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, stock-based compensation, deferred compensation, in-process research and development charges, integration and other acquisition-related expenses, gains and expenses related to non-qualified deferred compensation plan assets, 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 first quarter 2006 was $66 million, or $0.21 per share, on a diluted basis as compared to $45 million, or $0.15 per share, on a diluted basis in the same period in 2005.
"Consumer electronics, wireless and networking are driving the market. All of these require our customers to rapidly develop analog mixed-signal and system validation expertise," said Mike Fister, president and CEO of Cadence Design Systems, Inc. "The performance of our custom IC and verification businesses this quarter clearly demonstrates our market leadership."
Bill Porter, executive vice president and chief financial officer added, "We had a good quarter across all geographies, especially in Japan, and we continued to make progress on our objectives to demonstrate growth, execute consistently and achieve our operating targets."
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 April 1, 2006.
Business Outlook
For the second quarter of 2006, the company expects total revenue in the range of $340 million to $350 million. Second quarter GAAP earnings per diluted share are expected to be in the range of $0.09 to $0.11. Diluted earnings per share using the non-GAAP measure defined below are expected to be in the range of $0.21 to $0.23.
For the full year 2006, the company expects total revenue in the range of $1.41 billion to $1.46 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 $0.97 to $1.05.
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 first quarter 2006 financial results audio webcast today, April 26, 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 April 26, 2006, at 5 p.m. Pacific time and ending at 5 p.m. Pacific time on May 3, 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 first quarter 2006 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 Dec. 31, 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, stock-based compensation, 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), gains and expenses related to non-qualified deferred compensation plan assets 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. In addition, management believes it is useful to exclude stock-based compensation because it enhances investors' ability to review Cadence's business from the same perspective as Cadence's management, which believes that stock-based compensation expense is not directly attributable to the underlying performance of the company's business operations. Management also believes that it 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. Management 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. Finally, 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 net income in the calculation of non-GAAP net income for the periods shown below:
Net Income Reconciliation Quarters Ended
------------------------
April 1, April 2,
2006 2005
----------- -----------
(In thousands) (unaudited)
Net income on a GAAP basis $ 21,779 $ 1,023
Amortization of acquired intangibles 20,715 25,661
Stock-based compensation expense 29,665 -
Non-qualified deferred compensation expense 2,348 -
Deferred compensation - 11,357
Restructuring and other charges (430) 17,489
Write-off of acquired in-process technology 900 -
Integration and acquisition-related costs 512 660
Equity in losses from investments, gain on
non-qualified deferred compensation plan assets (2,530) 4,097
Income tax effect of non-GAAP adjustments (6,600) (15,318)
Cumulative effect of change in accounting
principle (418) -
----------- -----------
Net income on a non-GAAP basis $ 65,941 $ 44,969
=========== ===========
Diluted Net Income per Share Reconciliation Quarters Ended
------------------------
April 1, April 2,
2006 2005
----------- -----------
(In thousands, except per share data) (unaudited)
Diluted net income per share on a GAAP basis $ 0.07 $ 0.00
Amortization of acquired intangibles 0.07 0.08
Stock-based compensation expense 0.09 -
Non-qualified deferred compensation expense 0.01 -
Deferred compensation - 0.04
Restructuring and other charges - 0.06
Write-off of acquired in-process technology - -
Integration and acquisition-related costs - -
Equity in losses from investments, gain on
non-qualified deferred compensation plan assets (0.01) 0.01
Income tax effect of non-GAAP adjustments (0.02) (0.04)
Cumulative effect of change in accounting
principle - -
----------- -----------
Diluted net income per share on a non-GAAP basis $ 0.21 $ 0.15
=========== ===========
Shares used in calculation of diluted net income
per share - GAAP 315,354 307,354
Shares used in calculation of diluted net income
per share - non-GAAP (A) 315,354 307,354
(A) Shares used in the calcuation 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, 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 and stock-based
compensation expenses are obligations 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 June 16, 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 Second Quarter 2006 Earnings Release is published, which is currently scheduled for July 26, 2006.
Cadence Design Systems, Inc.
Condensed Consolidated Balance Sheets
April 1, 2006 and December 31, 2005
(In thousands)
(Unaudited)
April 1, December 31,
2006 2005
----------- -------------
Current Assets:
Cash and cash equivalents $ 872,886 $ 861,315
Short-term investments 32,054 33,276
Receivables, net of allowance for
doubtful accounts of $9,738 and $10,979,
respectively 242,565 282,073
Inventories 23,379 28,902
Prepaid expenses and other 78,326 70,736
----------- -------------
Total current assets 1,249,210 1,276,302
Property, plant and equipment, net of accumulated
depreciation of $566,381 and $549,593,
respectively 358,141 356,945
Goodwill 1,250,430 1,232,926
Acquired intangibles, net 141,628 153,847
Installment contract receivables 111,257 102,748
Other assets 271,164 278,544
----------- -------------
Total Assets $ 3,381,830 $ 3,401,312
=========== =============
Current Liabilities:
Current portion of long-term debt $ 36,000 $ 32,000
Accounts payable and accrued
liabilities 237,222 300,586
Current portion of deferred revenue 282,577 273,265
----------- -------------
Total current liabilities 555,799 605,851
----------- -------------
Long-term Liabilities:
Long-term portion of deferred revenue 64,508 51,864
Convertible notes 420,000 420,000
Long-term debt 91,000 128,000
Other long-term liabilities 362,852 350,893
----------- -------------
Total long-term liabilities 938,360 950,757
----------- -------------
Stockholders' Equity 1,887,671 1,844,704
----------- -------------
Total Liabilities and Stockholders' Equity $ 3,381,830 $ 3,401,312
=========== =============
Cadence Design Systems, Inc.
Condensed Consolidated Income Statements
For the Quarters Ended April 1, 2006 and April 2, 2005
(In thousands, except per share amounts)
(Unaudited)
Quarters Ended
------------------------
April 1, April 2,
2006 2005
----------- -----------
Revenue:
Product $ 208,122 $ 173,409
Services 32,431 32,443
Maintenance 87,661 86,685
----------- -----------
Total revenue 328,214 292,537
----------- -----------
Costs and Expenses:
Cost of product 20,480 21,933
Cost of services 24,067 22,488
Cost of maintenance 16,050 14,267
Marketing and sales 94,476 79,694
Research and development 116,261 90,386
General and administrative 35,041 25,933
Amortization of acquired intangibles 8,350 10,611
Deferred compensation - 11,357
Restructuring and other charges (430) 17,489
Write-off of acquired in-process technology 900 -
----------- -----------
Total costs and expenses 315,195 294,158
----------- -----------
Income (loss) from operations 13,019 (1,621)
Interest expense (3,540) (1,381)
Other income, net 28,450 4,507
----------- -----------
Income before provision for income taxes
and cumulative effect of change in
accounting principle 37,929 1,505
Provision for income taxes 16,568 482
----------- -----------
Net income before cumulative effect of change
in accounting principle 21,361 1,023
Cumulative effect of change in accounting
principle, net of tax 418 -
----------- -----------
Net income $ 21,779 $ 1,023
=========== ===========
Net income per share before cumulative effect of
change in accounting principle:
Basic $ 0.08 $ 0.00
=========== ===========
Diluted $ 0.07 $ 0.00
=========== ===========
Net income per share after cumulative effect of
change in accounting principle:
Basic $ 0.08 $ 0.00
=========== ===========
Diluted $ 0.07 $ 0.00
=========== ===========
Weighted average common shares outstanding -
basic 281,642 274,201
=========== ===========
Weighted average common shares outstanding -
diluted 315,354 307,354
=========== ===========
Cadence Design Systems, Inc.
Condensed Consolidated Statements of Cash Flows
For the Quarters Ended April 1, 2006 and April 2, 2005
(In thousands)
(Unaudited)
Quarters Ended
------------------------
April 1, April 2,
2006 2005
----------- -----------
Cash and Cash Equivalents at Beginning of Period $ 861,315 $ 448,517
----------- -----------
Cash Flows from Operating Activities:
Net income 21,779 1,023
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in accounting
principle (418) -
Depreciation and amortization 40,942 44,354
Stock based compensation 29,665 8,005
Equity in loss from investments, net 300 2,446
Gain on investments, net (20,048) (10,161)
Write-down of investment securities 1,001 6,193
Write-off of acquired in-process technology 900 -
Non-cash restructuring and other charges 44 1,352
Tax benefit of call options 954 -
Deferred income taxes 3,880 -
Proceeds from the sale of receivables 24,595 40,933
Recoveries for gains on trade accounts
receivable and sales returns (1,240) (1,774)
Other non-cash items 2,251 3,352
Changes in operating assets and
liabilities, net of effect of acquired
businesses:
Receivables 66,015 80,851
Inventories 2,133 707
Prepaid expenses and other (8,492) (1,807)
Installment contract receivables (57,333) (35,147)
Other assets (2,139) 407
Accounts payable and accrued liabilities (89,530) (60,552)
Deferred revenue 20,693 (15,595)
Other long-term liabilities 5,442 2,406
----------- -----------
Net cash provided by operating
activities 41,394 66,993
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of available-for-sale
securities 3,687 9,953
Proceeds from sale of short-term investments - 289,225
Purchases of short-term investments - (180,975)
Proceeds from the sale of long-term investments 20,000 4,607
Purchases of property, plant and equipment (15,279) (19,587)
Investment in venture capital partnerships and
equity investments (2,000) (2,430)
Cash paid in business combinations and asset
acquisitions, net of cash acquired (1,329) (1,411)
----------- -----------
Net cash provided by investing
activities 5,079 99,382
----------- -----------
Cash Flows from Financing Activities:
Principal payments on term loan (33,000) (27)
Tax benefits from employee stock transactions 6,140 -
Proceeds from issuance of common stock 61,460 39,589
Purchases of treasury stock (69,032) -
----------- -----------
Net cash provided by (used for)
financing activities (34,432) 39,562
----------- -----------
Effect of exchange rate changes on cash and cash
equivalents (470) 2,366
----------- -----------
Increase in cash and cash equivalents 11,571 208,303
----------- -----------
Cash and Cash Equivalents at End of Period $ 872,886 $ 656,820
=========== ===========
Cadence Design Systems, Inc.
As of April 26, 2006
Impact of Non-GAAP Adjustments on Forward Looking
Diluted Net Income Per Share
(Unaudited)
Quarter ended Year ended
July 1, December 30,
2006 2006
---------------- ----------------
Forecast Forecast
---------------- ----------------
Diluted net income per share on a GAAP
basis $ 0.09 to $ 0.11 $ 0.47 to $ 0.55
Amortization of acquired intangibles 0.05 0.19
Stock-based compensation expense 0.09 0.31
Non-qualified deferred compensation
expense - 0.01
Integration and acquisition-related
costs - 0.01
Income tax effect of non-GAAP
adjustments (0.02) (0.02)
---------------- ----------------
Diluted net income per share on a
non-GAAP basis $ 0.21 to $ 0.23 $ 0.97 to $ 1.05
================ ================
Cadence Design Systems, Inc.
As of April 26, 2006
Impact of Non-GAAP Adjustments on Forward Looking Net Income
(Unaudited)
Quarter ended Year ended
July 1, December 30,
2006 2006
---------------- ----------------
($ in Millions) Forecast Forecast
---------------- ----------------
Net income on a GAAP basis $ 25 to $ 31 $ 152 to $ 176
Amortization of acquired intangibles 17 62
Stock-based compensation expense 27 101
Non-qualified deferred compensation
expense 1 5
Restructuring and other charges 1 1
Integration and acquisition-related
costs 1 2
Equity in losses from investments,
gain on non-qualified deferred
compensation plan assets 1 1
Income tax effect of non-GAAP
adjustments (7) (5)
---------------- ----------------
Net income on a non-GAAP basis $ 66 to $ 72 $ 319 to $ 343
================ ================
Cadence Design Systems, Inc.
(Unaudited)
Revenue Mix by Geography (% of Total Revenue)
2004 2005 2006
------------------------ ------------------------ ----
GEOGRAPHY Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Q1
------------------------ ------------------------ ----
North America 53% 57% 55% 45% 52% 46% 49% 53% 42% 48% 51%
Europe 16% 19% 21% 30% 22% 16% 17% 21% 20% 18% 19%
Japan 22% 14% 15% 14% 16% 30% 25% 20% 26% 25% 21%
Asia 9% 10% 9% 11% 10% 8% 9% 6% 12% 9% 9%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Revenue Mix by Product Group (% of Total Revenue)
2004 2005 2006
------------------------ ----------------------- ----
PRODUCT GROUP Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Q1
------------------------ ----------------------- ----
Functional
Verification 20% 20% 18% 19% 19% 20% 19% 21% 25% 21% 26%
Digital IC Design 25% 21% 24% 27% 24% 27% 23% 26% 29% 28% 20%
Custom IC Design 27% 24% 27% 27% 27% 23% 31% 27% 22% 25% 27%
Design for
Manufacturing 6% 9% 12% 8% 9% 9% 9% 9% 8% 9% 8%
System Interconnect 10% 9% 8% 9% 9% 10% 9% 8% 7% 8% 9%
Services & Other 12% 17% 11% 10% 12% 11% 9% 9% 9% 9% 10%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Note: Product Group total revenue includes Product + Maintenance
For more information, please contact: Investors and Shareholders Jennifer Jordan Cadence Design Systems, Inc. 408-944-7100 Email Contact Media and Industry Analysts Adolph Hunter Cadence Design Systems, Inc. 408-914-6016 Email Contact