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CADENCE DESIGN SYSTEMS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[October 20, 2014]

CADENCE DESIGN SYSTEMS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) 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, or this Quarterly Report, and in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 28, 2013. 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 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, 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," "Disclosures About Market Risk," and "Liquidity and Capital Resources" sections contained in this Quarterly Report, and the risks discussed in our other Securities Exchange Commission, or SEC, filings, which identify important risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements.



We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this 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 develop solutions that our customers use to design increasingly small and complex integrated circuits, or ICs, and electronic devices. Our solutions are designed to help our customers reduce the time to bring an IC or electronic device to market and to reduce their design, development and manufacturing costs. Our product offerings include electronic design automation, or EDA, software, emulation hardware, and two categories of intellectual property, or IP, commonly referred to as verification IP, or VIP, and design IP. We provide maintenance for our software, emulation hardware, and IP product offerings. We also provide engineering services related to methodology, education, hosted design solutions and design services for advanced ICs and development of custom IP. These services help our customers manage and accelerate their electronics product development processes.


Our customers include semiconductor and electronics systems companies that deliver a wide range of electronics products in a number of market segments such as mobile devices, communications, cloud and data center infrastructure, personal computers and other devices. The renewal of many of our customer contracts and our customers' decisions to make new purchases from us are dependent upon our customers' commencement of new design projects. As a result, our business is significantly influenced by our customers' business outlook and investment in new designs and products.

The markets our customers serve are sensitive to product price, performance and the time it takes to bring their products to market. In order to be competitive and profitable in these markets, our customers demand high levels of productivity from their design teams, better predictability in shorter development schedules, high performance products and lower development and manufacturing costs. Semiconductor and electronics systems companies are responding to these challenges and users' demand for increased functionality and smaller devices by combining subsystems - such as radio frequency, or RF, wireless communication, signal processing, microprocessors and memory controllers - onto a single silicon chip, creating a system-on-chip, or SoC, or combining multiple chips into a single chip package in a format referred to as system-in-package, or SiP. The trend toward subsystem integration has required these chip makers to find solutions to challenges previously addressed by system companies, such as verifying system-level functionality and hardware-software interoperability, and has driven the need for incorporation of preverified commercial IP into these systems.

Our strategy is to provide our customers with the ability to address the broad range of issues that arise at the silicon, SoC, and system levels. Our offerings address many of the challenges associated with developing unique silicon circuitry, integrating that circuitry with design IP developed by us or third parties to create SoCs, designing the packaging and board-level interconnect which links ICs and SoCs, and combining the resulting hardware with software to create electronic systems.

21 -------------------------------------------------------------------------------- Significant issues that our customers face in creating their products include reducing power consumption, manufacturing microscopic circuitry, verifying device functionality and achieving technical performance targets, all while meeting aggressive time-to-market and cost requirements. Providers of EDA and IP solutions must deliver products that address these technical challenges while improving the productivity, predictability, reliability and profitability of the design processes and products of their customers.

Our products are engineered to improve our customers' design productivity and design quality by providing a comprehensive set of EDA solutions, emulation hardware and a differentiated portfolio of design IP and VIP. Product and maintenance revenue includes fees from licenses to use our software and IP, from sales and leases of our emulation hardware products and from royalties generated by our customers' shipment of their products containing certain types of our IP.

We combine our products and technologies into categories related to major design activities: • Functional Verification, including Emulation Hardware; • Digital IC Design and Signoff; • Custom IC Design; • System Interconnect and Analysis; and • IP.

We have realigned these categories in the current year to better reflect our business objectives. As a result of the realignment, our Design for Manufacturing, or DFM, products are now categorized together with Digital IC Design and Signoff. We have also established a stand-alone category for our IP offerings, which includes design IP and VIP. The product category that was formerly called System Interconnect Design has been renamed System Interconnect and Analysis, to better reflect the growing system analysis component in this category. All prior periods presented have been conformed to the current period presentation.

The products and technologies included in these categories are combined with ready-to-use packages of technologies assembled from our broad portfolio of IP and other associated components that provide comprehensive solutions for low power, mixed signal and designs at smaller geometries referred to as advanced process nodes, as well as popular designs based on design IP owned and licensed by other companies such as ARM Holdings plc. These solutions are marketed to users who specialize in areas such as system design and verification, functional verification, logic design, digital implementation, custom IC design and verification, and printed circuit board, or PCB, IC package and SiP design and analysis.

The major Cadence® design and verification platforms are branded as Incisive® functional verification, Virtuoso® custom IC design, Encounter® digital IC design and Allegro® system interconnect design. 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 28, 2013.

During the second quarter of fiscal 2013, we acquired Tensilica, Inc., or Tensilica, a privately held provider of configurable dataplane processing units, and Cosmic Circuits Private Limited, or Cosmic, a privately held provider of intellectual property used in system-on-chip design. These acquisitions, along with other acquired technology and internal development, expanded our design IP offerings, enabling us to offer customized IP as well as broader analog and mixed signal IP solutions to our customers.

During the first quarter of fiscal 2014, we acquired Forte Design Systems, a provider of SystemC-based high-level synthesis, or HLS, and arithmetic IP. During the second quarter of fiscal 2014, we acquired Jasper Design Automation, Inc., a leading provider of high-level formal analysis solutions.

These acquisitions expanded the capabilities and differentiation of the Cadence System Development Suite, strengthening our offerings for the fast development and verification of advanced design IP.

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 heading "Results of Operations" and "Liquidity and Capital Resources." 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. Historically, our assumptions, judgments and estimates relative to our critical accounting estimates have not differed materially from actual results. 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 28, 2013.

22 -------------------------------------------------------------------------------- New Accounting Standard On May 28, 2014, the Financial Accounting Standards Board issued a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under United States generally accepted accounting principles. The updated standard will become effective for us in the first quarter of fiscal 2017 and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

Results of Operations Financial results for the three and nine months ended September 27, 2014, as compared to the three and nine months ended September 28, 2013, reflect increases in: • our product and maintenance revenue, primarily because of increased business levels and increased revenue recognized from bookings in prior periods and incremental revenue from our acquisitions; • product and maintenance related costs consisting of costs associated with our emulation hardware and amortization of technology-related and maintenance-related acquired intangibles; • employee-related costs, primarily consisting of costs related to hiring additional employees, increased compensation for existing employees and incremental costs related to employees added from our fiscal 2014 and 2013 acquisitions; • stock-based compensation; • severance and other termination costs primarily associated with a voluntary early retirement program we offered to certain of our employees during the nine months ended September 27, 2014; • restructuring charges due to restructuring activities initiated during the three months ended September 27, 2014; • amortization of acquired intangibles resulting from our fiscal 2014 and 2013 acquisitions; and • our quarterly and year to date provisions for income taxes.

Revenue We primarily generate revenue from licensing our software and IP, selling or leasing our emulation hardware technology, providing maintenance for our software, emulation 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, emulation hardware and IP products in the bookings executed in any given period and whether the revenue for such bookings is recognized over multiple periods or up front, upon completion of delivery.

We seek to achieve a consistent revenue mix such that approximately 90% of our revenue is recurring in nature, and the remainder of the resulting revenue is recognized up-front, upon completion of delivery. Our ability to achieve this mix in any single fiscal period may be impacted primarily by hardware sales, because revenue for hardware sales is generally recognized up front in the period in which delivery is completed.

For an additional description of the impact of emulation hardware sales on the timing of revenue recognition, see the discussion in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading "Critical Accounting Estimates - Revenue Recognition" in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

Revenue by Period The following table shows our revenue for the three months ended September 27, 2014 and September 28, 2013 and the change in revenue between periods: Three Months Ended Change September 27, September 28, 2014 2013 Amount Percentage (In millions, except percentages) Product and maintenance $ 374.1 $ 341.6 $ 32.5 10 % Services 26.4 25.0 1.4 5 % Total revenue $ 400.5 $ 366.6 $ 33.9 9 % 23--------------------------------------------------------------------------------The following table shows our revenue for the nine months ended September 27, 2014 and September 28, 2013 and the change in revenue between periods: Nine Months Ended Change September 27, September 28, 2014 2013 Amount Percentage (In millions, except percentages) Product and maintenance $ 1,085.9 $ 1,007.9 $ 78.0 8 % Services 71.9 75.5 (3.6 ) (5 )% Total revenue $ 1,157.8 $ 1,083.4 $ 74.4 7 % Product and maintenance revenue increased during the three and nine months ended September 27, 2014, as compared to the three and nine months ended September 28, 2013, primarily because of increased business levels, increased revenue recognized from bookings in prior periods and incremental revenue recognized from our fiscal 2013 acquisitions. Services revenue may fluctuate from period to period based on demand for, and our resources to fulfill, our services and customized IP offerings.

No single customer accounted for 10% or more of total revenue during the three and nine months ended September 27, 2014 or September 28, 2013.

Revenue by Product Group The following table shows the percentage of revenue contributed by each of our five product groups for the past five consecutive quarters: Three Months Ended September 28, December 28, March 29, June 28, September 27, 2013 2013 2014 2014 2014 Functional Verification, including Emulation Hardware 24 % 25 % 23 % 21 % 23 % Digital IC Design and Signoff 29 % 29 % 30 % 30 % 29 % Custom IC Design 28 % 26 % 27 % 28 % 27 % System Interconnect and Analysis 10 % 10 % 10 % 11 % 10 % IP 9 % 10 % 10 % 10 % 11 % Total 100 % 100 % 100 % 100 % 100 % As described in Note 2 in the notes to consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013, 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.

Revenue by Geography Three Months Ended Change September 27, September 28, 2014 2013 Amount Percentage (In millions, except percentages) United States $ 179.9 $ 168.1 $ 11.8 7 % Other Americas 6.1 7.2 (1.1 ) (15 )% Asia 89.6 73.1 16.5 23 % Europe, Middle East and Africa 81.9 72.4 9.5 13 % Japan 43.0 45.8 (2.8 ) (6 )% Total revenue $ 400.5 $ 366.6 $ 33.9 9 % 24-------------------------------------------------------------------------------- Nine Months Ended Change September 27, September 28, 2014 2013 Amount Percentage (In millions, except percentages) United States $ 505.1 $ 476.5 $ 28.6 6 % Other Americas 17.9 17.4 0.5 3 % Asia 264.9 215.6 49.3 23 % Europe, Middle East and Africa 241.5 229.1 12.4 5 % Japan 128.4 144.8 (16.4 ) (11 )% Total revenue $ 1,157.8 $ 1,083.4 $ 74.4 7 % Most of our revenue is transacted in the United States dollar. However, certain revenue transactions are denominated in foreign currencies, primarily the Japanese yen, and we recognize reduced revenue from those contracts in periods when the Japanese yen weakens in value against the United States dollar and additional revenue from those contracts in periods when the Japanese yen strengthens against the United States dollar. 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." Revenue for Asia increased during the three and nine months ended September 27, 2014, as compared to the three and nine months ended September 28, 2013, primarily due to increases in revenue from our software business and emulation hardware installations.

Revenue for Japan decreased during the three and nine months ended September 27, 2014, as compared to the three and nine months ended September 28, 2013, primarily due to business conditions facing our Japanese customers. Because of these conditions, we expect lower revenue for Japan during fiscal 2014, as compared to fiscal 2013.

For the primary factors contributing to our increase in revenue in other geographies, see the general description under "Revenue by Period," above.

Revenue by Geography as a Percent of Total Revenue Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2014 2013 2014 2013 United States 45 % 46 % 44 % 44 % Other Americas 1 % 2 % 1 % 2 % Asia 22 % 20 % 23 % 20 % Europe, Middle East and Africa 21 % 20 % 21 % 21 % Japan 11 % 12 % 11 % 13 % Total 100 % 100 % 100 % 100 % Cost of Revenue Three Months Ended Change September 27, September 28, 2014 2013 Amount Percentage (In millions, except percentages) Cost of product and maintenance $ 37.0 $ 32.5 $ 4.5 14 % Cost of services 17.1 17.2 (0.1 ) (1 )% 25-------------------------------------------------------------------------------- Nine Months Ended Change September 27, September 28, 2014 2013 Amount Percentage (In millions, except percentages) Cost of product and maintenance $ 116.9 $ 90.5 $ 26.4 29 % Cost of services 48.7 50.7 (2.0 ) (4 )% Cost of Product and Maintenance Cost of product and maintenance includes costs associated with the sale and lease of our emulation hardware and licensing of our software and IP products, certain employee salary, benefits and other employee-related costs, cost of our customer support services, amortization of technology-related and maintenance-related acquired intangibles, as well as the costs of technical documentation and royalties payable to third-party vendors. Costs associated with our emulation hardware products include materials, assembly and overhead.

These additional hardware manufacturing costs make our cost of emulation hardware product 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 27, September 28, 2014 2013 Amount Percentage (In millions, except percentages) Product and maintenance-related costs $ 26.9 $ 25.3 $ 1.6 6 % Amortization of acquired intangibles 10.1 7.2 2.9 40 % Total cost of product and maintenance $ 37.0 $ 32.5 $ 4.5 14 % Nine Months Ended Change September 27, September 28, 2014 2013 Amount Percentage (In millions,except percentages) Product and maintenance-related costs $ 90.6 $ 73.7 $ 16.9 23 % Amortization of acquired intangibles 26.3 16.8 9.5 57 % Total cost of product and maintenance $ 116.9 $ 90.5 $ 26.4 29 % Cost of product and maintenance depends primarily upon our emulation hardware product sales and gross margins in any given period. Employee salary, benefits and other employee-related costs, and 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, also impact cost of product and maintenance.

The changes in product and maintenance-related costs for the three and nine months ended September 27, 2014, as compared to the three and nine months ended September 28, 2013, were due to the following: Change Three Months Ended Nine Months Ended (In millions) Emulation hardware costs $ 1.6 $ 17.4 Other items - (0.5 ) $ 1.6 $ 16.9 26-------------------------------------------------------------------------------- Emulation hardware costs increased during the nine months ended September 27, 2014, as compared to the nine months ended September 28, 2013, due to a higher volume of emulation hardware products sold. Gross margins on our emulation hardware products may fluctuate based on customer pricing strategies, product competition and product life cycle. Gross margins on our emulation hardware products decreased during the three and nine months ended September 27, 2014, as compared to the three and nine months ended September 28, 2013. We expect lower gross margins on the sale of our emulation hardware products for fiscal 2014, as compared to fiscal 2013, primarily due to an increasingly competitive environment for emulation hardware.

Amortization of acquired intangibles included in cost of product and maintenance increased during the three months ended September 27, 2014, as compared to the three months ended September 28, 2013, primarily due to the increase in amortization of intangible assets associated with our fiscal 2014 acquisitions.

Amortization of acquired intangibles included in cost of product and maintenance increased during the nine months ended September 27, 2014, as compared to the nine months ended September 28, 2013, primarily due to the increase in amortization of intangible assets associated with our fiscal 2014 and 2013 acquisitions. We expect amortization of acquired intangibles to increase for the remainder of fiscal 2014, as compared to the same period in fiscal 2013, primarily due to amortization of intangible assets recorded in connection with our fiscal 2014 acquisitions. For an additional description of our expected amortization of intangible assets, see Note 4 of the notes to condensed consolidated financial statements.

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 may cause our operating expenses to fluctuate include changes in the number of employees due to acquisitions and hiring, foreign exchange rates, stock-based compensation and the impact of our variable compensation programs that are driven by overall operating results.

Our employee salary and other compensation-related costs increased during the three and nine months ended September 27, 2014, as compared to the three and nine months ended September 28, 2013, primarily due to hiring of additional employees for our research and development and sales activities, increased compensation for existing employees and incremental costs related to employees added from our fiscal 2014 and 2013 acquisitions.

During the second quarter of fiscal 2014, we initiated a voluntary early retirement program. The program was offered to certain eligible employees in North America and Japan and enrollment for those employees was completed prior to September 27, 2014. We recorded costs associated with this program of approximately $0.5 million and $9.7 million in our operating expenses during the three and nine months ended September 27, 2014, respectively. The increase in operating expenses associated with this program is included in the change in severance and other termination costs presented in the analysis of our operating expenses below.

During the third quarter of fiscal 2014, we initiated restructuring activities and recorded restructuring and other charges of approximately $11.0 million related to severance payments, severance-related benefits, costs associated with outplacement services and impairment of certain property plant and equipment.

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." We expect our total operating expenses to increase during the remainder of fiscal 2014, as compared to the same period in fiscal 2013, primarily due to the addition of employees through our fiscal 2014 acquisitions and hiring of research and development and sales personnel, partially offset by reductions in expense as a result of our restructuring activities.

27 --------------------------------------------------------------------------------Our operating expenses for the three and nine months ended September 27, 2014 and September 28, 2013 were as follows: Three Months Ended Change September 27, September 28, 2014 2013 Amount Percentage (In millions, except percentages) Marketing and sales $ 100.4 $ 98.1 $ 2.3 2 % Research and development 148.7 138.1 10.6 8 % General and administrative 25.9 27.6 (1.7 ) (6 )% Total operating expenses $ 275.0 $ 263.8 $ 11.2 4 % Nine Months Ended Change September 27, September 28, 2014 2013 Amount Percentage (In millions, except percentages) Marketing and sales $ 297.3 $ 283.8 $ 13.5 5 % Research and development 447.9 398.6 49.3 12 % General and administrative 86.7 91.8 (5.1 ) (6 )% Total operating expenses $ 831.9 $ 774.2 $ 57.7 7 % Our operating expenses, as a percentage of total revenue, for the three and nine months ended September 27, 2014 and September 28, 2013 were as follows: Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2014 2013 2014 2013 Marketing and sales 25 % 27 % 26 % 26 % Research and development 37 % 38 % 39 % 37 % General and administrative 6 % 8 % 7 % 8 % Total operating expenses 68 % 73 % 72 % 71 % Marketing and Sales The changes in marketing and sales expense for the three and nine months ended September 27, 2014, as compared to the three and nine months ended September 28, 2013, were due to the following: Change Three Months Ended Nine Months Ended (In millions) Salary, benefits and other employee-related costs $ 3.2 $ 10.3 Stock-based compensation 1.3 4.1 Severance and other termination costs (0.5 ) 1.4 Facilities and other infrastructure costs (0.8 ) (2.1 ) Other items (0.9 ) (0.2 ) $ 2.3 $ 13.5 28--------------------------------------------------------------------------------Research and Development The changes in research and development expense for the three and nine months ended September 27, 2014, as compared to the three and nine months ended September 28, 2013, were due to the following: Change Three Months Nine Months Ended Ended (In millions) Salary, benefits and other employee-related costs $ 5.3 $ 29.4 Stock-based compensation 2.2 7.6 Severance and other termination costs - 5.9 Professional services 1.5 1.7 Other items 1.6 4.7 $ 10.6 $ 49.3 General and Administrative The changes in general and administrative expense for the three and nine months ended September 27, 2014, as compared to the three and nine months ended September 28, 2013, were due to the following: Change Three Months Ended Nine Months Ended (In millions) Professional services $ 1.5 $ (2.6 ) Severance and other termination costs 0.2 1.7 Salary, benefits and other employee-related costs 0.5 1.5 Facilities and other infrastructure costs (1.5 ) (2.1 ) Changes in fair value of contingent consideration (1.8 ) (2.1 ) Other items (0.6 ) (1.5 ) $ (1.7 ) $ (5.1 ) Restructuring and other charges We have initiated various restructuring plans to better align our resources with our business strategy, including a restructuring plan we initiated during the three months ended September 27, 2014, or the 2014 Restructuring Plan, and a restructuring plan we initiated during fiscal 2013. For an additional description of the 2014 Restructuring Plan, see Note 9 in the notes to condensed consolidated financial statements.

We recorded restructuring and other charges during the three months ended September 27, 2014 of $11.0 million related to the 2014 Restructuring Plan, including $8.3 million for severance and related benefits and $2.6 million related to the impairment of certain property plant and equipment.

Restructuring and other charges recorded during the three and nine months ended September 28, 2013 consisted primarily of severance and other benefits related to our restructuring activities initiated during fiscal 2013.

Because the restructuring charges and related benefits are derived from management's estimates made during the formulation of the restructuring plans, based on then-currently available information, our restructuring plans may not achieve the benefits anticipated on the timetable or at the level contemplated.

Demand for our products and services and, ultimately, our future financial performance, is difficult to predict with any degree of certainty. Accordingly, additional actions, including further restructuring of our operations, may be required in the future.

29 -------------------------------------------------------------------------------- Stock-based Compensation Stock-based compensation expense is recorded within the various components of our costs and expenses. Stock-based compensation included in operating expenses increased $4.3 million and $13.3 million during the three and nine months ended September 27, 2014, respectively, as compared to the three and nine months ended September 28, 2013, respectively, primarily because of higher grant-date fair values.

We expect stock-based compensation to increase during the remainder of fiscal 2014, as compared to the same period of fiscal 2013, because we expect that new awards granted during fiscal 2014 will have higher grant date fair values compared to grants made in previous years and because awards vesting during fiscal 2014 generally have higher grant date fair values than awards that vested during fiscal 2013.

Amortization of Acquired Intangibles Three Months Ended Change September 27, September 28, 2014 2013 Amount Percentage (In millions, except percentages) Amortization of acquired intangibles $ 6.3 $ 5.1 $ 1.2 24 % Nine Months Ended Change September 27, September 28, 2014 2013 Amount Percentage (In millions,except percentages) Amortization of acquired intangibles $ 17.1 $ 14.3 $ 2.8 20 % The increase in amortization of acquired intangibles during the three and nine months ended September 27, 2014, as compared to the three and nine months ended September 28, 2013, resulted from increased amortization of intangible assets related to our fiscal 2014 and fiscal 2013 acquisitions, which was partially offset by certain acquired intangibles becoming fully amortized.

We expect amortization of acquired intangibles to increase during the remainder of fiscal 2014, as compared to the same period in fiscal 2013, due to the amortization of intangible assets recorded in connection with our fiscal 2014 acquisitions. For an additional description of our expected amortization of intangible assets, see Note 4 of the notes to condensed consolidated financial statements.

Interest Expense Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2014 2013 2014 2013 (In millions) Contractual interest expense: 2013 Notes $ - $ 0.5 $ - $ 1.6 2015 Notes 2.3 2.3 6.9 6.9 Revolving credit facility 0.2 0.3 0.5 0.9 Amortization of debt discount: 2013 Notes - 1.7 - 5.0 2015 Notes 4.4 4.0 12.9 11.9 Amortization of deferred financing costs: 2013 Notes - 0.1 - 0.3 2015 Notes 0.6 0.6 1.8 1.6 Other - 0.1 0.1 0.2 Total interest expense $ 7.5 $ 9.6 $ 22.2 $ 28.4 30-------------------------------------------------------------------------------- We expect interest expense to increase during the remainder of fiscal 2014 after giving effect to our 4.375% Senior Notes due 2024, or our 2024 Notes. For an additional description of our 2024 Notes, see Note 16 of the notes to condensed consolidated financial statements.

Income Taxes The following table presents the provision for income taxes and the effective tax rate for the three and nine months ended September 27, 2014 and September 28, 2013: Three Months Ended Nine Months Ended September 27, September 28, September 27, September 28, 2014 2013 2014 2013 (In millions, except percentages) Provision for income taxes $ 8.6 $ 2.4 $ 20.4 $ 3.0 Effective tax rate 18.6 % 5.8 % 17.9 % 2.3 % Our provision for income taxes for the three and nine months ended September 27, 2014 primarily resulted from federal, state and foreign income taxes on our anticipated fiscal 2014 income. Our foreign earnings are generally subject to lower statutory tax rates than our United States earnings. In addition, our provision for income taxes for the three and nine months ended September 27, 2014 does not include the potential tax benefit of the United States federal research tax credit, which expired in December 2013. The expiration of the research tax credit is estimated to increase our estimated annual effective tax rate for fiscal 2014 by 3%.

Our provision for income taxes for the three months ended September 28, 2013 was primarily related to federal, state and foreign income taxes on our anticipated fiscal 2013 income. Our provision for income taxes for the nine months ended September 28, 2013 was primarily related to federal, state and foreign income taxes on our fiscal 2013 income partially offset by a tax benefit of $33.7 million from the release of an uncertain tax position, including related interest and penalties, and a $5.9 million tax benefit from the retroactive enactment of the fiscal 2012 United States federal research tax credit during the period.

We estimate our annual effective tax rate for fiscal 2014 to be approximately 18%. Our estimate excludes tax effects of certain stock compensation, potential acquisitions, and other items which we cannot anticipate.

Our future effective tax rates may be materially impacted by tax amounts associated with our foreign earnings at rates different from the federal statutory rate, research credits, the tax impact of stock-based compensation, accounting for uncertain tax positions, business combinations, closure of statute of limitations or settlement of tax audits, changes in valuation allowance and changes in tax law. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and Hungary. Our future effective tax rates may be adversely affected to the extent earnings are lower in countries where we have lower statutory tax rates or we repatriate certain foreign earnings on which United States taxes have not been previously accrued.

For further discussion regarding our income taxes, see Note 6 in the notes to consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

31 --------------------------------------------------------------------------------Liquidity and Capital Resources As of September 27, December 28, 2014 2013 Change (In millions)Cash, cash equivalents and short-term investments $ 595.5 $ 633.0 $ (37.5 ) Net working capital $ 55.6 $ 72.9 $ (17.3 ) Cash, Cash Equivalents and Short-term Investments As of September 27, 2014, our principal sources of liquidity consisted of $595.5 million of cash, cash equivalents and short-term investments, as compared to $633.0 million as of December 28, 2013.

Our primary source of cash, cash equivalents and short-term investments during the nine months ended September 27, 2014 was customer payments for products, maintenance and services, borrowings under our revolving credit facility, proceeds from the exercise of stock options and proceeds from stock purchases under our employee stock purchase plan.

Our primary uses of cash, cash equivalents and short-term investments during the nine months ended September 27, 2014 were payments relating to salaries, benefits, other employee-related costs and operating expenses, our fiscal 2014 acquisitions, payments on our revolving credit facility, repurchases of our common stock, purchases of inventory, purchases of property, plant and equipment, tax payments and payments related to our recent restructuring plans and our voluntary early retirement program.

Approximately 68% of our cash, cash equivalents and short-term investments were held by our foreign subsidiaries as of September 27, 2014. Our intent is to permanently reinvest our earnings from certain foreign operations. We do not anticipate we will need to repatriate dividends from foreign operations that are permanently reinvested in order to fund our domestic operations. In the event that dividends from foreign operations that are currently permanently reinvested are needed to fund United States liquidity, we could be required to accrue and pay additional taxes in order to repatriate these funds.

We maintain an investment portfolio of approximately $100 million in marketable debt securities, including corporate debt securities, United States Treasury securities, United States government agency securities, bank certificates of deposit and commercial paper. Our investments in marketable debt securities are classified as available-for-sale and are included in short-term investments as of September 27, 2014. Our investments are made in accordance with our cash investment policy, which governs the amounts and types of investments we hold in our portfolio. Our investment portfolio could be affected by various risks and uncertainties including credit risk, interest rate risk and general market risk, as outlined in Item 3, "Quantitative and Qualitative Disclosures About Market Risk" and Part II, Item 1A, "Risk Factors." We have a $250 million revolving credit facility that may be used to finance working capital, capital expenditures, acquisitions and other business purposes.

Any outstanding loans drawn under the credit facility are payable on or before September 19, 2019. The credit facility contains customary negative covenants that, among other things, restrict our ability to incur additional indebtedness, grant liens and make certain investments, asset dispositions and restricted payments. In addition, the credit facility contains certain financial covenants that require us to maintain a leverage ratio of not greater than 2.75 to 1, subject to certain exceptions, and requires that we maintain an interest coverage ratio of at least 3 to 1.

As of September 27, 2014, we had no outstanding borrowings under the credit facility and were in compliance with the financial covenants. For an additional description of this revolving credit facility, see Note 2 in the notes to condensed consolidated financial statements.

We expect that current cash, cash equivalents and short-term investment balances, cash flows that are generated from operations, proceeds from our 2024 Notes and cash borrowings available under our revolving credit facility will be sufficient to meet our domestic and international working capital needs, and other capital and liquidity requirements, including servicing the maturity or conversion of our 2015 Notes, acquisitions and share repurchases, if any, for at least the next 12 months.

32 --------------------------------------------------------------------------------Net Working Capital Net working capital decreased by $17.3 million as of September 27, 2014, as compared to December 28, 2013, due to the following: Change (In millions) Decrease in cash and cash equivalents (35.8 ) Increase in convertible notes (12.9 ) Decrease in short-term investments (1.8 ) Increase in current portion of deferred revenue (0.2 ) Increase in inventories 10.9 Decreases in accounts payable and accrued liabilities 11.0 Increase in prepaid expenses and other 11.5 $ (17.3 ) Cash Flows from Operating Activities Nine Months Ended September 27, September 28, 2014 2013 Change (In millions)Cash provided by operating activities $ 184.7 $ 248.4 $ (63.7 ) Cash flows from operating activities decreased $63.7 million during the nine months ended September 27, 2014, as compared to September 28, 2013, due to the following: Change (In millions) Net income, net of non-cash related gains and losses $ 18.3 Changes in operating assets and liabilities, net of effect of acquired businesses (82.0 ) $ (63.7 ) Cash flows from operating activities include net income, adjusted for certain non-cash items, as well as changes in the balances of certain assets and liabilities. Our cash flows from operating activities are significantly influenced by business levels and the payment terms set forth in our license agreements. The decrease in cash flows from operating activities for the nine months ended September 27, 2014, as compared to the nine months ended September 28, 2013, was primarily due to the timing of cash receipts from customers, working capital requirements, payments under our recent restructuring plans, payments for our voluntary early retirement program and an increase in cash paid for taxes, net of tax refunds.

We expect to pay an additional $11.7 million after September 27, 2014 related to our restructuring activities to date, of which we expect approximately $9.1 million will be paid within the next twelve months. We expect to pay $6.0 million related to our voluntary retirement program after September 27, 2014, of which we expect approximately $5.7 million will be paid within the next 12 months.

We expect that cash flows from operating activities will fluctuate in future periods due to a number of factors, including our operating results, tax payments and the timing of our billings, collections and disbursements.

33 --------------------------------------------------------------------------------Cash Flows from Investing Activities Nine Months Ended September 27, September 28, 2014 2013 Change (In millions)Cash used for investing activities $ (191.3 ) $ (417.1 ) $ 225.8 The changes in net cash used for investing activities for the nine months ended September 27, 2014, as compared to the nine months ended September 28, 2013, were due to the following: Change (In millions)Cash paid in business combinations and asset acquisitions, net of cash acquired $ 225.6 Proceeds from the sale and maturity of available-for-sale securities 12.8 Purchases of property, plant and equipment 8.0 Proceeds from the sale of long-term investments (6.2 ) Purchases of available-for-sale securities (14.4 ) $ 225.8 Cash paid in business combinations and asset acquisitions relates to our fiscal 2014 and 2013 acquisitions. For an additional description of the acquisitions completed during the nine months ended September 27, 2014, see Note 3 in the notes to condensed consolidated financial statements.

We maintain an investment portfolio of approximately $100 million in marketable debt securities. The proceeds from, purchases of and maturities of available-for-sale securities are primarily related to normal transactions within our investment portfolio.

We expect to continue our investing activities, including purchasing property, plant and equipment, purchasing intangible assets, business combinations, purchasing software licenses, and making long-term equity investments.

Cash Flows from Financing Activities Nine Months Ended September 27, September 28, 2014 2013 Change (In millions)Cash provided by financing activities $ (27.9 ) $ 77.4 $ (105.3 ) The changes in net cash provided by financing activities for the nine months ended September 27, 2014, as compared to the nine months ended September 28, 2013, were due to the following: Change (In millions) Payments for repurchases of common stock $ (62.6 ) Payment on revolving credit facility (50.0 ) Stock received for payment of employee taxes on vesting of restricted stock (4.2 ) Tax effect related to employee stock transactions allocated to equity (3.7 ) Payment of acquisition-related contingent consideration (1.2 ) Principal payments on receivable financing 2.5 Proceeds from the issuance of common stock 14.0 Other items (0.1 ) $ (105.3 ) 34-------------------------------------------------------------------------------- During the nine months ended September 27, 2014, we used $62.6 million of cash and cash equivalents to repurchase shares of our common stock. We expect to repurchase up to a total of $100.0 million of our common stock during fiscal 2014, and we may repurchase additional shares of our common stock during fiscal 2015 in connection with our current repurchase plan. For an additional description of our share repurchase programs and repurchase authorizations, see Part II, Item 2, "Unregistered Sales of Equity Securities and Use of Proceeds." Other Factors Affecting Liquidity and Capital Resources Revolving Credit Facility On September 19, 2014, we amended our senior revolving credit facility on terms substantially similar to the prior credit agreement, except that, as amended, our revolving credit facility (i) is unsecured, (ii) expires on September 19, 2019, (iii) currently has no subsidiary guarantors and (iv) includes certain amendments to the negative and financial covenants. Our revolving credit facility provides for borrowings up to $250.0 million, with the right to request increased capacity up to an additional $150.0 million upon the receipt of lender commitments, for total maximum borrowings of $400.0 million.

2024 Notes On October 9, 2014, we issued $350.0 million aggregate principal amount of 4.375% Senior Notes due 2024, or the 2024 Notes, due October 15, 2024. We received net proceeds of $342.4 million from issuance of the 2024 Notes, net of a discount of $1.4 million and issuance costs of $6.2 million. Interest will be payable in cash semi-annually commencing on April 15, 2015. The 2024 Notes are unsecured and rank equal in right of payment to all of our existing and future senior indebtedness.The proceeds of the 2024 Notes are available for general corporate purposes, which may include the retirement of debt, working capital, capital expenditures, acquisitions and strategic transactions.

Convertible Notes As of September 27, 2014, we had convertible notes outstanding with a net liability value of $337.7 million that mature on June 1, 2015. The principal maturity value of our 2015 Notes is $350.0 million. The total cash payable upon the early conversion of these notes, as determined by the indenture of each security, will be their principal amount plus any additional conversion value that would be due upon conversion.

We will owe additional cash to the note holders upon early conversion if our stock price exceeds $7.55 per share. We entered into hedges with counterparties to limit our exposure to the additional cash payments above the principal amount of the 2015 Notes that may be due to the holders upon conversion. In separate transactions, we sold warrants, or the 2015 Warrants, with a strike price of $10.78 per share. Although our incremental cash payout exposure above the conversion price is limited by the hedges to the $350.0 million outstanding principal value of the 2015 Notes and accrued interest, we will experience dilution to our stock and to our diluted earnings per share from the outstanding 2015 Warrants to the extent our average closing stock price exceeds $10.78 in any fiscal quarter until the 2015 Notes are converted and the 2015 Warrants are settled.

Additionally, holders may convert their 2015 Notes into cash during any quarter following a quarter in which our stock price closes above $9.81 for at least 20 of the last 30 trading days. The 2015 Notes are convertible into cash from September 28, 2014 through January 3, 2015 because our closing stock price exceeded $9.81 for at least 20 of the last 30 trading days prior to September 27, 2014. While holders of the 2015 Notes have the right to convert their notes, we do not anticipate a significant number of conversions before the June 1, 2015 maturity date of the 2015 Notes. If the holders of our 2015 Notes elect to convert their notes into cash, we would be required to make cash payments of up to $350.0 million and accrued interest prior to the maturity of the 2015 Notes. As of September 27, 2014, a total of one thousand dollars of the 2015 Notes had been tendered for early conversion.

In connection with the 2015 Notes, we entered into the 2015 Notes Hedges and sold warrants to limit our exposure to the additional cash payments above the $350.0 million principal balance in the event of a cash conversion of the 2015 Notes.

We believe that cash generated from our operating activities in future periods, proceeds from our 2024 Notes, and access to our revolving credit facility will be sufficient to service the maturity or conversion of our 2015 Notes. For an additional description of the 2015 Notes, the conversion terms thereof and the hedge and warrants transactions, see Note 2 in the notes to condensed consolidated financial statements.

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