Cadence's management believes it is useful in measuring Cadence's operations to exclude amortization of intangible assets and integration and acquisition-related costs, including changes in the fair value of contingent consideration related to prior acquisitions, because these costs are primarily fixed at the time of an acquisition and generally cannot be changed by Cadence's management in the short term. In addition, Cadence's management believes it is useful to exclude stock-based compensation expense because such exclusion enhances investors' ability to review Cadence's business from the same perspective as Cadence's management, which believes that stock-based compensation expense is based on many subjective inputs at a point in time and many of these inputs are not necessarily directly attributable to the underlying performance of Cadence's business operations. Cadence's management also believes it is useful to exclude costs and charges related to shareholder litigation because these costs and charges are not related to Cadence's core business operations. Cadence's management also believes that it is useful to exclude restructuring charges and credits. During the fourth quarter of 2010, Cadence commenced a restructuring program and expects to have paid substantially all termination benefits and costs by the fourth quarter of 2011. Cadence's management believes that in measuring the company's operations, it is useful to exclude any such restructuring charges and credits because exclusion of such charges and credits permits consistent evaluations of Cadence's performance before and after such actions are taken. Cadence's management also believes it is useful to exclude gains or losses and expenses or credits related to the non-qualified deferred compensation plan assets because these gains or losses and expenses or credits are not part of Cadence's direct costs of operations, but reflect changes in the value of assets held in the non-qualified deferred compensation plan. Cadence's management also believes it is useful to exclude executive and other employee severance costs as these costs do not occur frequently. Cadence's management also believes it is useful to exclude the amortization of the discount on convertible notes because this incremental cost recorded as interest expense does not represent a cash obligation of the company and is not part of Cadence's direct cost of operations. Finally, Cadence's management believes it is useful to exclude the equity in losses or income from investments, write-down of investments and gains or losses on the sale of investments because these items are not part of Cadence's direct cost of operations. Rather, these are non-operating items that are included in other income or expense and are part of the company's investment activities.
During the second quarter of 2011, Cadence's non-GAAP net income also excluded the effect of an income tax benefit associated with Cadence's effective settlement of an Internal Revenue Services, or IRS, examination of Cadence's federal income tax returns for the tax years 2003 through 2005. During the third quarter of 2010, Cadence's non-GAAP net income also excluded the effect of an income tax benefit associated with Cadence's effective settlement of an IRS examination of Cadence's federal income tax returns for the tax years 2000 through 2002. Cadence's management believes it is useful to exclude the income tax benefits associated with these settlements because exclusion of such tax benefits permits consistent evaluations of Cadence's performance. Cadence does not expect settlements resulting in income tax provisions or benefits of the magnitude recorded during the third quarter of 2010 to occur frequently.
During the second and fourth quarters of 2010, Cadence's non-GAAP net income also excluded losses associated with its repurchase of a portion of its 1.375% Convertible Senior Notes Due December 15, 2011 and a portion of its 1.500% Convertible Senior Notes Due December 15, 2013. Cadence's management believes it is useful to exclude the losses on the extinguishment of debt as the losses are not directly related to Cadence's core business operations and similar transactions are not expected to occur frequently.
During the second quarter of 2011, Cadence's non-GAAP net income also excluded the effect of an income tax benefit associated with an acquisition Cadence completed during the second quarter of 2011. During the second quarter of 2010, Cadence's non-GAAP net income also excluded the effect of an income tax benefit associated with Cadence's acquisition of Denali Software, Inc. Cadence's management believes it is useful to exclude the tax benefits associated with these acquisitions because exclusion of such tax benefits permits consistent evaluations of Cadence's performance. Cadence does not expect an acquisition-related income tax benefit of the magnitude recorded in the second quarter of 2010 to be recorded frequently.
Cadence's management believes that non-GAAP net income provides useful supplemental information to Cadence's management and investors regarding the performance of the company's business operations and facilitates comparisons to the company's historical operating results. Cadence's management also uses this information internally for forecasting and budgeting. Non-GAAP financial measures should not be considered as a substitute for or superior to 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 and GAAP net income per diluted share in the calculation of non-GAAP net income and non-GAAP net income per diluted share for the periods shown below:
Net Income Reconciliation Three Months Ended
----------------------
October 1, October 2,
2011 2010
---------- ----------
(unaudited)
(in thousands)
Net income on a GAAP basis $ 28,106 $ 126,753
Amortization of acquired intangibles 6,692 6,655
Stock-based compensation expense 11,891 12,010
Non-qualified deferred compensation expenses
(credits) 229 (1,873)
Restructuring and other charges (credits) (433) (1,682)
Shareholder litigation costs 179 1,452
Executive and other employee severance costs 1,331 1,627
Integration and acquisition-related costs 766 5,322
Amortization of debt discount 6,697 6,291
Other income or expense related to investments
and non-qualified deferred compensation plan
assets* (5,544) 1,834
Income tax benefit of IRS settlement - (148,302)
Income tax effect of non-GAAP adjustments (12,619) 1,139
---------- ----------
Net income on a non-GAAP basis $ 37,295 $ 11,226
========== ==========
* Includes, as applicable, equity in losses or income from investments,
write-down of investments, gains or losses on sale of investments and
gains or losses on non-qualified deferred compensation plan assets
recorded in Other income (expense), net.
Diluted Net Income per Share Reconciliation Three Months Ended
----------------------
October 1, October 2,
2011 2010
---------- ----------
(unaudited)
(in thousands, except per share data)
Diluted net income per share on a GAAP basis $ 0.10 $ 0.48
Amortization of acquired intangibles 0.03 0.03
Stock-based compensation expense 0.04 0.04
Non-qualified deferred compensation expenses
(credits) - (0.01)
Restructuring and other charges (credits) - (0.01)
Shareholder litigation costs - 0.01
Executive and other employee severance costs 0.01 0.01
Integration and acquisition-related costs - 0.02
Amortization of debt discount 0.02 0.02
Other income or expense related to investments
and non-qualified deferred compensation plan
assets* (0.02) 0.01
Income tax benefit of IRS settlement - (0.56)
Income tax effect of non-GAAP adjustments (0.04) -
---------- ----------
Diluted net income per share on a non-GAAP basis $ 0.14 $ 0.04
========== ==========
Shares used in calculation of diluted net income
per share --GAAP** 270,741 263,302
Shares used in calculation of diluted net income
per share --non-GAAP** 270,741 263,302
* Includes, as applicable, equity in losses or income from investments,
write-down of investments, gains or losses on sale of investments and
gains or losses on non-qualified deferred compensation plan assets
recorded in Other income (expense), net.
** Shares used in the calculation of GAAP net income per share are expected
to be the same as shares used in the calculation of non-GAAP net income
per share, except when the company reports a GAAP net loss and non-GAAP
net income, or GAAP net income and a non-GAAP net loss.
