Business Wire | Jul 20, 2020 04:05PM EDT

Cadence Reports Second Quarter 2020 Financial Results

Jul. 20, 2020

SAN JOSE, Calif.--(BUSINESS WIRE)--Jul. 20, 2020--Cadence Design Systems, Inc. (Nasdaq: CDNS) today announced results for the second quarter of 2020.

Cadence reported second quarter 2020 revenue of $638 million, compared to revenue of $580 million reported for the same period in 2019. On a GAAP basis, Cadence achieved operating margin of 24 percent and recognized net income of $131 million, or $0.47 per share on a diluted basis, in the second quarter of 2020, compared to operating margin of 23 percent and net income of $107 million, or $0.38 per share on a diluted basis, for the same period in 2019.

Using the non-GAAP measure defined below, operating margin for the second quarter of 2020 was 35 percent and net income was $185 million, or $0.66 per share on a diluted basis, compared to operating margin of 34 percent and net income of $161 million, or $0.57 per share on a diluted basis, for the same period in 2019.

"Cadence has adapted well to the difficult environment, continuing to innovate and delight customers, while delivering outstanding results for shareholders," said Lip-Bu Tan, chief executive officer. "While these are uncertain times, design activity remains strong and our Intelligent System Design strategy has us well positioned to take advantage of these opportunities. To ensure business continuity, we are further investing in infrastructure and collaboration platforms to maintain high levels of productivity and innovation."

"Cadence exceeded all of its key financial metrics for the second quarter and we are raising our outlook for the year to 11% revenue growth and 33% non-GAAP operating margin," said John Wall, senior vice president and chief financial officer. "Cadence operated from approximately 50 sites across the globe before the pandemic, and we are now operating from a distributed network of more than 8,000 homes. We are blessed to have such a strong and versatile global leadership group. I am very impressed and thankful for how our team is not only rising to the challenge but thriving in this environment."

CFO Commentary

Commentary on the second quarter 2020 financial results by John Wall, senior vice president and chief financial officer, is available at www.cadence.com/cadence/investor_relations.

Business Outlook

For the third quarter of 2020, the company expects total revenue in the range of $630 million to $650 million. Third quarter GAAP operating margin is expected to be approximately 22 percent and GAAP net income per diluted share is expected to be in the range of $0.49 to $0.51. Using the non-GAAP measure defined below, operating margin is expected to be approximately 32 percent and net income per diluted share is expected to be in the range of $0.59 to $0.61.

For 2020, the company expects total revenue in the range of $2.585 billion to $2.615 billion. On a GAAP basis, operating margin is expected to be approximately 22 percent and GAAP net income per diluted share for 2020 is expected to be in the range of $1.84 to $1.90. Using the non-GAAP measure defined below, operating margin for 2020 is expected to be approximately 33 percent and net income per diluted share for 2020 is expected to be in the range of $2.50 to $2.56.

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

Audio Webcast Scheduled

Lip-Bu Tan, chief executive officer, and John Wall, senior vice president and chief financial officer, will host the second quarter 2020 financial results audio webcast today, July 20, 2020, 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 July 20, 2020 at 5 p.m. (Pacific) and ending September 11, 2020 at 5 p.m. (Pacific). Webcast access is available at www.cadence.com/cadence/investor_relations.

About Cadence

Cadence is a pivotal leader in electronic design, building upon more than 30 years of computational software expertise. The company applies its underlying Intelligent System Design strategy to deliver software, hardware and IP that turn design concepts into reality. Cadence customers are the world's most innovative companies, delivering extraordinary electronic products from chips to boards to systems for the most dynamic market applications including consumer, hyperscale computing, 5G communications, automotive, aerospace, industrial and health. For six years in a row, Fortune Magazine has named Cadence one of the 100 Best Companies to Work For. Learn more at cadence.com.

(c) 2020 Cadence Design Systems, Inc. All rights reserved worldwide. Cadence, the Cadence logo and the other Cadence marks found at www.cadence.com/go/trademarks are trademarks or registered trademarks of Cadence Design Systems, Inc. All other trademarks are the property of their respective owners.

This document includes forward-looking statements which are based on current expectations and preliminary assumptions that are subject to factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These forward-looking statements 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 highly competitive industries in which it operates; (ii) the success of Cadence's efforts to maintain and improve operational efficiency and growth; (iii) the mix of products and services sold, the timing of orders and the ability to develop, install or deliver Cadence's products or services; (iv) change in customer demands that could result in delays in purchases, development, installations or deliveries of Cadence's products or services, including those resulting from consolidation, restructurings and other operational efficiency improvements of Cadence's customers; (v) economic and industry conditions, including that of the semiconductor and electronics industries, government regulations and trade restrictions; (vi) capital expenditure requirements, legislative or regulatory requirements, changes in tax laws, interest rates, currency exchange rate fluctuations and Cadence's ability to access capital and debt markets; (vii) the acquisition of other companies or technologies or the failure to successfully integrate and operate them; (viii) events that affect cash flow, liquidity, or reserves, or settlement assumptions Cadence may take from time to time with respect to accounts receivable, taxes and tax examinations, litigation or other matters; (ix) the effects of any litigation or other proceedings to which Cadence is or may become a party; and (x) the duration, severity and effects of the COVID-19 pandemic and containment measures on Cadence, its employees, and its suppliers and customers, which may also have the effect of heightening the other risks described in this paragraph. In addition, the timing and amount of Cadence's repurchase of its common stock under the authorizations will be subject to business and market conditions, corporate and regulatory requirements, stock price, acquisition opportunities and other factors.

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

GAAP to Non-GAAP Reconciliation

Non-GAAP financial measures should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with generally accepted accounting principles, or GAAP. 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. Investors are also encouraged to look at the GAAP results as the best measure of financial performance.

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. Non-GAAP net income is calculated by Cadence management by taking GAAP net income and excluding, as applicable, amortization of intangible assets, stock-based compensation expense, acquisition and integration-related costs including retention expenses, investment gains or losses, income or expenses related to Cadence's non-qualified deferred compensation plan, restructuring, executive severance and other significant items not directly related to Cadence's core business operations, and the income tax effect of non-GAAP pre-tax adjustments.

Cadence management uses non-GAAP net income because it excludes items that are generally not directly related to the performance of Cadence's core business operations and therefore provides supplemental information to Cadence management and investors regarding the performance of the business operations, facilitates comparisons to the historical operating results and allows the review of Cadence's business from the same perspective as Cadence management, including forecasting and budgeting.

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

Operating Margin Reconciliation Three Months Ended

June June 27, 29, 2020 2019

(unaudited)

GAAP operating margin as a percent of total revenue 24 % 23 %

Reconciling items to non-GAAP operating margin as a percent of total revenue:

Amortization of acquired intangibles 2 % 3 %

Stock-based compensation expense 7 % 8 %

Non-qualified deferred compensation expenses 1 % 0 %

Restructuring and other credits 0 % 0 %

Acquisition and integration-related costs 1 % 0 %

Special charges 0 % 0 %

Non-GAAP operating margin as a percent of total revenue 35 % 34 %

Net Income Reconciliation Three Months Ended

June 27, June 29, 2020 2019

(unaudited)

(in thousands)

Net income on a GAAP basis $ 131,288 $ 107,235

Amortization of acquired intangibles 16,074 14,458

Stock-based compensation expense 46,907 44,257

Non-qualified deferred compensation expenses 3,618 862

Restructuring and other credits (275 ) (313 )

Acquisition and integration-related costs 5,315 1,889

Special charges 270 -

Other income or expense related to investments and (2,797 ) 2,042 non-qualified deferred compensation plan assets*

Income tax effect of non-GAAP adjustments (15,786 ) (9,331 )

Net income on a non-GAAP basis $ 184,614 $ 161,099

Includes, as applicable, equity in losses or income from investments,* write-down of investments, gains or losses on investments and gains or losses on non-qualified deferred compensation plan assets recorded in other income or expense.

Diluted Net Income Per Share Reconciliation Three Months Ended

June 27, June 29, 2020 2019

(unaudited)

(in thousands, except per share data)

Diluted net income per share on a GAAP basis $ 0.47 $ 0.38

Amortization of acquired intangibles 0.06 0.05

Stock-based compensation expense 0.17 0.16

Non-qualified deferred compensation expenses 0.01 -

Restructuring and other credits - -

Acquisition and integration-related costs 0.02 -

Special charges - -

Other income or expense related to investments and (0.01 ) 0.01 non-qualified deferred compensation plan assets*

Income tax effect of non-GAAP adjustments (0.06 ) (0.03 )

Diluted net income per share on a non-GAAP basis $ 0.66 $ 0.57

Shares used in calculation of diluted net income 279,080 281,054 per share - GAAP**

Shares used in calculation of diluted net income 279,080 281,054 per share - non-GAAP**

Includes, as applicable, equity in losses or income from investments,* write-down of investments, gains or losses on investments and gains or losses on non-qualified deferred compensation plan assets recorded in other income or expense.

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.

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 September 11, 2020, Cadence will observe a Quiet Period during which the business outlook as provided in this press release and the most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q no longer constitute Cadence's current expectations. During the Quiet Period, the business outlook in these documents should be considered historical, speaking as of prior to the Quiet Period only and not subject to any update by Cadence. 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 Cadence's third quarter 2020 earnings release is published, which is currently scheduled for October 19, 2020.

Cadence Design Systems, Inc.Condensed Consolidated Balance SheetsJune 27, 2020 and December 28, 2019(In thousands)(Unaudited) June 27, 2020 December 28, 2019 Current assets:Cash and cash equivalents $ 1,189,186 $ 705,210

Receivables, net 312,758 304,546

Inventories 43,924 55,802

Prepaid expenses and other 93,915 103,785

Total current assets 1,639,783 1,169,343

Property, plant and equipment, net 282,738 275,855

Goodwill 778,857 661,856

Acquired intangibles, net 242,543 172,375

Deferred taxes 704,882 732,367

Other assets 350,694 345,429

Total assets $ 3,999,497 $ 3,357,225

Current liabilities:Revolving credit facility $ 350,000 $ -

Accounts payable and accrued liabilities 306,948 316,908

Current portion of deferred revenue 494,939 355,483

Total current liabilities 1,151,887 672,391

Long-term liabilities:Long-term portion of deferred revenue 87,437 73,400

Long-term debt 346,394 346,019

Other long-term liabilities 157,148 162,521

Total long-term liabilities 590,979 581,940

Stockholders' equity 2,256,631 2,102,894

Total liabilities and stockholders' equity $ 3,999,497 $ 3,357,225

Cadence Design Systems, Inc.Condensed Consolidated Income StatementsFor the Three and Six Months Ended June 27, 2020 and June 29, 2019(In thousands, except per share amounts)(Unaudited) Three Months Ended Six Months Ended June 27, June 29, June 27, 2020 June 29, 2019 2020 2019 Revenue:Product and maintenance $ 601,356 $ 548,028 $ 1,183,055 $ 1,091,546

Services 37,062 32,391 73,320 65,615

Total revenue 638,418 580,419 1,256,375 1,157,161

Costs and expenses:Cost of product and 55,669 43,388 111,115 93,910 maintenanceCost of services 19,546 18,081 38,563 38,144

Marketing and sales 120,476 116,208 246,220 233,038

Research and 250,821 231,814 492,489 460,024 developmentGeneral and 35,641 34,407 69,233 64,509 administrativeAmortization of 4,590 3,159 8,796 6,467 acquired intangiblesRestructuring and other (275 ) (313 ) (1,342 ) (1,002 )credits Total costs and 486,468 446,744 965,074 895,090 expenses Income from operations 151,950 133,675 291,301 262,071

Interest expense (5,914 ) (4,976 ) (10,551 ) (10,367 )

Other income (expense), 4,630 (110 ) 96 5,131 net Income before provision 150,666 128,589 280,846 256,835 for income taxes Provision for income 19,378 21,354 25,570 29,045 taxes Net income $ 131,288 $ 107,235 $ 255,276 $ 227,790

Net income per share - $ 0.48 $ 0.39 $ 0.93 $ 0.83 basic Net income per share - $ 0.47 $ 0.38 $ 0.91 $ 0.81 diluted Weighted average common 273,432 273,159 273,488 273,155 shares outstanding -basic Weighted average common 279,080 281,054 279,207 280,877 shares outstanding -diluted

Cadence Design Systems, Inc.Condensed Consolidated Statements of Cash FlowsFor the Six Months Ended June 27, 2020 and June 29, 2019(In thousands)(Unaudited) Six Months Ended

June 27, June 29,

2020 2019

Cash and cash equivalents at beginning of period $ 705,210 $ 533,298

Cash flows from operating activities:Net income 255,276 227,790

Adjustments to reconcile net income to net cashprovided by operating activities:Depreciation and amortization 69,902 61,197

Amortization of debt discount and fees 512 497

Stock-based compensation 93,389 86,510

Loss on investments, net 4,036 259

Deferred income taxes (1,609 ) (8,159 )

Provisions for losses (recoveries) on receivables 922 (386 )

ROU asset amortization and change in operating 1,502 2,504 lease liabilitiesOther non-cash items 296 160

Changes in operating assets and liabilities, netof effect of acquired businesses:Receivables (2,497 ) 63,876

Inventories 11,020 (25,689 )

Prepaid expenses and other 9,910 33,055

Other assets (17,687 ) 2,547

Accounts payable and accrued liabilities (11,141 ) (34,670 )

Deferred revenue 148,508 19,707

Other long-term liabilities 504 2,576

Net cash provided by operating activities 562,843 431,774

Cash flows from investing activities:Purchases of non-marketable investments - (33,717 )

Proceeds from the sale of non-marketable - 2,952 investmentsPurchases of property, plant and equipment (43,535 ) (30,562 )

Cash paid in business combinations, net of cash (195,118 ) (338 )acquiredNet cash used for investing activities (238,653 ) (61,665 )

Cash flows from financing activities:Proceeds from revolving credit facility 350,000 150,000

Payment on revolving credit facility - (250,000 )

Proceeds from issuance of common stock 43,667 32,855

Stock received for payment of employee taxes on (53,657 ) (45,698 )vesting of restricted stockPayments for repurchases of common stock (175,036 ) (156,120 )

Net cash provided by (used for) financing 164,974 (268,963 )activities Effect of exchange rate changes on cash and cash (5,188 ) (1,029 )equivalents Increase in cash and cash equivalents 483,976 100,117

Cash and cash equivalents at end of period $ 1,189,186 $ 633,415

Cadence Design Systems, Inc.(Unaudited) Revenue Mix by Geography (% ofTotal Revenue) 2019 2020

GEOGRAPHY Q1 Q2 Q3 Q4 Year Q1 Q2 Americas 44 % 42 % 44 % 46 % 44 % 43 % 44 %

China 10 % 12 % 10 % 9 % 10 % 13 % 12 %

Other Asia 19 % 19 % 21 % 20 % 20 % 18 % 19 %

Europe, Middle East and Africa 18 % 20 % 18 % 18 % 18 % 19 % 18 %

Japan 9 % 7 % 7 % 7 % 8 % 7 % 7 %

Total 100 % 100 % 100 % 100 % 100 % 100 % 100 %

Revenue Mix by ProductCategory (% of Total Revenue) 2019 2020

PRODUCT CATEGORY Q1 Q2 Q3 Q4 Year Q1 Q2 Custom IC Design and 25 % 26 % 26 % 25 % 25 % 25 % 24 %SimulationDigital IC Design and Signoff 30 % 31 % 30 % 29 % 30 % 29 % 28 %

Functional Verification, 24 % 22 % 20 % 24 % 23 % 23 % 24 %including Emulation andPrototyping HardwareIP 12 % 11 % 15 % 13 % 13 % 14 % 14 %

System Interconnect and 9 % 10 % 9 % 9 % 9 % 9 % 10 %AnalysisTotal 100 % 100 % 100 % 100 % 100 % 100 % 100 %

Cadence Design Systems, Inc.Impact of Non-GAAP Adjustments on Forward Looking Operating MarginAs of July 20, 2020(Unaudited) Three Months Year Ending Ending September 26, January 2, 2020 2021 Forecast Forecast GAAP operating margin as a percent of total revenue ~22% ~22%



Reconciling items to non-GAAP operating margin as a percent of total revenue:Amortization of acquired intangibles 2% 2%

Stock-based compensation expense 7% 8%

Acquisition and integration-related costs 1% 1%



Non-GAAP operating margin as a percent of total ~32% ~33%revenue?

? The non-GAAP measures presented in the table above should not be considered a substitute for financial results and measures determined or calculated in accordance with GAAP.

Cadence Design Systems, Inc.Impact of Non-GAAP Adjustments on Forward Looking Diluted Net Income Per ShareAs of July 20, 2020(Unaudited) Three Year Months Ending Ending September January 26, 2020 2, 2021 Forecast Forecast $0.49 to $1.84 toDiluted net income per share on a GAAP basis $0.51 $1.90



Amortization of acquired intangibles 0.06 0.23

Stock-based compensation expense 0.16 0.70

Non-qualified deferred compensation expenses (credits) - -

Restructuring and other charges (credits) - -

Acquisition and integration-related costs 0.02 0.07

Other income or expense related to investments and - 0.02non-qualified deferred compensation plan assets*Income tax effect of non-GAAP adjustments (0.14) (0.36)



$0.59 to $2.50 toDiluted net income per share on a non-GAAP basis? $0.61 $2.56

Cadence Design Systems, Inc.Impact of Non-GAAP Adjustments on Forward Looking Net IncomeAs of July 20, 2020(Unaudited) Three Year Months Ending Ending September January 26, 2020 2, 2021($ in millions) Forecast Forecast $138 to $516 toNet income on a GAAP basis $144 $533



Amortization of acquired intangibles 16 64

Stock-based compensation expense 45 197

Non-qualified deferred compensation expenses (credits) - (1)

Restructuring and other charges (credits) - (1)

Acquisition and integration-related costs 5 19

Other income or expense related to investments and 1 6non-qualified deferred compensation plan assets*Income tax effect of non-GAAP adjustments (40) (100)



$165 to $700 toNet income on a non-GAAP basis? $171 $717

? The non-GAAP measures presented in the table above should not be considered a substitute for financial results and measures determined or calculated in accordance with GAAP.

Includes, as applicable, equity in losses or income from investments,* write-down of investments, gains or losses on investments and gains or losses on non-qualified deferred compensation plan assets recorded in other income or expense.

CDNS-IR

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