In addition to using GAAP results in evaluating Cadence's business, management believes it is useful to measure results using a non-GAAP measure of net income, which excludes, as applicable, amortization of intangible assets and deferred compensation, in-process research and development charges, integration and other acquisition-related expenses, executive severance payments, restructuring charges and equity in losses (income) from investments. Non-GAAP net income is adjusted by the amount of additional taxes or tax benefit that the company would accrue if it used non-GAAP results instead of GAAP results to calculate the company's tax liability. See "GAAP to non-GAAP Reconciliation" below for further information on the non-GAAP measure.
Using this non-GAAP measure, net income in the fourth quarter 2005 was $93 million, or $0.29 per share, on a diluted basis as compared to $80 million, or $0.26 per share, on a diluted basis in the same period in 2004. For the fiscal year 2005, non-GAAP net income was $258 million, or $0.83 per share, compared to $201 million and $0.66 per share in 2004.
"We had a terrific fourth quarter and finished 2005 with good momentum. Our product portfolio is very competitive, our new initiatives such as kits and segmentation are starting to ramp, and our enterprise approach is winning with customers," said Bill Porter, senior vice president and chief financial officer.
"Throughout 2005 we delivered on our strategy to grow our core business through technology innovation, to expand into adjacencies such as verification and manufacturability, and to pursue pricing and business models for value," said Mike Fister, president and CEO of Cadence Design Systems, Inc. "With our success this past year, we've laid the groundwork for growth and market expansion in 2006 and beyond."
The following statements are based on current expectations. These statements are forward looking, and actual results may differ materially. These statements do not include the impact of any mergers, acquisitions or other business combinations completed after Dec. 31, 2005.
Business Outlook
For the first quarter of 2006, the company expects total revenue in the range of $315 million to $325 million. First quarter GAAP earnings per diluted share are expected to be in the range of $0.07 to $0.09. Diluted earnings per share using the non-GAAP measure defined below are expected to be in the range of $0.19 to $0.21.
For the full year 2006, the company expects total revenue in the range of $1.400 billion to $1.450 billion. On a GAAP basis, net income per diluted share for fiscal 2006 is expected in the range of $0.47 to $0.55. Using the non-GAAP measure defined below, diluted earnings per share for fiscal 2006 are expected to be in the range of $0.96 to $1.04.
A schedule showing a reconciliation of the business outlook from GAAP net income and diluted net income per share to the non-GAAP net income and diluted net income per share is included with this release.
Audio Webcast Scheduled
Fister and Porter will host a fourth quarter 2005 financial results audio webcast today, Feb. 1, 2006, at 2 p.m. (Pacific) / 5 p.m. (Eastern). Attendees are asked to register at the Web site at least 10 minutes prior to the scheduled webcast. An archive of the webcast will be available starting Feb. 1, 2006, at 5 p.m. Pacific time and ending at 5 p.m. Pacific time on Feb. 8, 2006. Webcast access is available at www.cadence.com/company/investor_relations.
About Cadence
Cadence enables global electronic-design innovation and plays an essential role in the creation of today's integrated circuits and electronics. Customers use Cadence software and hardware, methodologies, and services to design and verify advanced semiconductors, consumer electronics, networking and telecommunications equipment, and computer systems. Cadence reported 2005 revenues of approximately $1.3 billion, and has approximately 5,000 employees. The company is headquartered in San Jose, Calif., with sales offices, design centers, and research facilities around the world to serve the global electronics industry. More information about the company, its products, and services is available at www.cadence.com.
Cadence and the Cadence logo are registered trademarks of Cadence Design Systems, Inc. All other trademarks are the property of their respective owners.
The statements contained above regarding the company's fourth quarter 2005 results, those contained in the Business Outlook section above and the statements by Mike Fister and Bill Porter include forward-looking statements based on current expectations or beliefs, as well as a number of preliminary assumptions about future events that are subject to factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Readers are cautioned not to put undue reliance on these forward-looking statements, which are not a guarantee of future performance and are subject to a number of uncertainties and other factors, many of which are outside Cadence's control, including, among others: Cadence's ability to compete successfully in the design automation product and the commercial electronic design and methodology services industries; the mix of products and services sold and the timing of significant orders for its products; economic uncertainty; fluctuations in rates of exchange between the U.S. dollar and the currencies of other countries in which Cadence does business; and the acquisition of other companies or the failure to successfully integrate those it acquires.
For a detailed discussion of these and other cautionary statements, please refer to the company's filings with the Securities and Exchange Commission. These include the company's Annual Report on Form 10-K for the year ended Jan. 1, 2005, and the quarterly report on Form 10-Q for the quarter ended Oct. 1, 2005.
GAAP to non-GAAP Reconciliation
Cadence management evaluates and makes operating decisions using various operating measures. These measures are generally based on the revenues of its product, maintenance and services business operations and certain costs of those operations, such as cost of revenues, research and development, sales and marketing and general and administrative expenses. One such measure is non-GAAP net income (loss), which is a non-GAAP financial measure under Section 101 of Regulation G under the Securities Exchange Act of 1934, as amended. This measure consists of GAAP net income (loss) excluding, as applicable, amortization of intangible assets and deferred compensation, in-process research and development charges, integration and other acquisition-related expenses, restructuring charges (severance and benefits, excess facilities and asset-related restructuring charges), executive severance payments and equity in losses (income) from investments. Intangible assets consist primarily of purchased technology, backlog, patents, trademarks, distribution rights, customer contracts and related relationships and non-compete agreements. Non-GAAP net income (loss) is adjusted by the amount of additional taxes or tax benefit that the company would accrue if it used non-GAAP results instead of GAAP results to calculate the company's tax liability.
Management believes it is useful in measuring Cadence's operations to exclude amortization of intangibles, deferred compensation, in-process research and development and acquisition-related expenses because these costs are primarily fixed at the time of an acquisition and generally cannot be changed by management in the short term. Management believes that it also is useful to exclude restructuring costs. Cadence has dramatically reduced the size of its design services business and portions of its product and maintenance businesses over the past several years. As a result, in 2001, 2002 and 2003, Cadence's GAAP statements of operations have included significant charges relating to such restructurings. Cadence believes that in measuring its operations it is useful to exclude such restructuring costs because the company's level of restructuring activities is expected to significantly decrease in the foreseeable future. Management also believes it is useful to exclude the equity in losses (income) from investments and investment write-downs, as these items are not part of the company's direct cost of operations. Rather, these are non-operating items that are included in other income (expense) and are part of the company's investment activities.
Management believes that non-GAAP net income (loss) provides useful supplemental information to management and investors regarding the performance of the company's business operations and facilitates comparisons to our historical operating results. Management also uses this information internally for forecasting and budgeting. Non-GAAP financial measures should not be considered as a substitute for measures of financial performance prepared in accordance with GAAP. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures contained within this press release with their most directly comparable GAAP financial results.
The following tables reconcile the specific items excluded from GAAP in the calculation of non-GAAP net income for the periods shown below:
Net Income Reconciliation Quarters Ended
---------------------------------- -----------------------------------
December 31, 2005 January 1, 2005
(in thousands) (unaudited)
---------------------------------- ----------------- -----------------
Net income on a GAAP basis $ 26,566 $ 59,795
Amortization of acquired
intangibles 21,012 24,750
Deferred compensation 9,906 9,312
Restructuring and other
charges 549 4,142
Executive severance payments - 1,548
Integration and acquisition-
related costs 516 679
Equity in losses from
investments, gain on Non-
Qualified Deferred
Compensation plan assets,
venture capital partnership
termination costs 1,450 3,203
Income tax related to
repatriation of
foreign earnings 30,082 -
Income tax effect of non-GAAP
adjustments 2,939 (23,502)
---------------------------------- ---------------- ----------------
Net income on a non-GAAP basis $ 93,020 $ 79,927
---------------------------------- ---------------- ----------------
Net Income Reconciliation Years Ended
---------------------------------- -----------------------------------
December 31, 2005 January 1, 2005
(in thousands) (unaudited)
---------------------------------- ----------------- -----------------
Net income on a GAAP basis $ 49,343 $ 74,474
Amortization of acquired
intangibles 105,710 103,962
Deferred compensation 45,311 26,433
In-process research and
development charges 9,400 9,000
Restructuring and other
charges 35,334 13,542
Executive severance payments 7,582 1,548
Integration and acquisition-
related costs 3,644 2,990
Equity in losses from
investments, gain on Non-
Qualified Deferred
Compensation plan assets,
venture capital partnership
termination costs 13,434 27,409
Income tax related to
repatriation of foreign
earnings 30,082 -
Income tax effect of non-GAAP
adjustments (41,656) (58,580)
---------------------------------- ---------------- ----------------
Net income on a non-GAAP basis $ 258,184 $ 200,778
---------------------------------- ---------------- ----------------
Diluted Net Income per Share
Reconciliation Quarters Ended
---------------------------------- -----------------------------------
(in thousands, except per share December 31, 2005 January 1, 2005
data) (unaudited)
---------------------------------- ----------------- -----------------
Diluted net income per share on a
GAAP basis $ 0.08 $ 0.20
Amortization of acquired
intangibles 0.07 0.08
Deferred compensation 0.03 0.03
Restructuring and other
charges - 0.01
Executive severance payments - 0.01
Integration and acquisition-
related costs - -
Equity in losses from
investments, gain on Non-
Qualified Deferred
Compensation plan assets,
venture capital partnership
termination costs - 0.01
Income tax related to
repatriation of foreign
earnings 0.09 -
Income tax effect of non-GAAP
adjustments 0.02 (0.08)
---------------------------------- ---------------- ----------------
Diluted net income per share on a
non-GAAP basis $ 0.29 $ 0.26
---------------------------------- ---------------- ----------------
Shares used in calculation of
diluted net income per share --
GAAP 319,647 303,858
Shares used in calculation of
diluted net income per share --
non-GAAP (A) 319,647 303,858
Diluted Net Income per Share
Reconciliation Years Ended
---------------------------------- -----------------------------------
(in thousands, except per share December 31, 2005 January 1, 2005
data) (unaudited)
---------------------------------- ----------------- -----------------
Diluted net income per share on a
GAAP basis $ 0.16 $ 0.25
Amortization of acquired
intangibles 0.34 0.34
Deferred compensation 0.14 0.09
Restructuring and other
charges 0.11 0.04
In-process research and
development charges 0.03 0.03
Executive severance payments 0.02 0.01
Integration and acquisition-
related costs 0.01 0.01
Equity in losses from
investments, gain on Non-
Qualified Deferred
Compensation plan assets,
venture capital partnership
termination costs 0.04 0.08
Income tax related to
repatriation of foreign
earnings 0.10 -
Income tax effect of non-GAAP
adjustments (0.12) (0.19)
---------------------------------- ---------------- ----------------
Diluted net income per share on a
non-GAAP basis $ 0.83 $ 0.66
---------------------------------- ---------------- ----------------
Shares used in calculation of
diluted net income per share --
GAAP 314,383 305,774
Shares used in calculation of
diluted net income per share --
non-GAAP (A) 314,383 305,774
(A) Shares used in the calculation of GAAP earnings per share are
expected to be the same as shares used in the calculation of non-GAAP
earnings per share except when the company reports a GAAP loss and
non-GAAP income, or GAAP income and a non-GAAP loss.
Investors are encouraged to look at GAAP results as the best measure of financial performance. For example, amortization of intangibles or amortization of deferred compensation or in-process technology are important to consider because they may represent initial expenditures that under GAAP are reported across future fiscal periods. Likewise, deferred compensation expense is an obligation of the company that should be considered. Restructuring charges can be triggered by acquisitions or product adjustments as well as overall company performance within a given business environment. All of these metrics are important to financial performance generally.
Though Cadence management finds its non-GAAP measure is useful in evaluating the performance of Cadence's business, its reliance on this measure is limited because items excluded from such measures often have a material effect on Cadence's earnings and earnings per share calculated in accordance with GAAP. Therefore, Cadence management typically uses its non-GAAP earnings and earnings per share measures, in conjunction with GAAP earnings and earnings per share measures, to address these limitations.
Cadence believes that presenting its non-GAAP measure of earnings and earnings per share provides investors with an additional tool for evaluating the performance of the company's business, which management uses in its own evaluation of performance, and an additional base line for assessing the future earnings potential of the company. While the GAAP results are more complete, the company prefers to allow investors to have this supplemental measure since, with reconciliation to GAAP, it may provide additional insight into our financial results.
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 outlook, publicly available on its Web site.
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 Mar. 17, 2006, Cadence will observe a "Quiet Period" during which the Business Outlook as provided in this press release and the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q no longer constitute the company's current expectations. During the Quiet Period, the Business Outlook in these documents should be considered to be historical, speaking as of prior to the Quiet Period only and not subject to update by the company. During the Quiet Period, Cadence representatives will not comment on Cadence's business outlook or its financial results or expectations. The Quiet Period will extend until the day when Cadence's First Quarter 2006 Earnings Release is published, which is currently scheduled for Apr. 26, 2006.
Cadence Design Systems, Inc.
Condensed Consolidated Balance Sheets
December 31, 2005 and January 1, 2005
(In thousands)
(Unaudited)
December 31, January 1,
2005 2005
----------- -----------
Current Assets:
Cash and cash equivalents $ 861,315 $ 448,517
Short-term investments 33,276 144,491
Receivables, net of allowance for
doubtful accounts of $10,979 and
$12,734, respectively 282,073 384,114
Inventories 28,902 20,481
Prepaid expenses and other 70,736 72,312
----------- -----------
Total current assets 1,276,302 1,069,915
Property, plant and equipment, net of
accumulated depreciation of $549,593 and
$498,424, respectively 356,945 390,367
Goodwill 1,232,926 995,065
Acquired intangibles, net 153,847 195,655
Installment contract receivables 102,748 96,038
Other assets 278,544 242,799
----------- -----------
Total Assets $ 3,401,312 $ 2,989,839
=========== ===========
Current Liabilities:
Accounts payable and accrued liabilities $ 300,586 $ 277,992
Current portion of long-term debt 32,000 -
Current portion of deferred revenue 273,265 270,966
----------- -----------
Total current liabilities 605,851 548,958
----------- -----------
Long-term Liabilities:
Long-term portion of deferred revenue 51,864 20,847
Convertible notes 420,000 420,000
Long-term debt 128,000 -
Other long-term liabilities 350,893 300,064
----------- -----------
Total long-term liabilities 950,757 740,911
----------- -----------
Stockholders' Equity 1,844,704 1,699,970
----------- -----------
Total Liabilities and Stockholders' Equity $ 3,401,312 $ 2,989,839
=========== ===========
Cadence Design Systems, Inc.
Condensed Consolidated Income Statements
For the Quarters and Years Ended December 31, 2005 and January 1, 2005
(In thousands, except per share amounts)
(Unaudited)
Quarters Ended Years Ended
---------------------- -----------------------
December 31, January 1, December 31, January 1,
2005 2005 2005 2005
----------- --------- ----------- ----------
Revenue:
Product $ 257,684 $ 226,730 $ 851,496 $ 729,783
Services 32,656 32,982 126,169 137,046
Maintenance 88,023 83,384 351,527 330,651
----------- --------- ----------- ----------
Total revenue 378,363 343,096 1,329,192 1,197,480
----------- --------- ----------- ----------
Costs and Expenses:
Cost of product 17,018 23,421 79,649 82,011
Cost of services 21,620 21,467 90,335 90,993
Cost of maintenance 14,870 13,236 58,796 53,049
Marketing and sales 95,497 87,806 356,043 325,937
Research and
development 94,797 87,713 370,140 351,254
General and
administrative 25,512 21,664 117,590 85,413
Amortization of
acquired
intangibles 8,562 11,028 47,762 55,700
Deferred
compensation 9,906 9,312 45,311 26,433
Restructuring and
other charges 549 4,142 35,334 13,542
Write-off of
acquired in-
process technology - - 9,400 9,000
----------- --------- ----------- ----------
Total costs and
expenses 288,331 279,789 1,210,360 1,093,332
----------- --------- ----------- ----------
Income from
operations 90,032 63,307 118,832 104,148
Interest expense (1,503) (1,378) (5,446) (6,198)
Other income
(expense), net 3,741 2,447 15,097 (11,513)
----------- --------- ----------- ----------
Income before
provision for
income taxes 92,270 64,376 128,483 86,437
Provision for
income taxes 65,704 4,581 79,140 11,963
----------- --------- ----------- ----------
Net income $ 26,566 $ 59,795 $ 49,343 $ 74,474
=========== ========= =========== ==========
Basic net income per
share $ 0.09 $ 0.22 $ 0.18 $ 0.27
=========== ========= =========== ==========
Diluted net income
per share $ 0.08 $ 0.20 $ 0.16 $ 0.25
=========== ========= =========== ==========
Weighted average
common shares
outstanding -- basic 281,628 270,734 278,520 271,328
=========== ========= =========== ==========
Weighted average
common shares
outstanding --
diluted 319,647 303,858 314,383 305,774
=========== ========= =========== ==========
Cadence Design Systems, Inc.
Condensed Consolidated Statements of Cash Flows
For the Years Ended December 31, 2005 and January 1, 2005
(In thousands)
(Unaudited)
Years Ended
----------------------
December 31, January 1,
2005 2005
----------- ---------
Cash and Cash Equivalents at Beginning of
Period $ 448,517 $ 309,175
----------- ---------
Cash Flows from Operating Activities:
Net income 49,343 74,474
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 184,717 179,205
Deferred compensation 45,311 31,408
Equity in loss from investments, net 6,492 16,944
Gain on investments, net (18,297) (12,467)
Write-down of investment securities 10,934 4,236
Write-off of acquired in-process
technology 9,400 9,000
Non-cash restructuring and other charges 2,239 4,142
Tax benefits from employee stock
transactions 11,715 7,108
Tax benefit of call options 6,167 7,742
Deferred income taxes (22,968) (15,695)
Proceeds from the sale of receivables 192,079 30,070
Provisions (recoveries) for losses (gains)
on trade accounts receivable and sales
returns (1,778) 447
Other non-cash items 296 (431)
Changes in operating assets and
liabilities, net of effect of acquired
businesses:
Receivables 54,928 (49,361)
Inventories (7,588) (3,555)
Prepaid expenses and other (8,094) (3,410)
Installment contract receivables (155,648) 20,556
Other assets 1,640 16,417
Accounts payable and accrued
liabilities 20,330 2,001
Deferred revenue 32,616 34,878
Other long-term liabilities 12,449 18,813
----------- ---------
Net cash provided by operating
activities 426,283 372,522
----------- ---------
Cash Flows from Investing Activities:
Proceeds from sale of available-for-sale
securities 14,921 8,301
Proceeds from sale of short-term investments 289,225 516,935
Purchases of short-term investments (180,975) (549,835)
Proceeds from the sale of long-term
investments 6,075 9,900
Proceeds from sale of property, plant and
equipment 33,625 3,625
Purchases of property, plant and equipment (71,656) (61,779)
Purchases of software licenses (2,600) (4,157)
Investment in venture capital partnerships
and equity investments (14,184) (22,773)
Cash paid in business combinations and asset
acquisitions, net of cash acquired (297,128) (115,170)
----------- ---------
Net cash used for investing activities (222,697) (214,953)
----------- ---------
Cash Flows from Financing Activities:
Proceeds from term loan 160,000 -
Principal payments on capital leases (62) (370)
Payment of convertible notes issuance costs - (1,920)
Proceeds from issuance of common stock 146,481 75,318
Purchases of treasury stock (101,070) (94,105)
----------- ---------
Net cash provided by (used for)
financing activities 205,349 (21,077)
----------- ---------
Effect of exchange rate changes on cash and
cash equivalents 3,863 2,850
----------- ---------
Increase in cash and cash equivalents 412,798 139,342
----------- ---------
Cash and Cash Equivalents at End of Period $ 861,315 $ 448,517
=========== =========
Cadence Design Systems, Inc.
As of February 1, 2006
Impact of Non-GAAP Adjustments on Forward Looking Diluted Net Income
Per Share
(Unaudited)
Quarter ended Year ended
April 1, December 30,
2006 2006
--------------- ---------------
Forecast Forecast
--------------- ---------------
Diluted net income per share
on a GAAP basis $0.07 to $0.09 $0.47 to $0.55
Amortization of acquired
intangibles 0.07 0.18
Stock-based compensation expense 0.08 0.31
Restructuring and other charges - 0.01
Equity in losses from investments,
gain on Non-Qualified Deferred
Compensation plan assets - 0.01
Income tax effect of non-GAAP
adjustments (0.03) (0.02)
--------------- ---------------
Diluted net income per share
on a non-GAAP basis $0.19 to $0.21 $0.96 to $1.04
=============== ===============
Cadence Design Systems, Inc.
As of February 1, 2006
Impact of Non-GAAP Adjustments on Forward Looking Net Income
(Unaudited)
Quarter ended Year ended
April 1, December 30,
2006 2006
--------------- ---------------
($ in Millions) Forecast Forecast
--------------- ---------------
Net income on a GAAP basis $20 to $26 $150 to $174
Amortization of acquired
intangibles 21 60
Stock-based compensation expense 25 100
Restructuring and other charges 1 2
Integration and acquisition-related
costs 1 2
Equity in losses from investments,
gain on Non-Qualified Deferred
Compensation plan assets 1 4
Income tax effect of non-GAAP
adjustments (7) (5)
--------------- ---------------
Net income on a non-GAAP basis $62 to $68 $313 to $337
=============== ===============
Cadence Design Systems, Inc.
(Unaudited)
Revenue Mix by Geography (% of Total Revenue)
2003 2004
------------------------ ------------------------
GEOGRAPHY Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year
-------------------------------------------- ------------------------
North America 55% 54% 59% 64% 58% 53% 57% 55% 45% 52%
Europe 17% 15% 19% 16% 17% 16% 19% 21% 30% 22%
Japan 20% 22% 13% 13% 17% 22% 14% 15% 14% 16%
Asia 8% 9% 9% 7% 8% 9% 10% 9% 11% 10%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Revenue Mix by Geography (% of Total Revenue)
2005
------------------------
GEOGRAPHY Q1 Q2 Q3 Q4 Year
--------------------------------------------
North America 46% 49% 53% 42% 48%
Europe 16% 17% 21% 20% 18%
Japan 30% 25% 20% 26% 25%
Asia 8% 9% 6% 12% 9%
Total 100% 100% 100% 100% 100%
Revenue Mix by Product Group (% of Total Revenue)
2003 2004
------------------------ ------------------------
PRODUCT GROUP Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year
-------------------------------------------- ------------------------
Functional
Verification 20% 18% 18% 20% 19% 20% 20% 18% 19% 19%
Digital IC Design 24% 22% 27% 20% 23% 25% 21% 24% 27% 24%
Custom IC Design 27% 28% 27% 27% 27% 27% 24% 27% 27% 27%
Design for
Manufacturing 9% 10% 7% 13% 10% 6% 9% 12% 8% 9%
System
Interconnect 8% 9% 8% 10% 9% 10% 9% 8% 9% 9%
Services & Other 12% 13% 13% 10% 12% 12% 17% 11% 10% 12%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Revenue Mix by Product Group (% of Total Revenue)
2005
------------------------
PRODUCT GROUP Q1 Q2 Q3 Q4 Year
--------------------------------------------
Functional
Verification 20% 19% 21% 25% 21%
Digital IC Design 27% 23% 26% 29% 28%
Custom IC Design 23% 31% 27% 22% 25%
Design for
Manufacturing 9% 9% 9% 8% 9%
System
Interconnect 10% 9% 8% 7% 8%
Services & Other 11% 9% 9% 9% 9%
Total 100% 100% 100% 100% 100%
Note: Product Group total revenue includes Product + Maintenance
Contact:
Cadence Design Systems, Inc. Jennifer Jordan, 408-944-7100 Investors and Shareholders Email Contact Adolph Hunter, 408-914-6016 Media and Industry Analysts Email Contact