Cadence Reports Third Quarter 2012 Financial Results

Marketwired

SAN JOSE, CA--(Marketwire - Oct 24, 2012) - Cadence Design Systems, Inc. (NASDAQ: CDNS) today announced results for the third quarter of fiscal year 2012.

Cadence reported third quarter 2012 revenue of $339 million, compared to revenue of $292 million reported for the same period in 2011. On a GAAP basis, Cadence recognized net income of $59 million, or $0.21 per share on a diluted basis, including $15 million in acquisition-related income tax benefit, in the third quarter of 2012, compared to net income of $28 million, or $0.10 per share on a diluted basis in the same period in 2011.

Using Cadence's non-GAAP measure, net income in the third quarter of 2012 was $59 million, or $0.21 per share on a diluted basis, as compared to net income of $37 million, or $0.14 per share on a diluted basis, in the same period in 2011.

"Demand for our technology was strong across the board in Q3, with ongoing strength in emulation and increasing demand for verification solutions," said Lip-Bu Tan, president and chief executive officer. "We continue to extend our technology leadership at advanced nodes and expand our design and verification IP business."

"Results for all key operating metrics exceeded expectations for Q3 as the entire Cadence team continues to execute," added Geoff Ribar, senior vice president and chief financial officer.

The following statements are based on current expectations. These statements are forward-looking, and actual results may differ materially.

Business Outlook

For the fourth quarter of 2012, the company expects total revenue in the range of $335 million to $345 million. Fourth quarter GAAP net income per diluted share is expected to be in the range of $0.13 to $0.15. Net income per diluted share using the non-GAAP measure defined below is expected to be in the range of $0.18 to $0.20.

For 2012, the company expects total revenue in the range of $1,315 million to $1,325 million. On a GAAP basis, net income per diluted share for 2012 is expected to be in the range of $0.58 to $0.60. Using the non-GAAP measure defined below, net income per diluted share for 2012 is expected to be in the range of $0.75 to $0.77.

A schedule showing a reconciliation of the business outlook from GAAP net income and diluted net income per share to non-GAAP net income and diluted net income per share is included with this release.

Audio Webcast Scheduled
Lip-Bu Tan, Cadence's president and chief executive officer, and Geoff Ribar, Cadence's senior vice president and chief financial officer, will host a third quarter 2012 financial results audio webcast today, October 24, 2012, at 2 p.m. (Pacific) / 5 p.m. (Eastern). Attendees are asked to register at the website at least 10 minutes prior to the scheduled webcast. An archive of the webcast will be available starting October 24, 2012 at 5 p.m. (Pacific) and ending November 7, 2012 at 5 p.m. (Pacific). Webcast access is available at www.cadence.com/company/investor_relations.

About Cadence
Cadence enables global electronic design innovation and plays an essential role in the creation of today's integrated circuits and electronics. Customers use Cadence software, hardware, IP, and services to design and verify advanced semiconductors, consumer electronics, networking and telecommunications equipment, and computer systems. The company is headquartered in San Jose, California, with sales offices, design centers, and research facilities around the world to serve the global electronics industry. More information about the company and its products and services is available at www.cadence.com.

Cadence and the Cadence logo are registered trademarks of Cadence Design Systems, Inc. All other trademarks are the property of their respective owners.

The statements contained above regarding Cadence's third quarter 2012 results, as well as the information in the Business Outlook section and the statements by Lip-Bu Tan and Geoff Ribar include forward-looking statements based on current expectations or beliefs, as well as a number of preliminary assumptions about future events that are subject to factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Readers are cautioned not to put undue reliance on these forward-looking statements, which are not a guarantee of future performance and are subject to a number of risks, uncertainties and other factors, many of which are outside Cadence's control, including, among others: (i) Cadence's ability to compete successfully in the electronic design automation product and the commercial electronic design and methodology services industries; (ii) the success of Cadence's efforts to improve operational efficiency and growth; (iii) the mix of products and services sold and the timing of significant orders for Cadence's products, and its shift to a ratable license structure, which may result in changes in the mix of license types; (iv) change in customer demands, including those resulting from consolidation among Cadence's customers and the possibility that Cadence's customers' restructurings and other efforts to improve operational efficiency could result in delays in their purchases of Cadence's products and services; (v) economic and industry conditions in regions in which Cadence does business; (vi) fluctuations in rates of exchange between the U.S. dollar and the currencies of other countries in which Cadence does business; (vii) capital expenditure requirements, legislative or regulatory requirements, interest rates and Cadence's ability to access capital and debt markets; (viii) the acquisition of other companies or technologies or the failure to successfully integrate and operate these companies or technologies Cadence acquires; (ix) the effects of Cadence's efforts to improve operational efficiency on its business, including its strategic and customer relationships, and its ability to retain key employees; (x) events that affect the reserves or settlement assumptions Cadence may take from time to time with respect to accounts receivable, taxes, litigation or other matters; and (xi) the effects of any litigation or other proceedings to which Cadence is or may become a party.

For a detailed discussion of these and other cautionary statements related to Cadence's business, please refer to Cadence's filings with the Securities and Exchange Commission. These include Cadence's most recent reports on Form 10-K and Form 10-Q, including Cadence's future filings.

GAAP to non-GAAP Reconciliation

To supplement Cadence's financial results presented on a GAAP basis, Cadence management uses non-GAAP measures that it believes are helpful in understanding Cadence's performance. One such measure is non-GAAP net income, which is a financial measure not calculated under GAAP, and is calculated by taking GAAP net income and excluding, as applicable, amortization of intangible assets, stock-based compensation expense, integration and acquisition-related costs, including changes in contingent consideration related to prior acquisitions and asset purchases, acquisition-related income tax benefits, shareholder litigation costs, gains or losses and expenses or credits related to non-qualified deferred compensation plan assets, executive and other employee severance costs, restructuring charges and credits, amortization of discount on convertible notes, equity in losses or income from investments, write-down of investments and gains or losses on the sale of investments. Intangible assets consist primarily of purchased or licensed technology, backlog, patents, trademarks, distribution rights, customer contracts and related relationships and non-compete agreements. Non-GAAP net income is adjusted by the amount of additional taxes or tax benefit that Cadence would accrue if it used non-GAAP results instead of GAAP results to calculate the company's tax liability.

Cadence's management believes it is useful in measuring Cadence's operations to exclude amortization of intangible assets and integration and acquisition-related costs, including changes in contingent consideration related to prior acquisitions and asset purchases, because these costs are inconsistent in size, are significantly impacted by the timing and valuation of those acquisitions and generally cannot be changed by Cadence's management in the short term. In addition, Cadence's management believes it is useful to exclude stock-based compensation expense because it is based on many subjective inputs at a point in time and many of these inputs are not necessarily directly attributable to the underlying performance of Cadence's business operations, and such exclusion enhances investors' ability to review Cadence's business from the same perspective as Cadence's management. Cadence's management also believes it is useful to exclude costs related to shareholder litigation because these costs are not related to Cadence's core business operations. Cadence's management also believes that it is useful to exclude restructuring charges and credits. Cadence's management believes that in measuring the company's operations, it is useful to exclude any such restructuring charges and credits because exclusion of such charges and credits permits consistent evaluations of Cadence's performance before and after such actions are taken. Cadence's management also believes it is useful to exclude gains or losses and expenses or credits related to the non-qualified deferred compensation plan assets because these gains or losses and expenses or credits are not part of Cadence's direct costs of operations, but reflect changes in the value of assets held in the non-qualified deferred compensation plan. Cadence's management also believes it is useful to exclude executive and other employee severance costs because exclusion of such costs permits consistent evaluations of Cadence's performance. Cadence's management also believes it is useful to exclude the amortization of the discount on convertible notes because this incremental cost recorded as interest expense does not represent a cash obligation of the company and is not part of Cadence's direct cost of operations. Finally, Cadence's management believes it is useful to exclude the equity in losses or income from investments, write-down of investments and gains or losses on the sale of investments because these items are not part of Cadence's direct cost of operations. Rather, these are non-operating items that are included in other income or expense and are part of the company's investment activities.

During the third quarter of 2012, Cadence's non-GAAP net income also excluded the effect of an income tax benefit associated with Cadence's acquisition of Sigrity, Inc. Cadence's management believes it is useful to exclude the tax benefit associated with this acquisition because Cadence does not expect an acquisition-related income tax benefit of the magnitude recorded in the third quarter of 2012 to be recorded frequently.

Cadence's management believes that non-GAAP net income provides useful supplemental information to Cadence's management and investors regarding the performance of the company's business operations and facilitates comparisons to the company's historical operating results. Cadence's management also uses this information internally for forecasting and budgeting. Non-GAAP financial measures should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with GAAP. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures contained within this press release with their most directly comparable GAAP financial results.

The following tables reconcile the specific items excluded from GAAP net income and GAAP net income per diluted share in the calculation of non-GAAP net income and non-GAAP net income per diluted share for the periods shown below:

       
Net Income Reconciliation   Three Months Ended  
    September 29,
2012
    October 1,
2011
 
    (unaudited)  
(in thousands)                
Net income on a GAAP basis   $ 58,584     $ 28,106  
  Amortization of acquired intangibles     7,750       6,692  
  Stock-based compensation expense     12,399       11,891  
  Non-qualified deferred compensation expenses (credits)     (839 )     229  
  Restructuring and other charges (credits)     57       (433 )
  Shareholder litigation costs     - - - -       179  
  Executive and other employee severance costs     - - - -       1,331  
  Integration and acquisition-related costs     3,016       766  
  Amortization of debt discount     5,279       6,697  
  Other income or expense related to investments and non-qualified deferred compensation plan assets*     1,954       (5,544 )
  Acquisition-related income tax benefit     (14,806 )     - - - -  
  Income tax effect of non-GAAP adjustments     (14,054 )     (12,619 )
Net income on a non-GAAP basis   $ 59,340     $ 37,295  
                 
*   Includes, as applicable, equity in losses or income from investments, write-down of investments, gains or losses on sale of investments and gains or losses on non-qualified deferred compensation plan assets recorded in Other income (expense), net.
     
Diluted Net Income per Share Reconciliation   Three Months Ended  
    September 29,
2012
    October 1,
2011
 
    (unaudited)  
(in thousands, except per share data)                
Diluted net income per share on a GAAP basis   $ 0.21     $ 0.10  
  Amortization of acquired intangibles     0.03       0.03  
  Stock-based compensation expense     0.04       0.04  
  Non-qualified deferred compensation expenses (credits)     - - - -       - - - -  
  Restructuring and other charges (credits)     - - - -       - - - -  
  Shareholder litigation costs     - - - -       - - - -  
  Executive and other employee severance costs     - - - -       0.01  
  Integration and acquisition-related costs     0.01       - - - -  
  Amortization of debt discount     0.02       0.02  
  Other income or expense related to investments and non-qualified deferred compensation plan assets*     - - - -       (0.02 )
  Acquisition-related income tax benefit     (0.05 )     - - - -  
  Income tax effect of non-GAAP adjustments     (0.05 )     (0.04 )
Diluted net income per share on a non-GAAP basis   $ 0.21     $ 0.14  
Shares used in calculation of diluted net income per share --GAAP**     283,328       270,741  
Shares used in calculation of diluted net income per share --non-GAAP**     283,328       270,741  
                 
*   Includes, as applicable, equity in losses or income from investments, write-down of investments, gains or losses on sale of investments and gains or losses on non-qualified deferred compensation plan assets recorded in Other income (expense), net.
     
**   Shares used in the calculation of GAAP net income per share are expected to be the same as shares used in the calculation of non-GAAP net income per share, except when the company reports a GAAP net loss and non-GAAP net income, or GAAP net income and a non-GAAP net loss.
     

Investors are encouraged to look at the GAAP results as the best measure of financial performance.

Cadence expects that its corporate representatives will meet privately during the quarter with investors, the media, investment analysts and others. At these meetings, Cadence may reiterate the business outlook published in this press release. At the same time, Cadence will keep this press release, including the business outlook, publicly available on its website.

Prior to the start of the Quiet Period (described below), the public may continue to rely on the business outlook contained herein as still being Cadence's current expectations on matters covered unless Cadence publishes a notice stating otherwise.

Beginning December 14, 2012, Cadence will observe a Quiet Period during which the business outlook as provided in this press release and the company's most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q no longer constitute the company's current expectations. During the Quiet Period, the business outlook in these documents should be considered to be historical, speaking as of prior to the Quiet Period only and not subject to any update by the company. During the Quiet Period, Cadence's representatives will not comment on Cadence's business outlook, financial results or expectations. The Quiet Period will extend until the day when Cadence's Fourth Quarter 2012 Earnings Release is published, which is currently scheduled for January 30, 2013.

 
Cadence Design Systems, Inc.
Condensed Consolidated Balance Sheets
September 29, 2012 and December 31, 2011
(In thousands)
(Unaudited)
 
    September 29,
2012
  December 31,
2011
             
Current Assets:            
  Cash and cash equivalents   $ 649,099   $ 601,602
  Short-term investments     95,819     3,037
  Receivables, net of allowances of $110 and $0, respectively     123,206     136,772
  Inventories     34,629     43,243
  2015 notes hedges     287,079     215,113
  Prepaid expenses and other     60,780     64,216
    Total current assets     1,250,612     1,063,983
             
Property, plant and equipment, net of accumulated depreciation of $638,552 and $658,990, respectively     246,856     262,517
Goodwill     233,275     192,125
Acquired intangibles, net of accumulated amortization of $97,746 and $91,542, respectively     192,768     173,234
Long-term receivables     5,668     11,371
Other assets     59,335     58,039
Total Assets   $ 1,988,514   $ 1,761,269
             
Current Liabilities:            
  Convertible notes   $ 305,029   $ 294,061
  2015 notes embedded conversion derivative     287,079     215,113
  Accounts payable and accrued liabilities     160,250     165,791
  Current portion of deferred revenue     322,260     340,401
    Total current liabilities     1,074,618     1,015,366
             
Long-Term Liabilities:            
  Long-term portion of deferred revenue     58,436     73,959
  Convertible notes     136,594     131,920
  Other long-term liabilities     130,478     128,894
    Total long-term liabilities     325,508     334,773
             
Stockholders' Equity     588,388     411,130
Total Liabilities and Stockholders' Equity   $ 1,988,514   $ 1,761,269
             
Cadence Design Systems, Inc.  
Condensed Consolidated Income Statements  
For the Three and Nine Months Ended September 29, 2012 and October 1, 2011  
(In thousands, except per share amounts)  
(Unaudited)  
   
    Three Months Ended     Nine Months Ended  
    September 29, 2012     October 1, 2011     September 29, 2012     October 1, 2011  
                                 
Revenue:                                
  Product   $ 216,561     $ 163,966     $ 614,886     $ 463,723  
  Services     28,415       29,102       86,923       86,384  
  Maintenance     93,557       99,389       279,030       291,722  
                                 
    Total revenue     338,533       292,457       980,839       841,829  
                                 
Costs and Expenses:                                
  Cost of product     23,337       18,185       60,323       52,453  
  Cost of services     16,809       20,410       53,254       61,101  
  Cost of maintenance     11,124       11,223       33,756       32,837  
  Marketing and sales     82,461       79,914       246,674       235,292  
  Research and development     115,078       103,154       335,703       303,721  
  General and administrative     26,350       24,041       84,364       68,720  
  Amortization of acquired intangibles     3,876       3,786       11,305       12,750  
  Restructuring and other charges (credits)     57       (433 )     49       277  
                                 
    Total costs and expenses     279,092       260,280       825,428       767,151  
                                 
      Income from operations     59,441       32,177       155,411       74,678  
                                 
  Interest expense     (8,737 )     (10,830 )     (25,840 )     (32,584 )
  Other income (expense), net     (131 )     7,244       5,972       20,107  
                                 
      Income before provision (benefit) for income taxes     50,573       28,591       135,543       62,201  
                                 
  Provision (benefit) for income taxes     (8,011 )     485       9,469       864  
                                 
      Net income   $ 58,584     $ 28,106     $ 126,074     $ 61,337  
                                 
                                 
Net income per share - basic   $ 0.22     $ 0.11     $ 0.47     $ 0.23  
                                 
Net income per share - diluted   $ 0.21     $ 0.10     $ 0.45     $ 0.23  
                                 
Weighted average common shares outstanding - basic     271,350       264,723       269,643       263,149  
                                 
Weighted average common shares outstanding - diluted     283,328       270,741       278,760       270,068  
                                 
Cadence Design Systems, Inc.  
Condensed Consolidated Statements of Cash Flows  
For the Nine Months Ended September 29, 2012 and October 1, 2011  
(In thousands)  
(Unaudited)  
   
    Nine Months Ended  
    September 29,
2012
    October 1,
2011
 
                 
Cash and Cash Equivalents at Beginning of Period   $ 601,602     $ 557,409  
Cash Flows from Operating Activities:                
  Net income     126,074       61,337  
  Adjustments to reconcile net income to net cash provided by operating activities:                
  Depreciation and amortization     67,171       68,934  
  Amortization of debt discount and fees     17,480       22,068  
  Stock-based compensation     34,285       31,589  
  Gain on investments, net     (2,222 )     (19,220 )
  Non-cash restructuring and other charges     188       202  
  Deferred income taxes     (14,107 )     (4,741 )
  Provisions (recoveries) for losses (gains) on receivables, net     120       (6,596 )
  Other non-cash items     3,270       3,689  
  Changes in operating assets and liabilities, net of effect of acquired businesses:                
    Receivables     24,276       63,729  
    Inventories     6,936       (9,767 )
    Prepaid expenses and other     1,547       19,718  
    Other assets     (3,101 )     3,718  
    Accounts payable and accrued liabilities     (1,714 )     (71,832 )
    Deferred revenue     (38,230 )     20,245  
    Other long-term liabilities     (1,855 )     (4,868 )
      Net cash provided by operating activities     220,118       178,205  
                 
Cash Flows from Investing Activities:                
  Proceeds from the sale and maturity of available-for-sale securities     7,436       9,588  
  Purchases of available-for-sale securities     (101,248 )     -  
  Proceeds from the sale of long-term investments     44       4,824  
  Purchases of property, plant and equipment     (25,932 )     (17,703 )
  Investment in venture capital partnerships and equity investments     (250 )     (608 )
  Cash paid in business combinations and asset acquisitions, net of cash acquired     (66,432 )     (44,052 )
      Net cash used for investing activities     (186,382 )     (47,951 )
                 
Cash Flows from Financing Activities:                
  Principal payments on receivable sale financing     (2,907 )     (2,829 )
  Tax effect related to employee stock transactions allocated to equity     5,790       2,897  
  Payment of acquisition-related contingent consideration     (39 )     -  
  Proceeds from issuance of common stock     28,755       16,994  
  Stock received for payment of employee taxes on vesting of restricted stock     (13,457 )     (9,926 )
      Net cash provided by financing activities     18,142       7,136  
                 
Effect of exchange rate changes on cash and cash equivalents     (4,381 )     1,302  
                 
Increase in cash and cash equivalents     47,497       138,692  
                 
Cash and Cash Equivalents at End of Period   $ 649,099     $ 696,101  
                 
Cadence Design Systems, Inc.
As of October 24, 2012
Impact of Non-GAAP Adjustments on Forward Looking Diluted Net Income Per Share
(Unaudited)
 
    Three Months Ending
December 29, 2012
  Year Ending
December 29, 2012
    Forecast   Forecast
         
Diluted net income per share on a GAAP basis   $0.13 to $0.15   $0.58 to $0.60
         
  Amortization of acquired intangibles   0.03   0.10
  Stock-based compensation expense   0.04   0.17
  Non-qualified deferred compensation expenses   -   0.01
  Integration and acquisition-related costs   0.01   0.03
  Amortization of debt discount   0.02   0.07
  Other income or expense related to investments and non-qualified        
  deferred compensation plan assets*   -   (0.01)
  Acquisition-related income tax benefit   -   (0.05)
  Income tax effect of non-GAAP adjustments   (0.05)   (0.15)
         
Diluted net income per share on a non-GAAP basis   $0.18 to $0.20   $0.75 to $0.77
         
*   Includes, as applicable, equity in losses or income from investments, write-down of investments, gains or losses on sale of investments and gains or losses on non-qualified deferred compensation plan assets recorded in Other income (expense), net.
     
Cadence Design Systems, Inc.
As of October 24, 2012
Impact of Non-GAAP Adjustments on Forward Looking Net Income
(Unaudited)
 
    Three Months Ending
December 29, 2012
  Year Ending
December 29, 2012
($ in Millions)   Forecast   Forecast
         
Net income on a GAAP basis   $36 to $42   $162 to $168
         
  Amortization of acquired intangibles   8   29
  Stock-based compensation expense   13   47
  Non-qualified deferred compensation expenses   -   3
  Integration and acquisition-related costs   2   9
  Amortization of debt discount   5   21
  Other income or expense related to investments and non-qualified deferred compensation plan assets*   -   (2)
  Acquisition-related income tax benefit   -   (15)
  Income tax effect of non-GAAP adjustments   (13)   (44)
         
Net income on a non-GAAP basis   $51 to $57   $210 to $216
         
     
*   Includes, as applicable, equity in losses or income from investments, write-down of investments, gains or losses on sale of investments and gains or losses on non-qualified deferred compensation plan assets recorded in Other income (expense), net.
     
Cadence Design Systems, Inc.  
(Unaudited)  
   
Revenue Mix by Geography (% of Total Revenue)  
   
    2011     2012  
GEOGRAPHY   Q1     Q2     Q3     Q4     Year     Q1     Q2     Q3  
                                                 
Americas   44 %   47 %   44 %   44 %   45 %   44 %   46 %   43 %
EMEA   21 %   20 %   21 %   20 %   20 %   19 %   20 %   20 %
Japan   19 %   17 %   18 %   17 %   18 %   18 %   16 %   17 %
Asia   16 %   16 %   17 %   19 %   17 %   19 %   18 %   20 %
Total   100 %   100 %   100 %   100 %   100 %   100 %   100 %   100 %
                                                 
Revenue Mix by Product Group (% of Total Revenue)  
   
    2011     2012  
PRODUCT GROUP   Q1     Q2     Q3     Q4     Year     Q1     Q2     Q3  
                                                 
Functional Verification and Design IP   28 %   33 %   30 %   32 %   30 %   30 %   33 %   30 %
Digital IC Design   24 %   21 %   22 %   21 %   22 %   23 %   22 %   23 %
Custom IC Design   20 %   22 %   23 %   23 %   22 %   23 %   22 %   24 %
Design for Manufacturing   8 %   6 %   6 %   6 %   7 %   7 %   6 %   6 %
System Interconnect   10 %   8 %   9 %   8 %   9 %   8 %   8 %   9 %
Services & Other   10 %   10 %   10 %   10 %   10 %   9 %   9 %   8 %
Total   100 %   100 %   100 %   100 %   100 %   100 %   100 %   100 %
                                                 
Note: Product Group total revenue includes Product + Maintenance
Contact:
For more information, please contact:

Investors and Shareholders
Alan Lindstrom
Cadence Design Systems, Inc.
408-944-7100
investor_relations@cadence.com

Media and Industry Analysts
Nancy Szymanski
Cadence Design Systems, Inc.
408-473-8382
publicrelations@cadence.com
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