,469

 
787,114

Commitments and contingencies (Note 13)


 


Stockholders’ equity:
 
 
 
Common stock and capital in excess of par value
1,897,749

 
1,829,950

Treasury stock, at cost
(1,292,265
)
 
(1,178,121
)
Retained earnings
674,284

 
341,003

Accumulated other comprehensive loss
(22,351
)
 
(3,630
)
Total stockholders’ equity
1,257,417

 
989,202

Total liabilities and stockholders’ equity
$
2,273,207

 
$
2,418,714



See notes to condensed consolidated financial statements.



CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Revenue:
 
 
 
 
 
 
 
Product and maintenance
$
494,990

 
$
451,229

 
$
1,463,469

 
$
1,346,483

Services
37,478

 
34,169

 
104,703

 
94,827

Total revenue
532,468

 
485,398

 
1,568,172

 
1,441,310

Costs and expenses:
 
 
 
 
 
 
 
Cost of product and maintenance
36,406

 
34,825

 
118,263

 
117,371

Cost of services
24,048

 
19,657

 
64,360

 
59,735

Marketing and sales
108,608

 
104,263

 
327,056

 
311,507

Research and development
223,231

 
206,568

 
666,545

 
600,755

General and administrative
33,247

 
36,302

 
101,421

 
100,892

Amortization of acquired intangibles
3,470

 
3,453

 
10,618

 
11,145

Restructuring and other credits
(172
)
 
(55
)
 
(2,610
)
 
(2,772
)
Total costs and expenses
428,838

 
405,013

 
1,285,653

 
1,198,633

Income from operations
103,630

 
80,385

 
282,519

 
242,677

Interest expense
(5,177
)
 
(6,225
)
 
(18,821
)
 
(18,952
)
Other income, net
1,106

 
12,387

 
4,055

 
14,370

Income before provision for income taxes
99,559

 
86,547

 
267,753

 
238,095

Provision for income taxes
241

 
5,390

 
20,401

 
19,552

Net income
$
99,318

 
$
81,157

 
$
247,352

 
$
218,543

Net income per share - basic
$
0.36

 
$
0.30

 
0.90

 
0.80

Net income per share - diluted
$
0.35

 
$
0.29

 
0.88

 
0.78

Weighted average common shares outstanding – basic
273,716

 
273,156

 
273,718

 
271,739

Weighted average common shares outstanding – diluted
281,646

 
281,400

 
281,391

 
279,554











See notes to condensed consolidated financial statements.



CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net income
$
99,318

 
$
81,157

 
$
247,352

 
$
218,543

Other comprehensive income (loss), net of tax effects:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(9,186
)
 
3,549

 
(16,237
)
 
13,803

Changes in unrealized holding gains or losses on available-for-sale securities, net of reclassification adjustment for realized gains and losses

 
1,000

 

 
1,248

Changes in defined benefit plan liabilities
7

 
19

 
154

 
89

Total other comprehensive income (loss), net of tax effects
(9,179
)
 
4,568

 
(16,083
)
 
15,140

Comprehensive income
$
90,139

 
$
85,725

 
$
231,269

 
$
233,683



































See notes to condensed consolidated financial statements.



CADENCE DESIGN SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
Cash and cash equivalents at beginning of period
$
688,087

 
$
465,232

Cash flows from operating activities:
 
 
 
Net income
247,352

 
218,543

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
89,003

 
86,605

Amortization of debt discount and fees
950

 
920

Stock-based compensation
125,121

 
94,008

Gain on investments, net
(2,617
)
 
(12,502
)
Deferred income taxes
(3,221
)
 
212

Provisions for losses on receivables
4,790

 
1,499

Other non-cash items
1,589

 
3,763

Changes in operating assets and liabilities, net of effect of acquired businesses:
 
 
 
Receivables
(28,471
)
 
(9,539
)
Inventories
(1,455
)
 
2,282

Prepaid expenses and other
2,018

 
(4,627
)
Other assets
3,571

 
(14,469
)
Accounts payable and accrued liabilities
(41,718
)
 
(41,127
)
Deferred revenue
77,370

 
14,245

Other long-term liabilities
(1,415
)
 
4,071

Net cash provided by operating activities
472,867

 
343,884

Cash flows from investing activities:
 
 
 
Proceeds from the sale of available-for-sale securities

 
421

Proceeds from the sale of long-term investments

 
9,108

Purchases of property, plant and equipment
(41,761
)
 
(39,676
)
Cash paid in business combinations and asset acquisitions, net of cash acquired

 
(550
)
Net cash used for investing activities
(41,761
)
 
(30,697
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility

 
50,000

Payment on revolving credit facility
(85,000
)
 
(100,000
)
Principal payments on term loan
(300,000
)
 

Payment of debt issuance costs

 
(793
)
Proceeds from issuance of common stock
38,190

 
45,419

Stock received for payment of employee taxes on vesting of restricted stock
(59,619
)
 
(54,130
)
Payments for repurchases of common stock
(150,036
)
 
(50,013
)
Change in book overdraft
(3,867
)
 

Net cash used for financing activities
(560,332
)
 
(109,517
)
Effect of exchange rate changes on cash and cash equivalents
(14,276
)
 
9,382

Increase (decrease) in cash and cash equivalents
(143,502
)
 
213,052

Cash and cash equivalents at end of period
$
544,585

 
$
678,284

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
15,360

 
$
14,188

Cash paid for taxes, net
$
29,858

 
$
40,021





See notes to condensed consolidated financial statements.



CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared by Cadence Design Systems, Inc. (“Cadence”) without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. However, Cadence believes that the disclosures contained in this Quarterly Report on Form 10-Q comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These condensed consolidated financial statements are meant to be, and should be, read in conjunction with the consolidated financial statements and the Notes thereto included in Cadence’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017.
The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q reflect all adjustments (which include only normal, recurring adjustments and those items discussed in these Notes) that are, in the opinion of management, necessary to state fairly the results of operations, cash flows and financial position for the periods and dates presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year. Certain prior period balances have been reclassified to conform to the current year presentation. Management has evaluated subsequent events through the issuance date of the unaudited condensed consolidated financial statements.
Use of Estimates
Preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Comparability
Effective on the first day of fiscal 2018, Cadence adopted multiple new accounting standards. Prior periods were not retrospectively restated, so the consolidated balance sheet as of December 30, 2017 and the condensed consolidated income statements for the three and nine months ended September 30, 2017 were prepared using accounting standards that were different than those in effect for the three and nine months ended September 29, 2018. Therefore, the consolidated balance sheets as of September 29, 2018 and December 30, 2017 are not directly comparable, nor are the results of operations for the three and nine months ended September 29, 2018 and September 30, 2017.
Recently Adopted Accounting Standards
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)” and Subtopic 985-605 “Software - Revenue Recognition.” Topic 605 and Subtopic 985-605 are collectively referred to as “Topic 605” or “prior GAAP.” Under Topic 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, Topic 606 requires enhanced disclosures, including disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB issued several amendments to the standard, including updates on accounting for licenses of intellectual property (“IP”) and identifying performance obligations.
Cadence adopted Topic 606 on the first day of fiscal 2018 using the modified retrospective transition method. Under this method, Cadence evaluated contracts that were in effect at the beginning of fiscal 2018 as if those contracts had been accounted for under Topic 606. Cadence did not evaluate individual modifications for those periods prior to the adoption date, but the aggregate effect of all modifications as of the adoption date and such effects are provided below. Under the modified retrospective transition approach, periods prior to the adoption date were not adjusted and continue to be reported in accordance with historical, pre-Topic 606 accounting. A cumulative catch up adjustment was recorded to beginning retained earnings to reflect the impact of all existing arrangements under Topic 606.

5


The most significant impacts of the adoption of Topic 606 are as follows:
At the adoption date, Cadence increased retained earnings by $85.4 million for uncompleted contracts for which revenue will not be recognized in future periods under Topic 606. This revenue would otherwise have been recognized in prior periods, so the beginning balance of receivables increased by $47.3 million, contract assets were established at $4.0 million, deferred revenue decreased by $57.4 million and accrued liabilities increased by $23.3 million;
Revenue generated under Topic 606 is expected to be slightly lower than revenue would have been under Topic 605 in fiscal 2018. This is the result of a combination of factors, including the elimination of deferred revenue that, under Topic 605, would have continued to be recognized into revenue in 2018 and beyond, as well as changes in the timing of revenue recognition as discussed below. The actual effects on revenue recognized for the first three quarters of fiscal 2018 are reported in the table below; and
Cadence capitalized $27.3 million of incremental sales commission costs at the adoption date directly related to obtaining customer contracts and is amortizing these costs over the life of the contract.
Cadence will continue to recognize revenue over time for its time-based software arrangements, which generate a majority of total revenue. However, the reason for the similar accounting treatment is different under Topic 606 than under Topic 605. Under Topic 605, Cadence could not establish vendor specific objective evidence (“VSOE”) for its undelivered elements and therefore was not able to separate its delivered software licenses from those undelivered elements, such as technical support and unspecified (when-and-if available) update rights. Topic 606 no longer requires separability of promised goods or services, such as software licenses, technical support, or unspecified update rights on the basis of VSOE. Rather, Topic 606 requires Cadence to identify the performance obligations in the contract — that is, those promised goods and services (or bundles of promised goods or services) that are distinct — and allocate the transaction price of the contract to those performance obligations on the basis of stand-alone selling prices (“SSPs”). The transaction price allocated to each performance obligation is then recognized either at a point in time or over time using an appropriate measure of progress. Under Topic 606, Cadence has concluded that its software licenses in time-based arrangements are not distinct from each other, or from its obligation to provide unspecified software updates to the licensed software throughout the license term, because the multiple software licenses represent inputs to a single, combined offering, and timely, relevant software updates are integral to maintaining the utility of the software licenses. Cadence will recognize revenue for the combined performance obligation, which also includes the co-terminus technical support provided to the customer, ratably over the term of the arrangement.
In contrast to the similar accounting result for time-based software arrangements, revenue related to certain IP licenses will now be recognized upon delivery under Topic 606, as opposed to over time under Topic 605, because the requirement to have VSOE for undelivered elements under current accounting standards is eliminated under Topic 606. Certain perpetual software licenses will now be recognized over time under Topic 606, as opposed to upon delivery under Topic 605, because these software licenses and the when-and-if available updates provided to the customer are accounted for together as one performance obligation and recognized over time.
The timing of revenue recognition for hardware and professional services is expected to remain substantially unchanged. Cadence’s overall mix of revenue recognized at a point in time versus over time is expected to remain relatively constant, with approximately 90% recognizable over time.

6


The following table summarizes the effects of adopting Topic 606 on Cadence’s condensed consolidated balance sheet as of September 29, 2018:
 
As reported under Topic 606
 
Adjustments
 
Balances under Prior GAAP
 
(In thousands)
Receivables, net
$
240,836

 
$
(21,647
)
 
$
219,189

Prepaid expenses and other
66,979

 
(11,789
)
 
55,190

Long-term receivables
4,395

 
1,453

 
5,848

Other assets
232,540

 
(12,663
)
 
219,877

Accounts payable and accrued liabilities*
212,153

 
(22,623
)
 
189,530

Current portion of deferred revenue
329,168

 
51,315

 
380,483

Long-term portion of deferred revenue
49,343

 
13,639

 
62,982

Retained earnings
674,284

 
(87,726
)
 
586,558

Accumulated other comprehensive loss
(22,351
)
 
749

 
(21,602
)
_____________
* Cadence has certain arrangements under which consideration is received from customers prior to identifying the specific goods or services to be delivered under the contract. Cadence records an accrued liability on a contract-by-contract basis at the end of each reporting period for cash consideration received.
The following table summarizes the effects of adopting Topic 606 on Cadence’s condensed consolidated income statement for the three months ended September 29, 2018:
 
As reported under Topic 606
 
Adjustments
 
Balances under Prior GAAP
 
(In thousands, except per share amounts)
Product and maintenance revenue
$
494,990

 
$
(5,505
)
 
$
489,485

Services revenue
37,478

 
(1,004
)
 
36,474

Cost of product and maintenance
36,406

 
(2,654
)
 
33,752

Marketing and sales expense
108,608

 
(1,150
)
 
107,458

Provision for income taxes
241

 
1,953

 
2,194

Net income
99,318

 
(4,658
)
 
94,660

Net income per share - basic
0.36

 
(0.01
)
 
0.35

Net income per share - diluted
0.35

 
(0.01
)
 
0.34


7


The following table summarizes the effects of adopting Topic 606 on Cadence’s condensed consolidated income statement for the nine months ended September 29, 2018:
 
As reported under Topic 606
 
Adjustments
 
Balances under Prior GAAP
 
(In thousands, except per share amounts)
Product and maintenance revenue
$
1,463,469

 
$
(3,941
)
 
$
1,459,528

Services revenue
104,703

 
2,296

 
106,999

Cost of product and maintenance
118,263

 
(2,791
)
 
115,472

Marketing and sales expense
327,056

 
(5,126
)
 
321,930

Provision for income taxes
20,401

 
2,359

 
22,760

Net income
247,352

 
3,913

 
251,265

Net income per share - basic
0.90

 
0.02

 
0.92

Net income per share - diluted
0.88

 
0.01

 
0.89

Cadence’s net cash provided by operating activities for the nine months ended September 29, 2018 did not change due to the adoption of Topic 606. The following table summarizes the effects of adopting Topic 606 on the financial statement line items of Cadence’s condensed consolidated statement of cash flows for the nine months ended September 29, 2018:
 
As reported under Topic 606
 
Adjustments
 
Balances under Prior GAAP
 
(In thousands)
Net income
$
247,352

 
$
3,913

 
$
251,265

Changes in operating assets and liabilities:
 
 
 
 
 
Receivables
(28,471
)
 
(22,568
)
 
(51,039
)
Prepaid expenses and other
2,018

 
7,883

 
9,901

Other assets
3,571

 
(2,010
)
 
1,561

Accounts payable and accrued liabilities
(41,718
)
 
5,194

 
(36,524
)
Deferred revenue
77,370

 
7,588

 
84,958

Financial Instruments
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” Cadence adopted this standard on the first day of fiscal 2018, modifying its accounting and required disclosures for investments in equity securities, other than those accounted for using the equity method of accounting.
Cadence’s marketable investments in equity securities consist of investments in a publicly-held company and are presented as short-term investments in the condensed consolidated balance sheets. Prior to the adoption of the updated standard, these investments were classified as available-for-sale, and changes in the fair value of these investments were reported in accumulated other comprehensive loss in the condensed consolidated balance sheets. The new standard eliminated the available-for-sale classification for equity securities and requires changes in the fair value of these investments to be recognized through net income for the three and nine months ended September 29, 2018 and each subsequent reporting period. Upon adoption, Cadence recorded a cumulative-effect adjustment to increase retained earnings in the amount of $2.6 million related to unrealized holding gains previously recorded in accumulated other comprehensive loss. For additional information regarding changes in the fair value of Cadences investments in marketable equity securities during the three and nine months ended September 29, 2018, see Note 3 in the notes to condensed consolidated financial statements under the heading “Short-Term Investments.”


8


Cadence’s non-marketable investments in equity securities consist of investments in privately-held companies and are presented as other assets in the condensed consolidated balance sheets. Prior to the adoption of the updated standard, non-marketable investments that were not accounted for using the equity method of accounting were recorded at cost, less impairment. The new standard eliminated the cost method of accounting for investments in equity securities that do not have readily determinable fair values and permits the election of a measurement alternative that allows such securities to be recorded at cost, less impairment, if any, plus or minus changes resulting from observable price changes in market-based transactions for an identical or similar investment of the same issuer. Cadence adopted the provisions of the new standard applicable to its investments in equity securities without a readily determinable fair value on a prospective basis and elected the measurement alternative for non-marketable investments previously accounted for under the cost method of accounting. Gains and losses resulting from observable price changes or impairment will be recorded through net income in the period incurred. During the nine months ended September 29, 2018, there were no observable price changes or impairments related to Cadence’s non-marketable investments in equity securities. Cadence’s non-marketable investments, including those accounting for using the equity method of accounting, had a carrying value of $2.9 million and $3.0 million as of September 29, 2018 and December 30, 2017, respectively.
Income Tax
In October 2016, the FASB issued ASU 2016-16, “Income taxes (Topic 740): Intra-entity Transfers of Assets Other Than Inventory.” The new guidance requires the recognition of the income tax consequences of an intra-entity asset transfer when the transfer occurs rather than when the asset has been sold to a third party. For intra-entity transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. Cadence adopted the new standard on the first day of fiscal 2018 using the modified retrospective transition approach and recorded a cumulative-effect adjustment to decrease retained earnings in the amount of $8.3 million. The cumulative-effect adjustment includes the write-off of income tax consequences deferred from prior intra-entity transfers involving assets other than inventory and new deferred tax assets for amounts not recognized under U.S. GAAP. We anticipate the potential for increased volatility in future effective tax rates from the adoption of this guidance.
Stock-based Compensation
In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,” that provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Cadence adopted the standard on the first day of fiscal 2018. The adoption of this standard did not impact Cadence’s condensed consolidated financial statements or the related disclosures.
Retained Earnings
The following table presents the cumulative effect adjustments, net of income tax effects, to beginning retained earnings for new accounting standards adopted by Cadence on the first day of fiscal 2018:
 
Retained Earnings
 
(In thousands)
Balance, December 30, 2017, as previously reported
$
341,003

Cumulative effect adjustment from the adoption of new accounting standards:
 
Revenue from Contracts with Customers (Topic 606)
91,640

Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
2,638

Income taxes (Topic 740): Intra-entity Transfers of Assets Other Than Inventory
(8,349
)
Balance, December 30, 2017, as adjusted
426,932

Net Income
247,352

Balance, September 29, 2018
$
674,284


9


NOTE 2. DEBT
Cadence’s outstanding debt as of September 29, 2018 and December 30, 2017 was as follows:
 
September 29, 2018
 
December 30, 2017
 
(In thousands)
 
Principal
 
Unamortized Discount
 
Carrying Value
 
Principal
 
Unamortized Discount
 
Carrying Value
Revolving Credit Facility
$

 
$

 
$

 
$
85,000

 
$

 
$
85,000

2019 Term Loan

 

 

 
300,000

 
(226
)
 
299,774

2024 Notes
350,000

 
(4,887
)
 
345,113

 
350,000

 
(5,405
)
 
344,595

Total outstanding debt
$
350,000

 
$
(4,887
)
 
$
345,113

 
$
735,000

 
$
(5,631
)
 
$
729,369

Revolving Credit Facility
On January 30, 2017, Cadence entered into a five-year senior unsecured revolving credit facility with a group of lenders led by JPMorgan Chase Bank, N.A., as administrative agent, which replaced Cadence’s existing revolving credit facility. The credit facility provides for borrowings up to $350.0 million, with the right to request increased capacity up to an additional $250.0 million upon the receipt of lender commitments, for total maximum borrowings of $600.0 million. The credit facility expires on January 28, 2022 and has no subsidiary guarantors. Any outstanding loans drawn under the credit facility are due at maturity on January 28, 2022. Outstanding borrowings may be paid at any time prior to maturity.
Interest accrues on borrowings under the credit facility at either LIBOR plus a margin between 1.25% and 1.875% per annum or at the base rate plus a margin between 0.25% and 0.875% per annum. A commitment fee ranging from 0.15% to 0.30% is assessed on the daily average undrawn portion of revolving commitments.
The credit facility contains customary negative covenants that, among other things, restrict Cadence’s ability to incur additional indebtedness, grant liens, make certain investments (including acquisitions), dispose of certain assets and make certain payments, including share repurchases and dividends. In addition, the credit facility contains financial covenants that require Cadence to maintain a funded debt to EBITDA ratio not greater than 3.00 to 1, with a step up to 3.50 to 1 for one year following an acquisition by Cadence of at least $250.0 million that results in a pro forma leverage ratio between 2.75 to 1 and 3.25 to 1. As of September 29, 2018, Cadence was in compliance with all financial covenants associated with the revolving credit facility.
2019 Term Loan
In January 2016, Cadence entered into a $300.0 million three-year senior unsecured non-amortizing term loan facility due on January 28, 2019 (the “2019 Term Loan”) with a group of lenders led by JPMorgan Chase Bank, N.A., as administrative agent. In July 2018, Cadence prepaid the outstanding principal amount of $300.0 million and all accrued interest.
2024 Notes
In October 2014, Cadence issued $350.0 million aggregate principal amount of 4.375% Senior Notes due October 15, 2024 (the “2024 Notes”). Cadence received net proceeds of $342.4 million from the issuance of the 2024 Notes, net of a discount of $1.4 million and issuance costs of $6.2 million. Both the discount and issuance costs are being amortized to interest expense over the term of the 2024 Notes using the effective interest method. Interest is payable in cash semi-annually in April and October. The 2024 Notes are unsecured and rank equal in right of payment to all of Cadence’s existing and future senior indebtedness.
Cadence may redeem the 2024 Notes, in whole or in part, at a redemption price equal to the greater of (a) 100% of the principal amount of the notes to be redeemed and (b) the sum of the present values of the remaining scheduled payments of principal and interest, plus any accrued and unpaid interest, as more particularly described in the indenture governing the 2024 Notes.
The indenture governing the 2024 Notes includes customary representations, warranties and restrictive covenants, including, but not limited to, restrictions on Cadence’s ability to grant liens on assets, enter into sale and lease-back transactions, or merge, consolidate or sell assets, and also includes customary events of default. As of September 29, 2018, Cadence was in compliance with all financial covenants associated with the 2024 Notes.

10


NOTE 3. CASH, CASH EQUIVALENTS AND INVESTMENTS
Cadence’s cash, cash equivalents and short-term investments at fair value as of September 29, 2018 and December 30, 2017 were as follows:
 
As of
 
September 29,
2018
 
December 30,
2017
 
(In thousands)
Cash and cash equivalents
$
544,585

 
$
688,087

Short-term investments
5,446

 
4,455

Cash, cash equivalents and short-term investments
$
550,031

 
$
692,542

Cash and Cash Equivalents
Cadence considers all highly liquid investments with original maturities of three months or less on the date of purchase to be cash equivalents. The amortized cost of Cadence’s cash equivalents approximates fair value. The following table summarizes Cadence’s cash and cash equivalents at fair value as of September 29, 2018 and December 30, 2017:
 
As of
 
September 29,
2018
 
December 30,
2017
 
(In thousands)
Cash and interest bearing deposits
$
202,066

 
$
184,153

Money market funds
342,519

 
503,934

Total cash and cash equivalents
$
544,585

 
$
688,087

Short-Term Investments
Cadence’s short-term investments are comprised of marketable equity securities of publicly-held entities. During the three and nine months ended September 29, 2018, Cadence recorded losses of $0.4 million and gains of $1.0 million, respectively, to other income, net in the condensed consolidated income statements from its investments in marketable equity securities held as of September 29, 2018.
NOTE 4. RECEIVABLES, NET
Cadence’s current and long-term receivables balances as of September 29, 2018 and December 30, 2017 were as follows:
 
As of
 
September 29,
2018
 
December 30,
2017
 
(In thousands)
Accounts receivable
$
117,387

 
$
119,325

Unbilled accounts receivable
127,699

 
71,101

Long-term receivables
4,395

 
12,239

Total receivables
249,481

 
202,665

Less allowance for doubtful accounts
(4,250
)
 

Total receivables, net
$
245,231

 
$
202,665

Cadence’s customers are primarily concentrated within the semiconductor and electronics systems industries. As of September 29, 2018, no one customer accounted for 10% or more of Cadence’s total receivables. As of December 30, 2017, one customer accounted for 17% of Cadence’s total receivables.

11


NOTE 5. REVENUE
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration to which Cadence expects to be entitled in exchange for promised goods or services. Cadence’s performance obligations are satisfied either over time or at a point in time. Revenue from performance obligations that transferred to customers over time accounted for approximately 90% of Cadence’s total revenue for the three and nine months ended September 29, 2018.
Product and maintenance revenue includes Cadence’s licenses of time-based and perpetual software, sales of emulation hardware, licenses of per-use IP, and the related maintenance on these licenses and sales.
Service revenue includes revenue received for performing engineering services (which are generally not related to the functionality of other licensed products), customized IP on a fixed fee basis, and sales from cloud-based solutions that provide customers with software and services over a period of time.
Cadence enters into contracts that can include various combinations of licenses, products and services, some of which are distinct and are accounted for as separate performance obligations. For contracts with multiple performance obligations, Cadence allocates the transaction price of the contract to each performance obligation, generally on a relative basis using its standalone selling price. The stated contract value is generally the transaction price to be allocated to the separate performance obligations. Revenue is recognized net of any taxes collected from customers that are subsequently remitted to governmental authorities.
Nature of Products and Services
Software
Cadence’s time-based license arrangements grant customers the right to access and use all of the licensed products at the outset of an arrangement and updates are generally made available throughout the entire term of the arrangement, which is generally two to three years. Cadence’s updates provide continued access to evolving technology as customers’ designs migrate to more advanced nodes and as our customers’ technological requirements evolve. In addition, certain time-based license arrangements include remix rights and unspecified additional products that become commercially available during the term of the agreement. Payments are generally received in equal or near equal installments over the term of the agreement.
As explained in Note 1, the multiple software licenses, related updates, and technical support in these time-based arrangements constitute a single, combined performance obligation and revenue is recognized over the term of the license, commencing upon the later of the effective date of the arrangement or transfer of the software license. Remix rights are not an additional promised good or service in the contract, and where unspecified additional software product rights are part of the contract with the customer, such rights are accounted for as part of the single performance obligation that includes the licenses, updates, and technical support because such rights are provided for the same period of time and have the same time-based pattern of transfer to the customer.
Hardware
Cadence generally has two performance obligations in arrangements involving the sale or lease of hardware products. The first performance obligation is to transfer the hardware product (which includes software integral to the functionality of the hardware product). The second performance obligation is to provide maintenance on hardware and its embedded software, which includes rights to technical support, hardware repairs and software updates that are all provided over the same term and have the same time-based pattern of transfer to the customer. Transaction price allocated to the hardware product is generally recognized as revenue at the time of delivery because the customer obtains control of the product at that point in time. Cadence has concluded that control generally transfers at that point in time because the customer has title to the hardware, physical possession, and a present obligation to pay for the hardware. Transaction price allocated to maintenance is recognized as revenue ratably over the maintenance term. Payments for hardware contracts are generally received upon delivery of the hardware product.
IP
Cadence generally licenses IP under nonexclusive license agreements that provide usage rights for specific designs. In addition, for certain of Cadence’s IP license agreements, royalties are collected as customers ship their own products that incorporate Cadence IP. These arrangements generally have two performance obligations — transferring the licensed IP and associated maintenance, which includes rights to technical support and software updates that are all provided over the maintenance term and have a time-based pattern of transfer to the customer. Revenue allocated to the IP license is recognized at a point in time upon the later of the delivery of the IP or the beginning of the license period and revenue allocated to the maintenance is recognized over the maintenance term. Royalties are recognized as revenue in the quarter in which the applicable Cadence customer ships its products that incorporate Cadence IP. Payments for IP contracts are generally received upon delivery of the IP. Cadence customizes certain IP and revenue related to this customization is recognized as “Services” below.

12


Services
Revenue from service contracts is recognized over time, generally using costs incurred or hours expended to measure progress. 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. Payments for services are generally due upon milestones in the contract or upon consumption of the hourly resources.
Cadence combines its products and technologies into five product groups related to major design activities. The following table shows the percentage of product and related maintenance revenue contributed by each of Cadence’s five product groups and services for the three and nine months ended September 29, 2018 and September 30, 2017:
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Functional Verification, including Emulation and Prototyping Hardware
22
%
 
21
%
 
24
%
 
22
%
Digital IC Design and Signoff
30
%
 
30
%
 
29
%
 
29
%
Custom IC Design
26
%
 
28
%
 
26
%
 
27
%
System Interconnect and Analysis
9
%
 
10
%
 
9
%
 
10
%
IP
13
%
 
11
%
 
12
%
 
12
%
Total
100
%
 
100
%
 
100
%
 
100
%
Revenue by product group fluctuates from period to period based on demand for products and services, and Cadence’s available resources to deliver them. Certain of Cadence’s licensing arrangements allow customers the ability to remix among software products. Cadence also has arrangements with customers that include a combination of products, with the actual product selection and number of licensed users to be determined at a later date. For these arrangements, Cadence estimates the allocation of the revenue to product groups based upon the expected usage of products. The actual usage of Cadence’s products by these customers may differ and, if that proves to be the case, the revenue allocation in the table above would differ.
Significant Judgments
More judgments and estimates are required under Topic 606 than were required under Topic 605. Due to the complexity of certain contracts, the actual revenue recognition treatment required under Topic 606 for the Company’s arrangements may be dependent on contract-specific terms and may vary in some instances.
Cadence’s contracts with customers often include promises to transfer multiple software and/or IP licenses and services, including professional services, technical support services, and rights to unspecified updates to a customer. Determining whether licenses and services are distinct performance obligations that should be accounted for separately, or not distinct and thus accounted for together, requires significant judgment. In some arrangements, such as most of Cadence’s IP license arrangements, Cadence has concluded that the licenses and associated services are distinct from each other. In others, like Cadence’s time-based software arrangements, the licenses and certain services are not distinct from each other. As described in Note 1, Cadence’s time-based software arrangements include multiple software licenses and updates to the licensed software products, as well as technical support, and Cadence has concluded that these promised goods and services are a single, combined performance obligation.
Judgment is required to determine the SSP for each distinct performance obligation. Cadence rarely licenses or sells products on a standalone basis, so Cadence is required to estimate the range of SSPs for each performance obligation. In instances where SSP is not directly observable because Cadence does not sell the license, product or service separately, Cadence determines the SSP using information that may include market conditions and other observable inputs. Cadence typically has more than one SSP for individual performance obligations due to the stratification of those items by classes of customers and circumstances. In these instances, Cadence may use information such as the size of the customer and geographic region of the customer in determining the SSP.
Revenue is recognized over time for Cadence’s maintenance and professional services that are separate performance obligations, and also for Cadence’s combined performance obligations that include software licenses, updates, and technical support. For Cadence’s professional services, revenue is recognized over time, generally using costs incurred or hours expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. For Cadence’s other performance obligations recognized over time, revenue is generally recognized using a time-based measure of progress reflecting generally consistent efforts to satisfy those performance obligations throughout the arrangement term.

13


If a group of agreements are so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be one arrangement for revenue recognition purposes. Cadence exercises significant judgment to evaluate the relevant facts and circumstances in determining whether the separate agreements should be accounted for separately or as, in substance, a single arrangement. Cadence’s judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved.
Cadence is required to estimate the total consideration expected to be received from contracts with customers. In limited circumstances, the consideration expected to be received is variable based on the specific terms of the contract or based on Cadence’s expectations of the term of the contract. Generally, Cadence has not experienced significant returns or refunds to customers. These estimates require significant judgment and the change in these estimates could have an effect on its results of operations during the periods involved.
Contract Balances  
The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in receivables, contract assets, or contract liabilities (deferred revenue) on Cadence’s condensed consolidated balance sheet. Cadence records a contract asset when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. For Cadence’s time-based software agreements, customers are generally invoiced in equal, quarterly amounts, although some customers prefer to be invoiced in single or annual amounts. For certain hardware and IP agreements with payment plans, Cadence records a receivable related to revenue recognized upon delivery because it has an unconditional right to invoice and receive payment in the future related to those deliveries.
The contract assets indicated below are presented as prepaid expenses and other in the condensed consolidated balance sheet and primarily relate to Cadence’s rights to consideration for work completed but not billed as of September 29, 2018 on services and customized IP contracts. The contract assets are transferred to receivables when the rights become unconditional, usually upon completion of a milestone.
Cadence’s contract balances as of September 29, 2018 were as follows:
 
As of
 
September 29,
2018
 
December 30,
2017
 
 
 
As Adjusted
 
(In thousands)
Contract assets
$
15,151

 
$
3,964

Deferred revenue
378,511

 
336,060

During the three and nine months ended September 29, 2018, Cadence recognized revenue of $39.9 million and $250.2 million, respectively, that was included in the deferred revenue balance, as adjusted for Topic 606, as of December 30, 2017. All other activity in deferred revenue is due to the timing of invoices in relation to the timing of revenue as described above.
Revenue allocated to remaining performance obligations represents the transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. The Company has elected to exclude the future royalty payments from the remaining performance obligations. Contracted but unsatisfied performance obligations were approximately $2.4 billion as of September 29, 2018, of which Cadence expects to recognize approximately 60% of the revenue over the next 12 months and the remainder thereafter.
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, Cadence has determined that its contracts generally do not include a significant financing component. The primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing Cadence’s products and services, and not to facilitate financing arrangements.
During the three and nine months ended September 29, 2018, Cadence recognized revenue of $10.8 million and $25.3 million, respectively, from performance obligations satisfied in previous periods. These amounts represent royalties earned during the period and exclude contracts with nonrefundable prepaid royalties. Nonrefundable prepaid royalties are recognized upon delivery of the IP because Cadence’s right to the consideration is not contingent upon customers’ future shipments.

14


Deferred Sales Commissions
Cadence records an asset for the incremental costs of obtaining a contract with a customer, including direct sales commissions that are earned upon execution of the contract. Cadence uses the portfolio method to recognize the amortization expense related to these capitalized costs related to initial contracts and renewals and such expense is recognized over a period associated with the revenue of the related portfolio, which is generally two to three years for Cadence’s software arrangements and upon delivery for its hardware and IP arrangements. Incremental costs related to initial contracts and renewals are amortized over the same period because the commissions paid on both the initial contract and renewals are commensurate with one another. Total capitalized costs as of September 29, 2018 were $22.1 million and are included in other assets in Cadence’s condensed consolidated balance sheet. Amortization of these assets during the three and nine months ended September 29, 2018 was $5.8 million and $16.9 million, respectively, and is included in sales and marketing expense in Cadence’s condensed consolidated income statement.
NOTE 6. INCOME TAXES
Cadence’s provision for income taxes of $20.4 million for the nine months ended September 29, 2018 primarily resulted from the federal income tax effects of the U.S. Tax Cuts and Jobs Act (the “Tax Act”) and state and foreign income taxes on anticipated fiscal 2018 income, partially offset by $20.5 million of tax benefit related to stock-based compensation that vested or was exercised during the period.
The Tax Act was enacted in December 2017 and included several new tax provisions related to the taxation of foreign earnings and a reduction in the federal corporation income tax rate from 35% to 21% as of January 1, 2018.
Cadence reduced its provisional estimate for the fiscal 2017 deemed repatriation transition tax by $2.6 million during the nine months ended September 29, 2018 based on its continuing analysis of the earnings and cash balances of foreign subsidiaries and the additional guidance issued by the applicable tax authorities. Cadence has not yet completed the accounting for the fiscal 2017 effects of the Tax Act because of the complexity and ambiguity of certain of its tax and accounting effects. Cadence expects to complete the accounting for the Tax Act during the fourth quarter of fiscal 2018 as it obtains, prepares and analyzes additional information in accordance with Staff Accounting Bulletin No. 118. For further discussion regarding the income tax effects of the Tax Act, see Note 6 in the notes to consolidated financial statements in Cadence’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017.
NOTE 7. STOCK-BASED COMPENSATION
Stock-based compensation expense is reflected in Cadence’s condensed consolidated income statements for the three and nine months ended September 29, 2018 and September 30, 2017 as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
(In thousands)
Cost of product and maintenance
$
736

 
$
612

 
$
1,932

 
$
1,632

Cost of services
1,078

 
895

 
2,825

 
2,373

Marketing and sales
9,528

 
7,422

 
25,410

 
19,667

Research and development
28,668

 
21,792

 
77,003

 
55,288

General and administrative
6,254

 
5,369

 
17,951

 
15,048

Total stock-based compensation expense
$
46,264

 
$
36,090

 
$
125,121

 
$
94,008

Cadence had total unrecognized compensation expense related to stock option and restricted stock grants of $305.6 million as of September 29, 2018, which will be recognized over the remaining vesting period. The remaining weighted-average vesting period of unvested awards is 2.1 years.

15


NOTE 8. GOODWILL AND ACQUIRED INTANGIBLES
Goodwill
The changes in the carrying amount of goodwill during the nine months ended September 29, 2018 were as follows:
 
Gross Carrying
Amount
 
(In thousands)
Balance as of December 30, 2017
$
666,009

Effect of foreign currency translation
(4,668
)
Balance as of September 29, 2018
$
661,341

Acquired Intangibles, Net
Acquired intangibles as of September 29, 2018 were as follows, excluding intangibles that were fully amortized as of December 30, 2017:
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Acquired
Intangibles, Net
 
(In thousands)
Existing technology
$
330,667

 
$
(216,345
)
 
$
114,322

Agreements and relationships
146,359

 
(96,632
)
 
49,727

Tradenames, trademarks and patents
10,718

 
(7,882
)
 
2,836

Total acquired intangibles with definite lives
487,744

 
(320,859
)
 
166,885

In-process technology
71,500

 

 
71,500

Total acquired intangibles
$
559,244

 
$
(320,859
)
 
$
238,385

In-process technology as of September 29, 2018 consisted of acquired projects that, if completed, will contribute to Cadence’s design IP offerings. As of September 29, 2018, these projects were expected to be completed in approximately three to fifteen months. During the nine months ended September 29, 2018, there were no transfers from in-process technology to existing technology.
Acquired intangibles as of December 30, 2017 were as follows, excluding intangibles that were fully amortized as of December 31, 2016:
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Acquired
Intangibles, Net
 
(In thousands)
Existing technology
$
342,810

 
$
(199,529
)
 
$
143,281

Agreements and relationships
151,063

 
(90,675
)
 
60,388

Tradenames, trademarks and patents
10,918

 
(7,252
)
 
3,666

Total acquired intangibles with definite lives
504,791

 
(297,456
)
 
207,335

In-process technology
71,500

 

 
71,500

Total acquired intangibles
$
576,291

 
$
(297,456
)
 
$
278,835


16


Amortization expense from existing technology and maintenance agreements is included in cost of product and maintenance. Amortization of acquired intangibles for the three and nine months ended September 29, 2018 and September 30, 2017 was as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
(In thousands)
Cost of product and maintenance
$
9,505

 
$
10,165

 
$
29,773

 
$
31,611

Amortization of acquired intangibles
3,470

 
3,453

 
10,618

 
11,145

Total amortization of acquired intangibles
$
12,975

 
$
13,618

 
$
40,391

 
$
42,756

Estimated amortization expense for acquired intangible assets with definite lives for the following five fiscal years and thereafter is as follows:
 
(In thousands)
2018 – remaining period
$
12,941

2019
46,208

2020
40,608

2021
36,115

2022
17,810

Thereafter
13,203

Total estimated amortization expense
$
166,885

NOTE 9. RESTRUCTURING AND OTHER CHARGES
Cadence has initiated restructuring plans in an effort to better align its resources with its business strategy. These restructuring plans have primarily been comprised of severance payments and termination benefits related to headcount reductions, estimated lease losses related to facilities vacated under the restructuring plans and charges related to assets abandoned as part of the restructuring plans. During the nine months ended September 29, 2018, Cadence revised certain estimates made in connection with its prior restructuring plans and recorded credits of approximately $2.6 million. As of September 29, 2018, total liabilities related to prior restructuring plans were $0.9 million. Cadence expects to make cash payments for severance and related benefits for the prior restructuring plans through the first quarter of fiscal 2019.
The following table presents activity relating to Cadence’s restructuring plans during the nine months ended September 29, 2018:
 
Severance
and
Benefits
 
Excess
Facilities
 
Total
 
(In thousands)
Balance, December 30, 2017
$
13,535

 
$
249

 
$
13,784

Restructuring and other charges (credits)
(3,029
)
 
419

 
(2,610
)
Cash payments
(9,963
)
 
(257
)
 
(10,220
)
Effect of foreign currency translation
(36
)
 
(11
)
 
(47
)
Balance, September 29, 2018
$
507

 
$
400

 
$
907


17


The remaining liability for Cadence’s restructuring plans is recorded in the condensed consolidated balance sheet as follows:
 
As of
 
September 29, 2018
 
(In thousands)
Accounts payable and accrued liabilities
$
695

Other long-term liabilities
212

Total liabilities
$
907

NOTE 10. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income during the period by the weighted average number of shares of common stock outstanding during that period, less unvested restricted stock awards. Diluted net income per share is impacted by equity instruments considered to be potential common shares, if dilutive, computed using the treasury stock method of accounting.
The calculations for basic and diluted net income per share for the three and nine months ended September 29, 2018 and September 30, 2017 are as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
(In thousands, except per share amounts)
Net income
$
99,318

 
$
81,157

 
$
247,352

 
$
218,543

Weighted average common shares used to calculate basic net income per share
273,716

 
273,156

 
273,718

 
271,739

Stock-based awards
7,930

 
8,244

 
7,673

 
7,815

Weighted average common shares used to calculate diluted net income per share
281,646

 
281,400

 
281,391

 
279,554

Net income per share - basic
$
0.36

 
$
0.30

 
$
0.90

 
$
0.80

Net income per share - diluted
$
0.35

 
$
0.29

 
$
0.88

 
$
0.78

The following table presents shares of Cadence’s common stock outstanding for the three and nine months ended September 29, 2018 and September 30, 2017 that were excluded from the computation of diluted net income per share because the effect of including these shares in the computation of diluted net income per share would have been anti-dilutive:
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
(In thousands)
Long-term performance-based stock awards

 
100

 
50

 
186

Options to purchase shares of common stock
701

 

 
606

 
404

Non-vested shares of restricted stock
3

 
12

 
367

 
62

Total potential common shares excluded
704

 
112

 
1,023

 
652

NOTE 11. STOCK REPURCHASE PROGRAM
In January 2017, Cadence’s Board of Directors authorized the repurchase of shares of Cadence’s common stock with a value of up to $525.0 million in the aggregate. The actual timing and amount of repurchases are subject to business and market conditions, corporate and regulatory requirements, acquisition opportunities and other factors. As of September 29, 2018, $275.0 million remained available to repurchase shares of Cadence common stock under the current authorization.

18


The shares repurchased under Cadence’s repurchase authorizations and the total cost of repurchased shares, including commissions, during the three and nine months ended September 29, 2018 and September 30, 2017 were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
(In thousands)
Shares repurchased
1,098

 
1,331

 
3,611

 
1,331

Total cost of repurchased shares
$
50,011

 
$
50,013

 
$
150,036

 
$
50,013

NOTE 12. FAIR VALUE
Inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Cadence’s market assumptions. These two types of inputs have created the following fair value hierarchy:
Level 1 – Quoted prices for identical instruments in active markets;
Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
This hierarchy requires Cadence to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. Cadence recognizes transfers between levels of the hierarchy based on the fair values of the respective financial instruments at the end of the reporting period in which the transfer occurred. There were no transfers between levels of the fair value hierarchy during the nine months ended September 29, 2018.
On a quarterly basis, Cadence measures at fair value certain financial assets and liabilities. The fair value of financial assets and liabilities was determined using the following levels of inputs as of September 29, 2018 and December 30, 2017:
 
Fair Value Measurements as of September 29, 2018
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
342,519

 
$
342,519

 
$

 
$

Short-term investments:

 
 
 
 
 
 
Marketable equity securities
5,446

 
5,446

 

 

Trading securities held in Non-Qualified Deferred Compensation (“NQDC”) trust
30,386

 
30,386

 

 

Foreign currency exchange contracts
2,394

 

 
2,394

 

Total Assets
$
380,745

 
$
378,351

 
$
2,394

 
$

 
 
 
 
 
 
 
 
As of September 29, 2018, Cadence did not have any financial liabilities requiring a recurring fair value measurement.

19


 
 
 
 
 
 
 
 
 
Fair Value Measurements as of December 30, 2017
  
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Assets
 
Cash equivalents:


 
 
 
 
 
 
Money market funds
$
503,934

 
$
503,934

 
$

 
$

Short-term investments:
 
 
 
 
 
 
 
Marketable equity securities
4,455

 
4,455

 

 

Trading securities held in NQDC trust
31,473

 
31,473

 

 

Foreign currency exchange contracts
2,937

 

 
2,937

 

Total Assets
$
542,799

 
$
539,862

 
$
2,937

 
$

 
 
 
 
 
 
 
 
As of December 30, 2017, Cadence did not have any financial liabilities requiring a recurring fair value measurement.
NOTE 13. CONTINGENCIES
Legal Proceedings
From time to time, Cadence is involved in various disputes and litigation that arise in the ordinary course of business. These include disputes and lawsuits related to intellectual property, indemnification obligations, mergers and acquisitions, licensing, contracts, distribution arrangements and employee relations matters. At least quarterly, Cadence reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount or the range of loss can be estimated, Cadence accrues a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on Cadence’s judgments using the information available at the time. As additional information becomes available, Cadence reassesses the potential liability related to pending claims and litigation matters and may revise estimates.
Other Contingencies
Cadence provides its customers with a warranty on certain of its products, generally for a 90-day period. Cadence did not incur any significant costs related to warranty obligations during the three and nine months ended September 29, 2018 and September 30, 2017.
Cadence’s product license and services agreements typically include a limited indemnification provision for claims from third parties relating to Cadence’s intellectual property. If the potential loss from any indemnification claim is considered probable and the amount or the range of loss can be estimated, Cadence accrues a liability for the estimated loss. The indemnification is generally limited to the amount paid by the customer. Cadence did not incur any significant losses from indemnification claims during the three and nine months ended September 29, 2018 and September 30, 2017.
NOTE 14. ACCUMULATED OTHER COMPREHENSIVE LOSS
Cadence’s accumulated other comprehensive loss is comprised of the aggregate impact of foreign currency translation gains and losses and changes in defined benefit plan liabilities and is presented in Cadence’s condensed consolidated statements of comprehensive income. Aggregate changes in unrealized holding gains on available-for-sale securities net of reclassifications for realized gains and losses were also included through December 30, 2017.


20


Accumulated other comprehensive loss was comprised of the following as of September 29, 2018 and December 30, 2017:
 
As of
 
September 29,
2018
 
December 30,
2017
 
(In thousands)
Foreign currency translation loss
$
(19,213
)
 
$
(2,976
)
Changes in defined benefit plan liabilities
(3,138
)
 
(3,292
)
Unrealized holding gains on available-for-sale securities

 
2,638

Total accumulated other comprehensive loss
$
(22,351
)
 
$
(3,630
)
For the three and nine months ended September 29, 2018 and September 30, 2017 there were no significant amounts reclassified from accumulated other comprehensive loss to net income.
NOTE 15. SEGMENT REPORTING
Segment reporting is based on the “management approach,” following the method that management organizes the company’s reportable segments for which separate financial information is made available to, and evaluated regularly by, the chief operating decision maker in allocating resources and in assessing performance. Cadence’s chief operating decision maker is its CEO, who reviews Cadence’s consolidated results as one operating segment. In making operating decisions, the CEO primarily considers consolidated financial information, accompanied by disaggregated information about revenues by geographic region.
Outside the United States, Cadence markets and supports its products and services primarily through its subsidiaries. Revenue is attributed to geography based upon the country in which the product is used or services are delivered. Long-lived assets are attributed to geography based on the country where the assets are located.
The following table presents a summary of revenue by geography for the three and nine months ended September 29, 2018 and September 30, 2017:
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
 
(In thousands)
Americas:
 
 
 
 
 
 
 
United States
$
224,458

 
$
208,348

 
$
679,934

 
$
620,525

Other Americas
9,003

 
7,938

 
24,351

 
25,749

Total Americas
233,461

 
216,286

 
704,285

 
646,274

Asia
156,887

 
131,890

 
431,233

 
385,708

Europe, Middle East and Africa
101,452

 
94,681

 
311,833

 
284,415

Japan
40,668

 
42,541

 
120,821

 
124,913

Total
$
532,468

 
$
485,398

 
$
1,568,172

 
$
1,441,310


21


The following table presents a summary of long-lived assets by geography as of September 29, 2018 and December 30, 2017: 
 
As of
 
September 29,
2018
 
December 30,
2017
 
(In thousands)
Americas:
 
 
 
United States
$
197,760

 
$
198,744

Other Americas
499

 
611

Total Americas
198,259

 
199,355

Asia
36,408

 
37,678

Europe, Middle East and Africa
12,724

 
13,615

Japan
774

 
694

Total
$
248,165

 
$
251,342




22


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q (this “Quarterly Report”) and in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 30, 2017. This Quarterly Report contains statements that are not historical in nature, are predictive, or that depend upon or refer to future events or conditions or contain other forward-looking statements. Statements including, but not limited to, statements regarding the extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of our products and services, statements regarding our reliance on third parties and other statements using words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “plans,” “projects,” “should,” “will” and “would,” and words of similar import and the negatives thereof, constitute forward-looking statements. These statements are predictions based upon our current expectations about future events. Actual results could vary materially as a result of certain factors, including, but not limited to, those expressed in these statements. We refer you to the “Risk Factors,” “Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk,” and “Liquidity and Capital Resources” sections contained in this Quarterly Report, and the risks discussed in our other Securities and Exchange Commission (“SEC”) filings, which identify important risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements.
We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. We do not intend, and undertake no obligation, to update these forward-looking statements.
Overview
We enable our customers to design electronic products. Our products and services are designed to give our customers a competitive edge in their development of electronic systems, integrated circuits (“ICs”), electronic devices and increasingly sophisticated manufactured products. Our products and services do this by optimizing performance, minimizing power consumption, shortening the time to bring our customers’ products to market and reducing their design, development and manufacturing costs. We offer software, hardware, services and reusable IC design blocks, which are commonly referred to as intellectual property (“IP”).
Our strategy, which we call System Design Enablement (“SDE”), is to provide the technologies necessary for our customers to develop a complete and functional electronic product. Our SDE strategy enables us to address the growing trends of electronic systems companies developing their own ICs as part of their end product systems, as well as semiconductor companies delivering greater portions of the systems into which their IC products are integrated. Our products and services enable our customers to design complex and innovative electronic products, so demand for our products is driven by our customers’ investment in new designs and products. Historically, the industry that provided the tools used by IC engineers was referred to as Electronic Design Automation (“EDA”). Today, our offerings include and extend beyond EDA tools to include SDE.
We combine our products and technologies into categories related to major design activities:
Functional Verification, including Emulation and Prototyping Hardware;
Digital IC Design and Signoff;
Custom IC Design;
System Interconnect and Analysis; and
IP.
For additional information about our products, see the discussion in Item 1, “Business,” under the heading “Products and Product Strategy,” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2017.
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 further below under the headings “Results of Operations” and “Liquidity and Capital Resources.”

23


Critical Accounting Estimates
In preparing our condensed 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 condensed 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 as deemed necessary. For further information about our critical accounting estimates, see the discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Estimates” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2017.
New Accounting Standards
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842),” requiring, among other things, the recognition of lease liabilities and corresponding right-of-use assets on the balance sheet by lessees for certain lease arrangements that are classified as operating leases under the previous standard. While we are continuing to assess the potential impacts of the standard, we anticipate that the adoption of this standard will have a material impact on our consolidated balance sheet, but we do not expect a material impact on our consolidated income statement. We currently expect the most significant impact will be the recognition of right-of-use assets and lease liabilities for operating leases. We are implementing a new lease accounting system and updating our processes in preparation for the adoption of the new standard. The updated standard will become effective for us in the first quarter of fiscal 2019.
Credit Losses
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which supersedes current guidance requiring recognition of credit losses when it is probable that a loss has been incurred. The new standard requires the establishment of an allowance for estimated credit losses on financial assets, including trade and other receivables, at each reporting date. The new standard will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. The new standard will be effective for us in the first quarter of fiscal 2020, and early adoption is permitted. We are currently reviewing this standard to assess the impact on our condensed consolidated financial statements and the related disclosures.
Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” that eliminates “Step 2” from the goodwill impairment test. The new standard is effective for us in the first quarter of fiscal 2020, and early adoption is permitted. The new guidance must be applied on a prospective basis. We do not anticipate that the adoption of this standard will have a significant impact on our consolidated financial statements or the related disclosures.
Income Tax Effects within Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which allows a reclassification of the income tax effects of the Tax Act on items within accumulated other comprehensive income to retained earnings. The new guidance may be applied at the beginning of the period of adoption or retrospectively to each period in which the effect of the change in federal income tax rate from the Tax Act is recognized. The new standard will be effective for us in the first quarter of fiscal 2019. We do not anticipate that the adoption of this standard will impact our consolidated financial statements or the related disclosures.
Stock-based Compensation
In June 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting,” to simplify the accounting for share-based transactions with nonemployees in which the grantor acquires goods or services to be used or consumed. Under the new standard, most of the guidance on recording share-based compensation granted to nonemployees will be aligned with the requirements for share-based compensation granted to employees. This standard will be effective for us in the first quarter of fiscal 2019, and early adoption is permitted. We do not expect the adoption of this standard to have a material impact on our condensed consolidated financial statements.

24


Fair Value Measurements
In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement,” which modifies the disclosure requirements on fair value measurements. The new standard is effective for us in the first quarter of fiscal 2020, and early adoption is permitted. While we continue to assess the potential impact of this standard, we do not expect the adoption of this standard to have a material impact on our condensed consolidated financial statements.
Internal-use Software
In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which clarifies the accounting for implementation costs in cloud computing arrangements. The new standard is effective for us in the first quarter of fiscal 2020, and early adoption is permitted. We are currently reviewing this standard to assess the impact on our condensed consolidated financial statements.

25


Results of Operations
Financial results for the three and nine months ended September 29, 2018, as compared to the three and nine months ended September 30, 2017, reflect the following:
the effects of adopting ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which provided a new basis of accounting for our revenue arrangements during fiscal 2018;
increased product and maintenance revenue resulting from overall growth in our software, hardware and IP business, particularly in North America and Asia; and
continued investment in research and development activities focused on creating and enhancing our products.
The adoption of Topic 606 limits the comparability of revenue and certain expenses, including sales commissions, presented in the results of operations for the three and nine months ended September 29, 2018, when compared to the three and nine months ended September 30, 2017. For additional information regarding the adoption of this and other accounting standards at the beginning of fiscal 2018, refer to Note 1 in the notes to condensed consolidated financial statements under the heading “Recently Adopted Accounting Standards.”
Revenue
We primarily generate revenue from licensing our software and IP, selling or leasing our emulation and prototyping hardware technology, providing maintenance for our software, hardware and IP, providing engineering services and earning royalties generated from the use of our IP. The timing of our revenue is significantly affected by the mix of software, hardware and IP products generating revenue in any given period and whether the revenue is recognized over time or at a point in time, upon completion of delivery. For an additional description of our acquisitions, see Note 7 in the notes to consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 30, 2017.
Approximately 90% of our revenue is recognized over time, and the remainder of the resulting revenue is recognized at the point in time that control is transferred to the customer. Revenue recognized over time includes revenue from our software arrangements, services, royalties from certain IP arrangements, maintenance on IP licenses and hardware, and operating leases of hardware. Revenue recognized at a point in time is primarily generated by our sales of emulation and prototyping hardware and IP licenses. Our ability to maintain this mix in any single fiscal period may be impacted primarily by delivery of hardware and IP products to our customers.
During the three and nine months ended September 29, 2018, we recognized revenue based on the ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” but during the three and nine months ended September 30, 2017, we recognized revenue based on Topic 605. Therefore, the periods are not directly comparable. For additional information on the impact of the new accounting standard on our revenue, see Note 1 in the notes to condensed consolidated financial statements.
Revenue by Period
The following table shows our revenue for the three months ended September 29, 2018 and September 30, 2017 and the change in revenue between periods:
 
Three Months Ended
 
Change
 
September 29,
2018
 
September 30,
2017
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance
$
495.0

 
$
451.2

 
$
43.8

 
10
%
Services
37.5

 
34.2

 
3.3

 
10
%
Total revenue
$
532.5

 
$
485.4

 
$
47.1

 
10
%

26


The following table shows our revenue for the nine months ended September 29, 2018 and September 30, 2017 and the change in revenue between periods:
 
Nine Months Ended
 
Change
 
September 29,
2018
 
September 30,
2017
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance
$
1,463.5

 
$
1,346.5

 
$
117.0

 
9
%
Services
104.7

 
94.8

 
9.9

 
10
%
Total revenue
$
1,568.2

 
$
1,441.3

 
$
126.9

 
9
%

Product and maintenance revenue may fluctuate from period to period and by geography based on demand for our hardware and IP offerings. Product and maintenance revenue increased during the three and nine months ended September 29, 2018, as compared to the three and nine months ended September 30, 2017, because of growth in our software and emulation and prototyping hardware business as well as an increase in IP business levels.
Services revenue may fluctuate from period to period based on the timing of fulfillment of our services and IP performance obligations.
No one customer accounted for 10% or more of total revenue during the three and nine months ended September 29, 2018 or September 30, 2017.
Revenue by Product Group
The following table shows the percentage of revenue contributed by each of our five product categories and services for the past five consecutive quarters:
 
Three Months Ended
 
September 29,
2018
 
June 30,
2018
 
March 31,
2018
 
December 30,
2017
 
September 30,
2017
Functional Verification, including Emulation and Prototyping Hardware
22
%
 
23
%
 
26
%
 
23
%
 
21
%
Digital IC Design and Signoff
30
%
 
30
%
 
30
%
 
29
%
 
30
%
Custom IC Design
26
%
 
26
%
 
26
%
 
26
%
 
28
%
System Interconnect and Analysis
9
%
 
9
%
 
9
%
 
10
%
 
10
%
IP
13
%
 
12
%
 
9
%
 
12
%
 
11
%
Total
100
%
 
100
%
 
100
%
 
100
%
 
100
%
Revenue by product group fluctuates from period to period based on demand for our products and services and our available resources to deliver and support them. Certain of our licensing arrangements allow customers the ability to remix among software products. Additionally, we have arrangements with customers that include a combination of our products, 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. The actual usage of our products by these customers may differ and, if that proves to be the case, the revenue allocation in the table above would differ.

27


Revenue by Geography
 
Three Months Ended
 
Change
 
September 29,
2018
 
September 30,
2017
 
Amount
 
Percentage
 
(In millions, except percentages)
United States
$
224.5

 
$
208.4

 
$
16.1

 
8
 %
Other Americas
9.0

 
7.9

 
1.1

 
14
 %
Asia
156.9

 
131.9

 
25.0

 
19
 %
Europe, Middle East and Africa
101.4

 
94.7

 
6.7

 
7
 %
Japan
40.7

 
42.5

 
(1.8
)
 
(4
)%
Total revenue
$
532.5

 
$
485.4

 
$
47.1

 
10
 %
 
Nine Months Ended
 
Change
 
September 29,
2018
 
September 30,
2017
 
Amount
 
Percentage
 
(In millions, except percentages)
United States
$
680.0

 
$
620.5

 
$
59.5

 
10
 %
Other Americas
24.4

 
25.8

 
(1.4
)
 
(5
)%
Asia
431.2

 
385.7

 
45.5

 
12
 %
Europe, Middle East and Africa
311.8

 
284.4

 
27.4

 
10
 %
Japan
120.8

 
124.9

 
(4.1
)
 
(3
)%
Total revenue
$
1,568.2

 
$
1,441.3

 
$
126.9

 
9
 %
Revenue by Geography as a Percent of Total Revenue
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
United States
42
%
 
43
%
 
43
%
 
43
%
Other Americas
2
%
 
2
%
 
2
%
 
2
%
Asia
29
%
 
27
%
 
27
%
 
26
%
Europe, Middle East and Africa
19
%
 
19
%
 
20
%
 
20
%
Japan
8
%
 
9
%
 
8
%
 
9
%
Total
100
%
 
100
%
 
100
%
 
100
%
Revenue by geography fluctuates from period to period based on demand for our products and services and our available resources to deliver and support them.
Most of our revenue is transacted in the United States dollar. However, certain revenue transactions are denominated in foreign currencies. For an additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see the discussion under Item 3, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”
Cost of Revenue
 
Three Months Ended
 
Change
 
September 29,
2018
 
September 30,
2017
 
Amount
 
Percentage
 
(In millions, except percentages)
Cost of product and maintenance
$
36.4

 
$
34.8

 
$
1.6

 
5
%
Cost of services
24.0

 
19.7

 
4.3

 
22
%

28


 
Nine Months Ended
 
Change
 
September 29,
2018
 
September 30,
2017
 
Amount
 
Percentage
 
(In millions, except percentages)
Cost of product and maintenance
$
118.3

 
$
117.4

 
$
0.9

 
1
%
Cost of services
64.4

 
59.7

 
4.7

 
8
%
Cost of Product and Maintenance
Cost of product and maintenance includes costs associated with the sale and lease of our emulation and prototyping hardware and licensing of our software and IP products, certain employee salary and benefits and other employee-related costs, cost of our customer support services, amortization of technology-related and maintenance-related acquired intangibles, costs of technical documentation and royalties payable to third-party vendors. Costs associated with our emulation and prototyping hardware products include components, assembly, testing, applicable reserves and overhead. These hardware manufacturing costs make our cost of emulation and prototyping hardware products higher, as a percentage of revenue, than our cost of software and IP products.
A summary of cost of product and maintenance is as follows:
 
Three Months Ended
 
Change
 
September 29,
2018
 
September 30,
2017
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance-related costs
$
26.9

 
$
24.6

 
$
2.3

 
9
 %
Amortization of acquired intangibles
9.5

 
10.2

 
(0.7
)
 
(7
)%
Total cost of product and maintenance
$
36.4

 
$
34.8

 
$
1.6

 
5
 %
 
Nine Months Ended
 
Change
 
September 29,
2018
 
September 30,
2017
 
Amount
 
Percentage
 
(In millions, except percentages)
Product and maintenance-related costs
$
88.5

 
$
85.8

 
$
2.7

 
3
 %
Amortization of acquired intangibles
29.8

 
31.6

 
(1.8
)
 
(6
)%
Total cost of product and maintenance
$
118.3

 
$
117.4

 
$
0.9

 
1
 %
Cost of product and maintenance depends primarily on our hardware product sales in any given period. Cost of product and maintenance is also affected by employee salary and benefits and other employee-related costs, reserves for inventory, as well as the timing and extent to which we acquire intangible assets, acquire or license third-parties’ intellectual property or technology and sell our products that include such acquired or licensed intellectual property or technology.
The changes in product and maintenance-related costs for the three and nine months ended September 29, 2018, as compared to the three and nine months ended September 30, 2017, were due to the following:
 
Change
 
Three Months Ended
 
Nine Months Ended
 
(In millions)
Emulation and prototyping hardware costs
$
2.0

 
$
1.9

Other items
0.3

 
0.8

Total change in product and maintenance-related costs
$
2.3

 
$
2.7

Gross margins on our hardware products will fluctuate based on product life cycle, product competition, product mix and pricing strategies.

29


Cost of Services
Cost of services primarily includes employee salary, benefits and other employee-related costs to perform work on revenue-generating projects, costs to maintain the infrastructure necessary to manage a services organization, and provisions for contract losses, if any. Cost of services will fluctuate from period to period based on our utilization of design services engineers on revenue-generating projects or on internal development projects.
Operating Expenses
Our operating expenses include marketing and sales, research and development and general and administrative expenses. Factors that tend to cause our operating expenses to fluctuate include changes in the number of employees due to hiring and acquisitions, restructuring activities, foreign exchange rate movements, stock-based compensation and the impact of our variable compensation programs that are driven by operating results.
Salary, benefits and other employee-related costs and facilities and other infrastructure costs included in operating expenses increased overall during the three and nine months ended September 29, 2018, as compared to the three and nine months ended September 30, 2017, primarily due to an increase in headcount resulting from additional hiring and our 2017 acquisitions.
Stock-based compensation included in our operating expenses increased during the three and nine months ended September 29, 2018, as compared to the three and nine months ended September 30, 2017, primarily because successive increases in the price of our common stock between grant dates have resulted in higher grant date fair values for the mix of stock awards expensed in each period. We expect stock-based compensation included in operating expenses to increase during the remainder of fiscal 2018, as compared to fiscal 2017, due to higher grant date fair values of stock awards vesting during fiscal 2018.
Many of our operating expenses are transacted in various foreign currencies. We recognize lower expenses in periods when the United States dollar strengthens in value against other currencies and we recognize higher expenses when the United States dollar weakens against other currencies. For an additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see the discussion in Item 3, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”
Our operating expenses for the three and nine months ended September 29, 2018 and September 30, 2017 were as follows:
 
Three Months Ended
 
Change
 
September 29,
2018
 
September 30,
2017
 
Amount
 
Percentage
 
(In millions, except percentages)
Marketing and sales
$
108.6

 
$
104.3

 
$
4.3

 
4
 %
Research and development