TMCnet News
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 29, 2012. Certain of these 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 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 and development costs. Our offerings include software, two categories of intellectual property, or IP (commonly referred to as verification IP, or VIP, and Design IP), and hardware technology. We provide maintenance for our product offerings and provide engineering services related to methodology, education and hosted design solutions, which help our customers manage and accelerate their electronics product development processes. Substantially all of our business is generated from semiconductor and electronics systems manufacturers and designers and the renewal of many of our customer contracts is dependent upon their commencement of new design projects. As a result, our business is significantly influenced by our customers' business outlook and investment in the introduction of new products and the improvement of existing products. The markets our customers serve are sensitive to product price and the time it takes to bring the 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 quality products and lower development 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. 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, and combining ICs and SoCs with software to create electronic 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. Significant issues that our customers face in creating their products include optimizing energy consumption, manufacturing microscopic circuitry, verifying device functionality, and achieving technical performance targets, all while meeting aggressive time-to-market and cost requirements. Providers of electronic design automation, or EDA, 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 and a differentiated portfolio of Design IP and VIP. Product revenue includes fees from licenses to use our software and IP, and from sales and leases of our hardware products. See "Product Arrangements" below for a discussion of our license types. 21-------------------------------------------------------------------------------- Table of Contents We combine our products and technologies into categories related to major design activities: • Functional Verification, Hardware and IP; • Custom IC Design; • Digital IC Design; • System Interconnect Design; and • Design for Manufacturing, or DFM. The major Cadence® design platforms are branded as Incisive® functional verification, Virtuoso® custom IC design, Encounter® digital IC design and Allegro® system interconnect design. Our functional verification offerings include VIP products and are supplemented by our Design IP offerings and our hardware offerings. In addition, we augment these platform product offerings with a set of DFM products that service both the digital and custom IC design flows. 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 printed circuit board, or PCB, and IC package and SiP design. During the first quarter of fiscal 2013, we announced that we had signed definitive agreements to purchase Tensilica and Cosmic to add to our IP offerings. The addition of these technologies will enable us to offer broader IP solutions to customers. 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 29, 2012. Results of Operations Financial results for the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, reflect the following: • An increase in our product and maintenance revenue, primarily because of increased business levels and increased revenue recognized from bookings in prior periods; • An increase in employee-related costs, primarily consisting of costs related to hiring additional employees subsequent to March 31, 2012 and incremental costs related to employees added from our acquisition of Sigrity, Inc., or Sigrity, during fiscal 2012; • An increase in variable compensation due to increased revenue, bookings and operating performance; and • An income tax benefit in the three months ended March 30, 2013, primarily resulting from the release of uncertain tax benefits recorded in a past business combination. Revenue We primarily generate revenue from licensing our EDA software and IP, selling or leasing our hardware technology, providing maintenance for our software, IP and hardware and providing engineering services. The timing of our product revenue is significantly affected by the mix of hardware and software 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. 22-------------------------------------------------------------------------------- Table of Contents We seek to achieve a consistent mix of bookings with approximately 90% of the aggregate value of our bookings of a type for which the revenue is recurring, or ratable, in nature, and the remainder of the resulting revenue recognized up-front, upon completion of delivery. Our ability to achieve this bookings mix in any single fiscal quarter may be impacted by hardware sales, because product revenue for hardware sales is generally recognized up-front in the quarter in which delivery is completed. Greater than 90% of the aggregate value of our bookings during the three months ended March 30, 2013 and March 31, 2012 was of a type for which the revenue is recurring, or ratable, in nature. For an additional description of the impact of hardware sales on the anticipated mix of bookings, our other license types and the timing of revenue recognition for license transactions, see the discussion under the heading "Critical Accounting Estimates - Revenue Recognition" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K for the fiscal year ended December 29, 2012. Revenue by Period In the condensed consolidated income statements for the three months ended March 30, 2013, we combined product and maintenance revenue because product and maintenance revenue is generally recognized from agreements that require customers to purchase both the product and associated maintenance in a bundled offering. We reclassified prior period product and maintenance revenue balances to conform to the current year presentation. The following table shows our revenue for the three months ended March 30, 2013 and March 31, 2012 and the change in revenue between periods: Three Months Ended Change March 30, March 31, 2013 2012 Amount Percentage (In millions, except percentages) Product and maintenance $ 328.3 $ 286.3 $ 42.0 15 % Services 26.0 29.5 (3.5 ) (12 )% Total revenue $ 354.3 $ 315.8 $ 38.5 12 % Product and maintenance revenue increased during the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, primarily because of increased business levels and increased revenue recognized from bookings in prior periods. Services revenue decreased during the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, because of the redeployment of certain of our design services engineers to internal research and development projects. We expect services revenue to decrease during the remainder of fiscal 2013, as compared to the same periods in fiscal 2012, as we expect these design services engineers to continue to work on internal research and development projects, primarily related to our Design IP activities. No one customer accounted for 10% or more of total revenue during the three months ended March 30, 2013 or March 31, 2012. 23-------------------------------------------------------------------------------- Table of Contents Revenue by Product Group The following table shows the percentage of product and related maintenance revenue contributed by each of our five product groups, and services and other for the past five consecutive quarters: Three Months Ended March 30, December 29, September 29, June 30, March 31, 2013 2012 2012 2012 2012 Functional Verification, Hardware and IP 26 % 30 % 30 % 33 % 30 % Digital IC Design 25 % 23 % 23 % 22 % 23 % Custom IC Design 25 % 24 % 24 % 22 % 23 % System Interconnect Design 10 % 9 % 9 % 8 % 8 % Design for Manufacturing 7 % 6 % 6 % 6 % 7 % Services and other 7 % 8 % 8 % 9 % 9 % 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 29, 2012, 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. The changes in the percentage of revenue contributed by the Functional Verification, Hardware and IP product group for the quarters presented are primarily related to changes in revenue related to our hardware products. Revenue by Geography Three Months Ended Change March 30, March 31, 2013 2012 Amount Percentage (In millions, except percentages) United States $ 149.2 $ 130.5 $ 18.7 14 % Other Americas 4.6 8.1 (3.5 ) (43 )% Europe, Middle East and Africa 78.9 59.7 19.2 32 % Japan 53.5 56.2 (2.7 ) (5 )% Asia 68.1 61.3 6.8 11 % Total revenue $ 354.3 $ 315.8 $ 38.5 12 % 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 the heading "Item 3. Quantitative and Qualitative Disclosures About Market Risk - Foreign Currency Risk." Revenue for Japan decreased during the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, due to the devaluation of the Japanese yen and the economic climate facing our customers in Japan. We expect revenue for Japan to continue to decrease during the remainder of fiscal 2013, as compared to the same period in 2012, because of expected further devaluation of the Japanese yen. For the primary factors contributing to our increase in revenue in other geographies, see the general description under "Revenue by Period," above. 24-------------------------------------------------------------------------------- Table of Contents Revenue by Geography as a Percent of Total Revenue Three Months Ended March 30, March 31, 2013 2012 United States 42 % 41 % Other Americas 2 % 3 % Europe, Middle East and Africa 22 % 19 % Japan 15 % 18 % Asia 19 % 19 % Total 100 % 100 % Cost of Revenue Three Months Ended Change March 30, March 31, 2013 2012 Amount Percentage (In millions, except percentages) Product and maintenance $ 29.8 $ 27.2 $ 2.6 10 % Services 18.3 19.4 (1.1 ) (6 )% The following table shows cost of revenue as a percentage of related revenue for the three months ended March 30, 2013 and March 31, 2012: Three Months Ended March 30, March 31, 2013 2012 Product and maintenance 9 % 10 % Services 71 % 66 % Cost of Product and Maintenance Cost of product and maintenance includes costs associated with the sale and lease of our hardware and licensing of our software and IP products, employee salary, benefits and other employee-related costs, cost of our customer support services, amortization of acquired intangibles, as well as the costs of technical documentation and royalties payable to third-party vendors. Costs associated with our hardware products include materials, assembly and overhead. These additional hardware manufacturing costs make our cost of 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 March 30, March 31, 2013 2012 Amount Percentage (In millions, except percentages) Product and maintenance-related costs $ 26.0 24.3 $ 1.7 7 % Amortization of acquired intangibles 3.8 2.9 0.9 31 % Total cost of product and maintenance $ 29.8 $ 27.2 $ 2.6 10 % Cost of product and maintenance depends primarily upon the mix of hardware and software product sales in any given period, employee salary, benefits and other employee-related costs, and also depend upon 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. 25-------------------------------------------------------------------------------- Table of Contents Cost of Services Cost of services primarily includes employee salary, benefits and other employee-related costs, costs to maintain the infrastructure necessary to manage a services organization, and provisions for contract losses, if any. Certain of our design services engineers have been redeployed to internal research and development projects or to assist with pre-sales activities, resulting in lower cost of services expense. We expect to continue to utilize certain design services engineers on internal projects and pre-sales activities. 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 hiring, acquisitions, foreign exchange rates and the impact of our variable compensation programs, which are driven by overall operating results. Our employee salary and other compensation-related costs increased during the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, primarily due to hiring additional employees for our research and development activities, the addition of employees through our fiscal 2012 acquisition of Sigrity, and higher variable compensation as a result of improved business performance. Many of our operating expenses are denominated 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 under the heading "Item 3. Quantitative and Qualitative Disclosures About Market Risk - Foreign Currency Risk." We expect our operating expenses to increase during the remainder of fiscal 2013, as compared to the same period in fiscal 2012, due to the addition of employees through the acquisitions of Tensilica and Cosmic and expected hiring of research and development personnel. Our operating expenses for the three months ended March 30, 2013 and March 31, 2012 were as follows: Three Months Ended Change March 30, March 31, 2013 2012 Amount Percentage (In millions, except percentages) Marketing and sales $ 90.4 $ 83.8 $ 6.6 8 % Research and development 124.1 108.6 15.5 14 % General and administrative 29.8 27.8 2.0 7 % Operating expenses $ 244.3 $ 220.2 $ 24.1 11 % Our operating expenses, as a percentage of total revenue, for the three months ended March 30, 2013 and March 31, 2012 were as follows: Three Months Ended March 30, March 31, 2013 2012 Marketing and sales 26 % 27 % Research and development 35 % 34 % General and administrative 8 % 9 % Operating expenses 69 % 70 % 26-------------------------------------------------------------------------------- Table of Contents Marketing and Sales The changes in marketing and sales expense for the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, were due to the following: Change (In millions) Salary, benefits and other employee-related costs $ 6.2 Other individually insignificant items 0.4 $ 6.6 Research and Development The changes in research and development expense for the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, were due to the following: Change (In millions) Salary, benefits and other employee-related costs $ 10.8 Professional engineering services 2.0 Stock-based compensation 1.5 Other individually insignificant items 1.2 $ 15.5 The increase in salary, benefits and other employee-related costs during the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, is primarily due to hiring additional employees for our research and development activities, the addition of employees through our fiscal 2012 acquisition of Sigrity and increased costs associated with design services engineers utilized for internal research and development projects. We expect research and development expense to increase for the remainder of fiscal 2013, as compared to the same period in fiscal 2012, due to the acquisitions of Tensilica and Cosmic and higher salary, benefits and other employee-related costs from an expected increase in hiring. General and Administrative The changes in general and administrative expense for the three months ended March 30, 2013, as compared to the three months ended March 31, 2012 were due to the following: Change (In millions) Professional services 2.1Other individually insignificant items (0.1 ) $ 2.0 The increase in professional services costs during the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, is primarily due to services rendered in connection with the acquisitions of Tensilica and Cosmic. 27-------------------------------------------------------------------------------- Table of Contents Amortization of Acquired Intangibles Three Months Ended Change March 30, March 31, 2013 2012 Amount Percentage (In millions, except percentages) Amortization of acquired intangibles $ 3.8 $ 3.8 $ - - % We expect amortization of acquired intangibles to increase during the remainder of fiscal 2013, as compared to the same period in fiscal 2012, due to the amortization of intangible assets that we expect to be recorded in connection with the acquisitions of Tensilica and Cosmic. Interest Expense Three Months Ended March 30, March 31, 2013 2012 (In millions) Contractual interest expense: 2013 Notes 0.5 0.5 2015 Notes 2.3 2.3 Amortization of debt discount: 2013 Notes 1.7 1.5 2015 Notes 3.9 3.6 Amortization of deferred financing costs: 2013 Notes 0.1 0.1 2015 Notes 0.5 0.5 Other 0.3 - Total interest expense $ 9.3 $ 8.5 Income Taxes During the three months ended March 30, 2013, uncertain tax benefits recorded in a previous business combination were released, resulting in a reduction of uncertain tax benefits of $12.0 million, interest (net of tax benefit) of $13.4 million and penalties of $8.3 million for a total tax benefit of $33.7 million. In addition, the American Tax Relief Act of 2012, enacted in January 2013, retroactively extended the United States federal research tax credit from January 1, 2012 through December 31, 2013. The following table presents the provision for income taxes and the effective tax rate for the three months ended March 30, 2013 and March 31, 2012: Three Months Ended March 30, March 31, 2013 2012 (In millions, except percentages) Provision (benefit) for income taxes $ (27.6 ) $ 8.1 Effective tax rate (54.0 )% 20.8 % Our benefit for income taxes for the three months ended March 30, 2013 primarily consisted of the following: • Tax benefit of $33.7 million related to the release of the uncertain tax position described above; and 28-------------------------------------------------------------------------------- Table of Contents • A period-specific tax benefit for the retroactively extended fiscal 2012 federal research tax credit in the amount of $5.9 million, offset by: • Federal, state and foreign tax expense on anticipated fiscal 2013 income. Our tax expense for the three months ended March 31, 2012 primarily consisted of the following: •Tax expense related to certain of our foreign subsidiaries; •Interest expense on unrecognized tax positions; and •Excess tax benefits from stock-based compensation that were allocated to equity. 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 29, 2012. Liquidity and Capital Resources As of March 30, December 29, 2013 2012 Change (In millions)Cash, cash equivalents and short-term investments $ 911.2 $ 827.1 $ 84.1 Net working capital $ 251.3 $ 174.0 $ 77.3 Cash, Cash Equivalents and Short-term Investments As of March 30, 2013, our principal sources of liquidity consisted of $911.2 million of cash, cash equivalents and short-term investments, as compared to $827.1 million as of December 29, 2012. During the second quarter of fiscal 2012, we began to 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 March 30, 2013. 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 Part II, Item 1A, "Risk Factors." Our primary source of cash, cash equivalents and short-term investments during the three months ended March 30, 2013 was customer payments for products, maintenance and services. We also received cash from stock purchases under our ESPP and from the exercise of stock options. Our primary use of cash, cash equivalents and short-term investments during the three months ended March 30, 2013 was payments relating to salaries, benefits, other employee-related costs and other operating expenses. Approximately 55% of our cash, cash equivalents and short-term investments were held by our foreign subsidiaries as of March 30, 2013. 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. During fiscal 2012, we entered into a $250 million five-year senior secured revolving credit facility. Borrowings under the credit facility 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 December 12, 2017. The credit facility contains customary negative covenants that, among other things, restrict our ability to incur additional indebtedness, grant liens, make certain investments, dispose of certain assets and make certain payments. In addition, the credit facility contains certain financial covenants that require us to maintain a leverage ratio of not greater than 3 to 1, subject to certain exceptions, and requires that we maintain an interest coverage ratio of at least 3 to 1. As of March 30, 2013, we 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. After quarter-end on April 23, 2013, we borrowed $100 million on our line of credit for general working capital purposes. 29-------------------------------------------------------------------------------- Table of Contents On April 22, 2013, after quarter-end, we completed our acquisition of Tensilica. In connection with our acquisition of Tensilica, we utilized our United States cash for cash consideration paid at closing. Additionally, we have signed a definitive agreement to purchase Cosmic. We expect that the majority of the purchase price of Cosmic will be paid using cash held in our foreign subsidiaries. We expect that current cash, cash equivalents and short-term investment balances, cash flows that are generated from operations and additional cash 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 acquisitions, for at least the next 12 months. Net Working Capital Net working capital increased by $77.3 million as of March 30, 2013, as compared to December 29, 2012, due to the following: Change (In millions) Increase in cash and cash equivalents $ 83.8 Decrease in accounts payable and accrued liabilities 14.7 Decrease in current portion of deferred revenue 10.2 Decrease in prepaid expenses and other (4.4 ) Increase in convertible notes (5.6 ) Decrease in receivables, net (22.6 ) Other individually insignificant items 1.2 $ 77.3 Cash Flows from Operating Activities Three Months Ended Change March 30, March 31, 2013 2012 (In millions) Cash provided by operating activities $ 75.3 $ 60.7 $ 14.6 Cash flows from operating activities increased $14.6 million during the three months ended March 30, 2013, as compared to March 31, 2012, due to the following: Change (In millions) Net income, net of non-cash related gains and losses $ 57.7 Changes in operating assets and liabilities, net of effect of acquired businesses (43.1 ) $ 14.6 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. We expect that cash flows from operating activities will fluctuate in future periods due to a number of factors, including our operating results and the timing of our billings, collections and tax payments. 30-------------------------------------------------------------------------------- Table of Contents Cash Flows from Investing Activities Three Months Ended Change March 30, 2013 March 31, 2012 (In millions) Cash used for investing activities (1.8 ) (9.4 ) 7.6 The changes in net cash used for investing activities for the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, were due to the following: Change (In millions)Proceeds from the sale of available-for-sale securities $ 15.0 Purchases of available-for-sale securities (24.3 ) Proceeds from the maturity of available-for-sale securities 8.7 Proceeds from the sale of long-term investments 6.1 Purchases of property, plant and equipment 1.6 Other individually insignificant items 0.5 $ 7.6 The proceeds from, and purchases of, available-for-sale securities is primarily related to normal purchases, sales and maturities of the debt securities included in our $100 million investment portfolio. In connection with our business combinations and asset acquisitions completed before March 30, 2013, we may be obligated to make payments based on, or subject to the satisfaction of, certain performance metrics. If performance is such that these payments are fully achieved, we would be obligated to pay up to an aggregate of $14.4 million in cash during the next 37 months. During fiscal 2013, we expect to use cash for our acquisitions of Tensilica and Cosmic. We also expect to continue our investing activities, including purchasing property, plant and equipment, purchasing intangible assets, purchasing software licenses, business combinations, and making long-term equity investments. Cash Flows from Financing Activities Three Months Ended Change March 30, 2013 March 31, 2012 (In millions) Cash provided by financing activities 15.2 9.4 5.8 The changes in net cash provided by financing activities for the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, were due to the following: Change (In millions) Proceeds from the issuance of common stock $ 9.0 Tax effect related to employee stock transactions allocated to equity 2.4 Principal payments on receivable financing (2.5 ) Stock received for payment of employee taxes on vesting of restricted stock (2.6 ) Other individually insignificant items (0.5 ) $ 5.8 The increase in proceeds from the issuance of common stock during the three months ended March 30, 2013, as compared to the three months ended March 31, 2012, resulted from an increase in the exercise of stock options. 31-------------------------------------------------------------------------------- Table of Contents Other Factors Affecting Liquidity and Capital Resources As of March 30, 2013, we had convertible notes outstanding with a net liability value of $452.4 million and that mature between December 15, 2013, and June 1, 2015. The principal maturity value of these convertible notes is $494.5 million. The total cash or stock 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. In the case of our 2015 Notes, 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, 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 March 31, 2013 through June 29, 2013 because our closing stock price exceeded $9.81 for at least 20 of the last 30 trading days prior to March 30, 2013. Accordingly, the net balance of the 2015 Notes of $312.7 million is classified as a current liability on our condensed consolidated balance sheet as of March 30, 2013. While holders of the 2015 Notes would have the right to convert their notes if early conversion conditions are met, we do not expect holders of the 2015 Notes to convert their notes under such circumstances because the economic value to the holders of the notes has exceeded and likely will continue to exceed the cash received upon conversion. 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 million prior to the maturity of the 2015 Notes. 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 million principal balance in the event of a cash conversion of the 2015 Notes. The 2015 Notes currently trade at a premium to their if-converted value, and we do not anticipate a conversion of the 2015 Notes by the note holders between March 31, 2013 and June 29, 2013. However, if the holders of the 2015 Notes elect to convert their notes between March 31, 2013 and June 29, 2013, we expect to have sufficient cash, cash equivalents, short-term investments and access to our revolving credit facility to fund any payment resulting from a conversion. In the case of our 2013 Notes, we may owe shares of our common stock to the note holders upon conversion if our stock price exceeds $21.15 per share. We entered into hedges with counterparties to limit our exposure to the dilution that may result from the issuance of shares upon conversion of the 2013 Notes. In separate transactions, we sold warrants with a strike price of $31.50 per share. We will experience dilution to our stock and to diluted earnings per share from the outstanding warrants to the extent our stock price exceeds $31.50. We expect to have sufficient cash, cash equivalents, short-term investments and access to our credit facility to fund the maturity of the 2013 Notes in December 2013. The 2013 Notes could become convertible prior to their maturity if certain conversion conditions are met. However, we do not currently expect that any of the conversion conditions will be met prior to the maturity of the 2013 Notes. We also believe that we will have sufficient cash in future periods as well as access to our revolving credit facility to service the maturities of our 2015 Notes, but future changes in our cash position, cash flows from operating activities, cash flows from investing activities, cash flows from financing activities, as well as general business levels and changes in our access to financing may impact our ability to settle the principal amount payable to the holders of the 2013 Notes and 2015 Notes when they mature or convert. For an additional description of the 2015 Notes and 2013 Notes, the conversion terms thereof and the hedge and warrants transactions, see Note 2 in the notes to condensed consolidated financial statements. |