FORM 10-Q
| (Mark One) | ||
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 29, 2003
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-10606
CADENCE DESIGN SYSTEMS, INC.
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Delaware
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77-0148231 | |
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(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
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2655 Seely Avenue, Building 5, San Jose,
California
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95134 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(408) 943-1234
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 is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No
On May 2, 2003, approximately 267,105,827 shares of the registrant’s common stock, $0.01 par value, were outstanding.
CADENCE DESIGN SYSTEMS, INC.
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PART I.
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FINANCIAL INFORMATION
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Item 1.
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Financial Statements:
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Condensed Consolidated Balance Sheets:
March 29, 2003 and December 28, 2002 |
3 | ||||||
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Condensed Consolidated Statements of
Operations:
Three Months Ended March 29, 2003 and March 30, 2002 |
4 | ||||||
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Condensed Consolidated Statements of Cash
Flows:
Three Months Ended March 29, 2003 and March 30, 2002 |
5 | ||||||
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Notes to Condensed Consolidated Financial
Statements
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6 | ||||||
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Item 2.
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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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16 | |||||
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Item 3.
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Quantitative and Qualitative Disclosures About
Market Risk
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33 | |||||
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Item 4.
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Controls and Procedures
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35 | |||||
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PART II.
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OTHER INFORMATION
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Item 1.
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Legal Proceedings
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36 | |||||
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Item 2.
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Changes in Securities and Use of Proceeds
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38 | |||||
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Item 3.
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Defaults Upon Senior Securities
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39 | |||||
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Item 4.
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Submission of Matters to a Vote of Security
Holders
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39 | |||||
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Item 5.
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Other Information
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39 | |||||
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Item 6.
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Exhibits and Reports on Form 8-K
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39 | |||||
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Signatures
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40 | ||||||
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Certifications pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
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41 | ||||||
2
PART I. FINANCIAL INFORMATION
CADENCE DESIGN SYSTEMS, INC.
ASSETS
| March 29, | December 28, | |||||||||
| 2003 | 2002 | |||||||||
| (Unaudited) | ||||||||||
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Current Assets:
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||||||||||
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Cash and cash equivalents
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$ | 239,395 | $ | 371,327 | ||||||
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Short-term investments
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21,853 | 24,286 | ||||||||
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Receivables, net
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297,570 | 313,968 | ||||||||
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Inventories
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8,760 | 9,614 | ||||||||
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Prepaid expenses and other
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41,360 | 39,448 | ||||||||
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Total current assets
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608,938 | 758,643 | ||||||||
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Property, plant and equipment, net
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425,983 | 434,491 | ||||||||
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Acquired intangibles, net
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921,019 | 883,339 | ||||||||
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Installment contract receivables, net
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105,333 | 113,185 | ||||||||
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Other assets
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231,512 | 248,603 | ||||||||
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Total Assets
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$ | 2,292,785 | $ | 2,438,261 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
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Current Liabilities:
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Current portion of capital lease obligations
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$ | 1,451 | $ | 1,609 | ||||||
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Accounts payable and accrued liabilities
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237,302 | 297,399 | ||||||||
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Deferred revenue
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208,729 | 212,882 | ||||||||
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Total current liabilities
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447,482 | 511,890 | ||||||||
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Long-Term Liabilities:
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Long-term debt and capital lease obligations
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10,223 | 52,659 | ||||||||
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Other long-term liabilities
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230,874 | 214,407 | ||||||||
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Total long-term liabilities
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241,097 | 267,066 | ||||||||
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Stockholders’ Equity:
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Common stock and capital in excess of par value
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1,061,569 | 1,100,380 | ||||||||
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Deferred stock compensation
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(39,023 | ) | (44,426 | ) | ||||||
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Retained earnings
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588,344 | 607,460 | ||||||||
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Accumulated other comprehensive loss
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(6,684 | ) | (4,109 | ) | ||||||
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Total stockholders’ equity
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1,604,206 | 1,659,305 | ||||||||
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Total Liabilities and Stockholders’ Equity
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$ | 2,292,785 | $ | 2,438,261 | ||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
CADENCE DESIGN SYSTEMS, INC.
| Three Months Ended | ||||||||||
| March 29, | March 30, | |||||||||
| 2003 | 2002 | |||||||||
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Revenue:
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Product
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$ | 141,282 | $ | 219,049 | ||||||
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Services
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32,388 | 43,266 | ||||||||
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Maintenance
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82,206 | 82,399 | ||||||||
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Total revenue
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255,876 | 344,714 | ||||||||
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Costs and Expenses:
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Cost of product
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8,211 | 18,100 | ||||||||
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Cost of services
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23,627 | 32,766 | ||||||||
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Cost of maintenance
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15,075 | 16,428 | ||||||||
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Marketing and sales
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83,615 | 96,781 | ||||||||
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Research and development
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85,122 | 78,190 | ||||||||
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General and administrative
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26,677 | 37,530 | ||||||||
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Amortization of acquired intangibles
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25,286 | 18,649 | ||||||||
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Amortization of deferred stock compensation (A)
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9,620 | 3,493 | ||||||||
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Restructuring and other charges
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— | 17,708 | ||||||||
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Write-off of acquired in-process technology
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1,700 | — | ||||||||
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Total costs and expenses
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278,933 | 319,645 | ||||||||
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Income (loss) from operations
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(23,057 | ) | 25,069 | |||||||
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Interest expense
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(674 | ) | (479 | ) | ||||||
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Other income, net
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908 | 5,482 | ||||||||
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Income (loss) before provision
(benefit) for income taxes
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(22,823 | ) | 30,072 | |||||||
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Provision (benefit) for income taxes
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(3,707 | ) | 8,727 | |||||||
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Net income (loss)
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$ | (19,116 | ) | $ | 21,345 | |||||
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Basic net income (loss) per share
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$ | (0.07 | ) | $ | 0.09 | |||||
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Diluted net income (loss) per share
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$ | (0.07 | ) | $ | 0.08 | |||||
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Weighted average common shares outstanding
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268,358 | 249,720 | ||||||||
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Weighted average common and potential common
shares outstanding –
assuming dilution |
268,358 | 260,871 | ||||||||
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(A) Amortization of deferred stock
compensation would be
further classified as follows: |
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Cost of services
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$ | 244 | $ | 304 | ||||||
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Marketing and sales
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524 | 1,207 | ||||||||
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Research and development
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5,013 | 1,039 | ||||||||
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General and administrative
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3,839 | 943 | ||||||||
| $ | 9,620 | $ | 3,493 | |||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
CADENCE DESIGN SYSTEMS, INC.
| Three Months Ended | ||||||||||||
| March 29, | March 30, | |||||||||||
| 2003 | 2002 | |||||||||||
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Cash and Cash Equivalents at Beginning of Period
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$ | 371,327 | $ | 206,311 | ||||||||
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Cash Flows from Operating Activities:
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Net income (loss)
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(19,116 | ) | 21,345 | |||||||||
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Adjustments to reconcile net income
(loss) to net cash provided by
operating activities: |
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Depreciation and amortization
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47,437 | 49,145 | ||||||||||
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Amortization of deferred stock compensation
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9,620 | 3,493 | ||||||||||
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Net investment gain on sale, equity
(income) loss and write-down
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— | (15,078 | ) | |||||||||
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Write-off of long-term investment securities
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1,505 | 2,769 | ||||||||||
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Write-off of acquired in-process technology
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1,700 | — | ||||||||||
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Non-cash restructuring and other charges
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— | 1,365 | ||||||||||
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Tax benefits from employee stock transactions
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— | 2,528 | ||||||||||
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Deferred income taxes
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— | 672 | ||||||||||
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Provisions for losses on trade accounts receivable
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289 | 1,631 | ||||||||||
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Changes in operating assets and liabilities, net
of effect of acquired businesses:
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Receivables
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(6,897 | ) | 25,456 | |||||||||
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Proceeds from the sale of receivables
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20,053 | 80,399 | ||||||||||
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Installment contract receivables
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14,796 | (92,215 | ) | |||||||||
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Inventories
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854 | 1,897 | ||||||||||
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Prepaid expenses and other
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943 | (22,233 | ) | |||||||||
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Other assets
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17,356 | (14,910 | ) | |||||||||
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Accounts payable and accrued liabilities
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(96,069 | ) | (70,654 | ) | ||||||||
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Deferred revenue
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(7,903 | ) | 8,042 | |||||||||
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Other long-term liabilities
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16,467 | 18,337 | ||||||||||
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Net cash provided by operating activities
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1,035 | 1,989 | ||||||||||
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Cash Flows from Investing Activities:
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Proceeds from sale and maturities of short-term
investments –
available-for-sale |
23,815 | |||||||||||
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Purchases of property, plant and equipment
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(17,180 | ) | (31,542 | ) | ||||||||
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Investment in venture capital partnerships and
equity investments
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(5,569 | ) | (2,050 | ) | ||||||||
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Net cash paid for business combinations and
acquired intangibles
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(26,432 | ) | (19,580 | ) | ||||||||
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Net cash used for investing activities
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(49,181 | ) | (29,357 | ) | ||||||||
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Cash Flows from Financing Activities:
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Proceeds from credit facility
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10,000 | |||||||||||
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Principal payments on credit facility and capital
leases
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(52,594 | ) | (300 | ) | ||||||||
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Proceeds from issuance of common stock
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21,890 | 45,333 | ||||||||||
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Purchases of stock
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(61,964 | ) | (42,404 | ) | ||||||||
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Net cash provided by (used for) financing
activities
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(82,668 | ) | 2,629 | |||||||||
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Effect of exchange rate changes on cash
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(1,118 | ) | (2,347 | ) | ||||||||
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Decrease in cash and cash equivalents
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(131,932 | ) | (27,086 | ) | ||||||||
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Cash and Cash Equivalents at End of Period
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$ | 239,395 | $ | 179,225 | ||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
CADENCE DESIGN SYSTEMS, INC.
NOTE 1. BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements included in this Quarterly Report have been prepared by Cadence Design Systems, Inc., or Cadence, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, Cadence believes that the disclosures contained in this Quarterly Report fully comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, 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 28, 2002.
The unaudited Condensed Consolidated Financial Statements included in this Quarterly Report reflect all adjustments (which include only normal, recurring adjustments) that are, in the opinion of management, necessary to state fairly the results for the periods presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year.
The preparation of Condensed Consolidated Financial Statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
| Restated Condensed Consolidated Statements of Cash Flows and Other Reclassifications |
For the three months ended March 30, 2002, Cadence has restated its Statements of Cash Flows to include proceeds from the sale of receivables as a component of Cash Flows from Operating Activities rather than as a component of Cash Flows from Financing Activities, which is consistent with the guidance of Statement of Financial Accounting Standards, or SFAS, No. 95, “Statement of Cash Flows.” Certain other prior year condensed consolidated financial statements balances have been reclassified to conform to the 2003 presentation. Cadence does not consider such reclassifications significant.
NOTE 2. ACQUISITIONS
| Celestry Design Technologies, Inc. |
In January 2003, Cadence acquired Celestry Design Technologies, Inc., or Celestry, a privately-held developer of silicon modeling tools and full-chip circuit simulation technology. Cadence purchased Celestry to acquire key personnel and technology. The aggregate initial purchase price was $64.4 million, which included cash, 1.6 million shares of Cadence common stock issuable on the exercise of assumed options with a fair value of $9.3 million, and acquisition costs of $1.1 million. The purchase price and goodwill will increase if certain performance goals related to bookings and product development are achieved in the first and second years following the acquisition. The results of operations of the Celestry business and the estimated fair values of the assets acquired and liabilities assumed have been included in Cadence’s Condensed Consolidated Financial Statements from the date of acquisition. Comparative pro forma financial information for the Celestry acquisition has not been presented because the results of operations were not material to Cadence’s Condensed Consolidated Financial Statements.
6
The following table summarizes the preliminary allocation of the purchase price for Celestry and the estimated amortization period for the acquired intangibles:
| (In thousands) | |||||||
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Current assets
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$ | 18,253 | |||||
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Property, plant and equipment, net
|
871 | ||||||
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Acquired intangibles:
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Existing technology (four-year weighted-average
useful life)
|
15,700 | ||||||
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Maintenance agreements (four-year
weighted-average useful life)
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4,700 | ||||||
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Patents (four-year weighted-average useful life)
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1,900 | ||||||
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In-process technology
|
1,700 | ||||||
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Trademarks (one-year weighted-average useful life)
|
700 | ||||||
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Goodwill
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39,764 | ||||||
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Total assets acquired
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83,588 | ||||||
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Current liabilities
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11,749 | ||||||
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Other long-term liabilities
|
7,434 | ||||||
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Total liabilities assumed
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19,183 | ||||||
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Net assets acquired
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$ | 64,405 | |||||
The $1.7 million of purchase price allocated to acquired in-process technology was determined, in part, by a third party appraiser through established valuation techniques. The acquired in-process technology was immediately expensed because technological feasibility had not been established and no future alternative use exists. The in-process technology write-off is a component of operating expenses in the Condensed Consolidated Statement of Operations. The weighted-average useful life of the acquired intangibles, excluding in-process technology, is approximately four years.
The $39.8 million of goodwill was assigned to the Product segment. The goodwill is not expected to be deductible for tax purposes.
| Acquisition Related Earnouts |
During the three months ended March 29, 2003, Cadence issued 0.5 million shares, valued at $4.5 million, related to the achievement of certain performance goals related to bookings, product development and employee retention resulting from acquisitions. Cadence recorded additional goodwill as a result of the issuance of these shares. The goodwill is not expected to be deductible for tax purposes.
NOTE 3. INVENTORIES
Cadence’s inventories include hardware parts and components for complex computer systems that emulate the performance and operation of integrated circuits, or IC’s, and electronic systems.
A summary of inventories follows:
| March 29, | December 28, | ||||||||
| 2003 | 2002 | ||||||||
| (In thousands) | |||||||||
|
Raw materials
|
$ | 8,389 | $ | 9,289 | |||||
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Work in process
|
371 | 325 | |||||||
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Total inventories
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$ | 8,760 | $ | 9,614 | |||||
NOTE 4. LONG-TERM NON-MARKETABLE INVESTMENT SECURITIES
Cadence’s long-term non-marketable investment securities are carried at cost and are included in Other Assets in the Condensed Consolidated Balance Sheets. If Cadence determines that an other-than-temporary decline in value exists
7