# CADENCE DESIGN SYSTEMS INC (CDNS) FY 2024 MD&A Verbatim Item 7 Management's Discussion and Analysis from CADENCE DESIGN SYSTEMS INC's 10-K for fiscal year 2024. SEC filing source: https://www.sec.gov/Archives/edgar/data/813672/000081367225000024/cdns-20241231.htm Accession: 0000813672-25-000024 Filing date: 2025-02-21 Report date: 2024-12-31 Extracted from Item 7 to the first post-MD&A boundary after HTML sanitization. Confidence: high Company profile: /company/CDNS/ All MD&A years: /company/CDNS/mda/ Previous year: /company/CDNS/mda/fy2023/ (FY 2023) Next year: /company/CDNS/mda/fy2025/ (FY 2025) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report and with Part I, Item 1A, “Risk Factors.” Please refer to the cautionary language at the beginning of Part I of this Annual Report regarding forward-looking statements. Business Overview Cadence® is a global market leader that develops computational, AI-driven software, accelerated hardware, and IP solutions for engineers and scientists to bring new and innovative products to life. The world’s most innovative technology companies use our solutions and services to deliver transformational products to multiple industries that drive the global economy. The products these companies develop are some of the most complex systems in the world. Since our inception, we have been at the forefront of technology innovation. We work closely with our customers, helping them solve their most complex challenges in the semiconductor and electronic systems industries to unlock limitless opportunities. Our strategy allows us to deliver solutions to our customers to solve their most complex product development challenges. Our industry-leading computational software, specialized accelerated hardware, and IP enable us to adapt to our customer’s dynamic design requirements, allowing them to meet their critical business and environmental concerns including time-to-market and sustainability. The creation of even the most seemingly simple electronic systems and products often requires a complex design process and requires highly trained engineers with various areas of specialized knowledge and skill sets. Our ability to deliver innovative products that keep up with increasing complexity allows our customers to be successful in meeting their business goals and objectives. We group our products into the following categories: •Core EDA •IP; and •System Design and Analysis. For additional information about our products, see the discussion in Item 1, “Business,” under the heading “Product Categories.” Management uses certain 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 headings “Results of Operations” and “Liquidity and Capital Resources.” Recent Acquisitions Consistent with our Intelligent System Design strategy, during the first quarter of fiscal 2024, we completed our acquisition of Invecas, a leading provider of design engineering, embedded software and system-level solutions. We believe the addition of a skilled engineering team with vast experience in delivering end-to-end system solutions with deep expertise in advanced nodes, mixed-signal, verification, embedded software, packaging and turnkey custom silicon production will enhance our ability to pursue attractive opportunities in the markets we serve. Revenue and cost of revenue associated with contracts assumed with our acquisition of Invecas is primarily classified as services revenue and cost of services in our consolidated income statements. During the second quarter of fiscal 2024, we completed our acquisition of BETA CAE, a system analysis platform provider of multi-domain, engineering simulation solutions. The acquisition of BETA CAE expands our multiphysics system analysis suite with highly complementary products, enabling us to offer a more comprehensive portfolio to customers in the automotive sector and at companies in the aerospace, industrial and healthcare industries. Revenue associated with contracts assumed with our acquisition of BETA CAE is primarily classified as product and maintenance revenue in our System Design and Analysis product category. Cost of revenue associated with these contracts is primarily classified as cost of product and maintenance in our consolidated income statements. Macroeconomic and Geopolitical Environment Because we operate globally, our business is subject to the effects of economic downturns or recessions in the regions in which we do business, volatility in foreign currency exchange rates relative to the U.S. dollar, inflation, changing interest rates, expanded trade control laws and regulations, potential imposition of new or higher tariffs and geopolitical conflicts. We have been impacted by the continued expansion of trade control laws and regulations, including certain export control restrictions concerning advanced node IC production in China, the inclusion of additional Chinese technology companies on the Bureau of Industry and Security “Entity List” and regulations governing the sale of certain technologies. Based on our current assessments, we expect the impact of these expanded trade control laws and regulations on our business to be limited. In addition, President Trump has announced the imposition of broad-based tariffs on imports from many countries, including China and Mexico. We are monitoring the imposition of these new or higher tariffs, including any pauses on the tariffs imposed, and will assess their potential impact on our business either directly, such as on our hardware business, or due to downstream effects. We also continuously monitor geopolitical conflicts around the world, including the ongoing conflict between Russia and Ukraine and conflicts in the Middle East, and assess their impact on our business. To date, these conflicts have not materially limited our ability to develop or support our products and have not had a material impact on our results of operations, financial condition, liquidity or cash flows. 33 Table of Contents While our business model provides some resilience against these factors, we will continue to monitor the direct and indirect impacts of these or similar circumstances on our business and financial results. For additional information on the potential impact of macroeconomic conditions on our business, see Part I, Item 1A, “Risk Factors.” Results of Operations The discussion of our fiscal 2024 consolidated results of operations includes year-over-year comparisons to fiscal 2023 for revenue, cost of revenue, operating expenses, operating margin, other non-operating income and expenses, income taxes and cash flows. For a discussion of the fiscal 2023 changes compared to fiscal 2022, see the discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 14, 2024. Results of operations for fiscal 2024, as compared to fiscal 2023, reflect the following: •Growth in revenue from our software, services, IP and hardware offerings; •Continued investment in research and development activities and technical sales support, including headcount from acquisitions; •Incremental costs for professional services; and •Increased interest expense from our indebtedness. Revenue We primarily generate revenue from licensing our software and IP, selling or leasing our hardware products, providing maintenance for our software, hardware and IP, providing engineering services and earning royalties generated from the use of our IP. The timing of our revenue is significantly affected by the mix of software, hardware and IP products generating revenue in any given period and whether the revenue is recognized over time or at a point in time, upon completion of delivery. Recurring revenue includes revenue recognized over time from our software arrangements, services, royalties, maintenance on IP licenses and hardware products, and operating leases of hardware. Recurring revenue also includes revenue recognized at varying points in time over the term of other arrangements with non-cancelable commitments, whereby the customer commits to a fixed dollar amount over a specified period of time that can be used to purchase from a list of products or services. The remainder of our revenue is recognized at a point in time and is characterized as up-front revenue. Up-front revenue is primarily generated by our sales of hardware products, individual IP licenses and certain software licenses. The percentage of our recurring and up-front revenue and fluctuations in revenue within our geographies in any single fiscal period are primarily impacted by delivery of hardware and IP products to our customers. The following table shows the percentage of our revenue that is classified as recurring or up-front for fiscal 2024 and 2023:  [[GREPCENT_TABLE]] [["","2024","","2023"],["Revenue recognized over time","80","%","","81","%"],["Revenue from arrangements with non-cancelable commitments","3","%","","3","%"],["Recurring revenue","83","%","","84","%"],["Up-front revenue","17","%","","16","%"],["Total","100","%","","100","%"]] [[/GREPCENT_TABLE]] The percentage of revenue characterized as recurring compared to revenue characterized as up-front may vary between fiscal quarters. We expect our percentage of annual up-front revenue to continue to increase in 2025 as growth in our product offerings for which revenue is recognized up-front is expected to be greater than the growth of our product offerings for which revenue is recognized over time The following table shows the percentage of recurring revenue for the twelve-month periods ended concurrently with our five most recent fiscal quarters: [[GREPCENT_TABLE]] [["","Trailing Twelve Months Ended"],["","December 31, 2024","","September 30, 2024","","June 30, 2024","","March 31, 2024","","December 31, 2023"],["Recurring revenue","83","%","","86","%","","87","%","","87","%","","84","%"],["Up-front revenue","17","%","","14","%","","13","%","","13","%","","16","%"],["Total","100","%","","100","%","","100","%","","100","%","","100","%"]] [[/GREPCENT_TABLE]] 34 Table of Contents Revenue by Year The following table shows our revenue for fiscal 2024 and 2023 and the change in revenue between years: [[GREPCENT_TABLE]] [["","","","","","Change"],["","2024","","2023","","","","2024 vs. 2023"],["","(In millions, except percentages)"],["Product and maintenance","$","4,213.5","","","$","3,834.4","","","","","$","379.1","","","10","%"],["Services","427.8","","","255.6","","","","","172.2","","","67","%"],["Total revenue","$","4,641.3","","","$","4,090.0","","","","","$","551.3","","","13","%"]] [[/GREPCENT_TABLE]] Product and maintenance revenue increased during fiscal 2024, as compared to fiscal 2023, primarily due to growth in revenue from our software, hardware and IP offerings as a result of customers’ continued investment in complex designs for their products. Services revenue increased during fiscal 2024, as compared to fiscal 2023, primarily due to growth in revenue from our design service offerings, which were supplemented by our acquisition of Invecas. Services revenue may fluctuate from period to period based on the timing of fulfillment of our services and IP performance obligations. No one customer accounted for 10% or more of total revenue during fiscal 2024 or 2023. Revenue by Product Category The following table shows the percentage of revenue contributed by each of our product categories during fiscal 2024 and 2023: [[GREPCENT_TABLE]] [["","2024","","2023"],["Core EDA","71","%","","76","%"],["IP","13","%","","12","%"],["System Design and Analysis","16","%","","12","%"],["Total","100","%","","100","%"]] [[/GREPCENT_TABLE]] Revenue from any one product category as a percentage of total revenue may fluctuate from period to period based on the mix of products and services sold in a given period and the timing of revenue recognition, particularly for our hardware, IP and certain software products. While revenue from our Core EDA product category increased during fiscal 2024, as compared to fiscal 2023, Core EDA as a percentage of total revenue decreased over the same period. As shown in the table below, revenue from China decreased during the same period and the substantial majority of that decreased revenue is included in the Core EDA category, resulting in lower revenue growth in the Core EDA category compared to both the IP and System Design and Analysis categories. 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 categories based upon the expected usage of our products. The actual usage of our products by these customers may differ and, if that proves to be the case, the revenue allocation in the table above would differ. Revenue by Geography [[GREPCENT_TABLE]] [["","","","","","Change"],["","2024","","2023","","","","2024 vs. 2023"],["","(In millions, except percentages)"],["United States","$","2,159.7","","","$","1,694.5","","","","","$","465.2","","","27","%"],["Other Americas","93.1","","","65.3","","","","","27.8","","","43","%"],["China","573.1","","","679.5","","","","","(106.4)","","","(16)","%"],["Other Asia","855.9","","","766.4","","","","","89.5","","","12","%"],["Europe, Middle East and Africa (\u201cEMEA\u201d)","699.3","","","655.1","","","","","44.2","","","7","%"],["Japan","260.2","","","229.2","","","","","31.0","","","14","%"],["Total revenue","$","4,641.3","","","$","4,090.0","","","","","$","551.3","","","13","%"]] [[/GREPCENT_TABLE]] During fiscal 2024, as compared to fiscal 2023, revenue in the United States increased primarily due to growth in revenue from our hardware, software, IP and service offerings, while revenue in China decreased primarily due to a decrease in revenue from our hardware and IP offerings. Revenue in the remaining geographies presented in the table above increased during fiscal 2024, as compared to fiscal 2023, primarily due to growth in revenue from software offerings. 35 Table of Contents Revenue by Geography as a Percent of Total Revenue [[GREPCENT_TABLE]] [["","2024","","2023"],["United States","47","%","","41","%"],["Other Americas","2","%","","2","%"],["China","12","%","","17","%"],["Other Asia","18","%","","19","%"],["Europe, Middle East and Africa","15","%","","16","%"],["Japan","6","%","","5","%"],["Total","100","%","","100","%"]] [[/GREPCENT_TABLE]] Most of our revenue is transacted in the U.S. dollar. However, certain revenue transactions are denominated in foreign currencies. For an additional description of how changes in foreign exchange rates affect our consolidated financial statements, see the discussion under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.” Cost of Revenue [[GREPCENT_TABLE]] [["","","","","","Change"],["","2024","","2023","","","","2024 vs. 2023"],["","(In millions, except percentages)"],["Cost of product and maintenance","$","436.6","","","$","331.8","","","","","$","104.8","","","32","%"],["Cost of services","210.9","","","103.3","","","","","107.6","","","104","%"],["Total cost of revenue","$","647.5","","","$","435.1","","","","","$","212.4","","","49","%"]] [[/GREPCENT_TABLE]] The following table shows cost of revenue as a percentage of related revenue for fiscal 2024 and 2023: [[GREPCENT_TABLE]] [["","2024","","2023"],["Cost of product and maintenance","10","%","","9","%"],["Cost of services","49","%","","40","%"]] [[/GREPCENT_TABLE]] Cost of Product and Maintenance Cost of product and maintenance includes costs associated with the sale and lease of our hardware products and licensing of our software and IP products, certain employee salary and benefits and other employee-related costs, cost of our customer support services, amortization of technology-related and maintenance-related acquired intangibles, costs of technical documentation and royalties payable to third-party vendors. Cost of product and maintenance depends primarily on our hardware product sales in any given period, but is also affected by employee salary and benefits and other employee-related costs, reserves for inventory, and the timing and extent to which we acquire intangible assets, license third-party technology or IP, and sell our products that include such acquired or licensed assets, technology or IP. A summary of cost of product and maintenance for fiscal 2024 and 2023 is as follows: [[GREPCENT_TABLE]] [["","","","","","","","Change"],["","2024","","2023","","","","2024 vs. 2023"],["","(In millions, except percentages)"],["Product and maintenance-related costs","$","376.5","","","$","288.0","","","","","$","88.5","","","31","%"],["Amortization of acquired intangibles","60.1","","","43.8","","","","","16.3","","","37","%"],["Total cost of product and maintenance","$","436.6","","","$","331.8","","","","","$","104.8","","","32","%"]] [[/GREPCENT_TABLE]] 36 Table of Contents Product and maintenance-related costs increased during fiscal 2024, when compared to fiscal 2023, due to the following: [[GREPCENT_TABLE]] [["","Change"],["","2024 vs. 2023"],["","(In millions)"],["Hardware product costs","$","80.1"],["Salary, benefits and other employee-related costs","4.9"],["Other items","3.5"],["Total change in product and maintenance-related costs","$","88.5"]] [[/GREPCENT_TABLE]] Costs associated with our hardware products include components, assembly, testing, applicable reserves and overhead. These costs make our cost of hardware products higher, as a percentage of revenue, than our cost of software and IP products. Hardware product costs increased during fiscal 2024, as compared to fiscal 2023, primarily due to increased installations of hardware products and increased charges for excess and obsolete inventory related to previous generations of our hardware products. Amortization of acquired intangibles included in cost of product and maintenance may fluctuate from period to period depending on the timing of newly acquired assets relative to assets becoming fully amortized in any given period. Cost of Services Cost of services primarily includes employee salary, benefits and other employee-related costs to perform work on revenue-generating projects, costs to maintain the infrastructure necessary to manage a services organization, and direct costs associated with certain design services. Cost of services may fluctuate from period to period based on our utilization of design services engineers on revenue-generating projects rather than internal development projects and the timing of design service projects being completed. Cost of services increased during fiscal 2024, as compared to fiscal 2023, primarily due to increased costs associated with our design service offerings and costs associated with the service offerings from our acquisition of Invecas. Operating Expenses Our operating expenses include marketing and sales, research and development, and general and administrative expenses. Factors that tend to cause our operating expenses to fluctuate include changes in the number of employees due to hiring and acquisitions, industry trends for salary and other employee benefits, stock-based compensation, foreign exchange rate movements, acquisition-related costs, and volatility in variable compensation programs that are driven by operating results. Many of our operating expenses are transacted in various foreign currencies. We recognize lower expenses in periods when the U.S. dollar strengthens in value against other currencies, and we recognize higher expenses when the U.S. dollar weakens against other currencies. For an additional description of how changes in foreign exchange rates affect our consolidated financial statements, see the discussion in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.” Our operating expenses for fiscal 2024 and 2023 were as follows: [[GREPCENT_TABLE]] [["","","","","","","","Change"],["","2024","","2023","","","","2024 vs. 2023"],["","(In millions, except percentages)"],["Marketing and sales","$","757.5","","","$","690.3","","","","","$","67.2","","","10","%"],["Research and development","1,549.1","","","1,441.8","","","","","107.3","","","7","%"],["General and administrative","282.3","","","242.4","","","","","39.9","","","16","%"],["Total operating expenses","$","2,588.9","","","$","2,374.5","","","","","$","214.4","","","9","%"]] [[/GREPCENT_TABLE]] Our operating expenses, as a percentage of total revenue, for fiscal 2024 and 2023 were as follows: [[GREPCENT_TABLE]] [["","2024","","2023"],["Marketing and sales","16","%","","17","%"],["Research and development","34","%","","35","%"],["General and administrative","6","%","","6","%"],["Total operating expenses","56","%","","58","%"]] [[/GREPCENT_TABLE]] 37 Table of Contents  Marketing and Sales The increase in marketing and sales expense were due to the following: [[GREPCENT_TABLE]] [["","Change"],["","2024 vs. 2023"],["","(In millions)"],["Salary, benefits and other employee-related costs","$","48.2"],["Stock-based compensation","10.9"],["Facilities and other infrastructure costs","6.7"],["Other items","1.4"],["Total change in marketing and sales expense","$","67.2"]] [[/GREPCENT_TABLE]] Salary, benefits and other employee-related costs and stock-based compensation included in marketing and sales expense increased during fiscal 2024, as compared to fiscal 2023, primarily due to our continued investment in attracting and retaining talent dedicated to technical sales support, including additional headcount from acquisitions. Facilities and other infrastructure costs included in marketing and sales expense increased during fiscal 2024, as compared to fiscal 2023, primarily due to our growing workforce. We expect to continue attracting and retaining talent dedicated to technical sales support through hiring and acquisitions. Research and Development  The increase in research and development expense were due to the following: [[GREPCENT_TABLE]] [["","Change"],["","2024 vs. 2023"],["","(In millions)"],["Salary, benefits and other employee-related costs","$","49.1"],["Stock-based compensation","47.0"],["Facilities and other infrastructure costs","8.4"],["Professional services","5.0"],["Other items","(2.2)"],["Total change in research and development expense","$","107.3"]] [[/GREPCENT_TABLE]] Salary, benefits and other employee-related costs and stock-based compensation included in research and development expense increased during fiscal 2024, as compared to fiscal 2023, due to our continued investment in attracting and retaining talent for research and development activities, including additional headcount from acquisitions. Facilities and other infrastructure costs increased during fiscal 2024, as compared to fiscal 2023, primarily due to our growing workforce. We expect to continue attracting and retaining talent dedicated to research and development activities through hiring and acquisitions. General and Administrative The changes in general and administrative expense were due to the following: [[GREPCENT_TABLE]] [["","Change"],["","2024 vs. 2023"],["","(In millions)"],["Outside legal fees","$","18.7"],["Salary, benefits and other employee-related costs","12.8"],["Estimated legal liabilities","8.3"],["Foreign service tax","5.0"],["Other professional services","3.4"],["Stock-based compensation","3.4"],["Contributions to non-profit organizations","(14.7)"],["Other items","3.0"],["Total change in general and administrative expense","$","39.9"]] [[/GREPCENT_TABLE]] 38 Table of Contents Outside legal fees included in general and administrative expense increased during fiscal 2024, as compared to fiscal 2023, primarily due to increased legal services associated with acquisitions and legal proceedings. For additional information about our legal proceedings, including the increase in estimated legal liabilities, see Note 18 in the notes to consolidated financial statements. Salary, benefits and other employee-related costs and stock-based compensation included in general and administrative expense increased during fiscal 2024, as compared to fiscal 2023, primarily due to additional headcount from acquisitions. Also, during fiscal 2024, as compared to fiscal 2023, we experienced an increase in foreign service tax expense, because we did not benefit from any foreign service tax refunds as we did during fiscal 2023. Contributions to non-profit organizations decreased during fiscal 2024, as compared to fiscal 2023, primarily due to the timing of our periodic contributions to support charitable initiatives, including the Cadence Giving Foundation. Amortization of Acquired Intangibles Amortization of acquired intangibles consists primarily of amortization of customer relationships, acquired backlog, trade names, trademarks and patents. Amortization in any given period depends primarily on the timing and extent to which we acquire intangible assets. [[GREPCENT_TABLE]] [["","","","","","","","Change"],["","2024","","2023","","","","2024 vs. 2023"],["","(In millions, except percentages)"],["Amortization of acquired intangibles","$","30.4","","","$","18.2","","","","","$","12.2","","","67","%"]] [[/GREPCENT_TABLE]] Amortization of acquired intangibles increased during fiscal 2024, as compared to fiscal 2023, primarily due to amortization from intangible assets acquired with our fiscal 2024 and fiscal 2023 acquisitions, partially offset by certain intangible assets that became fully amortized. Restructuring and Other Charges We have initiated restructuring plans in recent years, most recently in August 2024, to better align our resources with our business strategy. Restructuring charges and related benefits are derived from management's estimates during the formulation of the restructuring plans, based on then-currently available information. As a result, our restructuring plans may not achieve the benefits anticipated on the timetable or at the level contemplated. Additional actions, including further restructuring of our operations, may be required in the future. For additional information about our restructuring plans, see Note 11 in the notes to consolidated financial statements. Operating margin Operating margin represents income from operations as a percentage of total revenue. Our operating margin for fiscal 2024 and 2023 was as follows: [[GREPCENT_TABLE]] [["","2024","","2023"],["Operating margin","29","%","","31","%"]] [[/GREPCENT_TABLE]] Operating margin decreased during fiscal 2024, as compared to fiscal 2023, primarily due to the mix of products and services sold during each respective period. In addition, our acquisitions during fiscal 2024 resulted in incremental expenses, including amortization of acquired intangibles, that exceeded incremental revenue. 39 Table of Contents Interest Expense Interest expense for fiscal 2024 and 2023 was comprised of the following: [[GREPCENT_TABLE]] [["","2024","","2023"],["","(In millions)"],["Contractual cash interest expense:"],["Senior Notes","$","46.0","","","$","15.3"],["Term Loans","25.9","","","17.7"],["Revolving Credit Facility","0.7","","","2.0"],["Amortization of debt discount and debt issuance costs:"],["Senior Notes","1.9","","","0.9"],["Term Loans","1.2","","","0.2"],["Revolving Credit Facility","0.4","","","\u2014"],["Other","(0.1)","","","0.1"],["Total interest expense","$","76.0","","","$","36.2"]] [[/GREPCENT_TABLE]] Interest expense increased during fiscal 2024, as compared to fiscal 2023, primarily due to the interest expense related to new debt issued during fiscal 2024. We expect interest expense to increase during fiscal 2025 due to the increased level of debt on our consolidated balance sheet compared to prior periods. For an additional description of our debt arrangements, see Note 5 in the notes to consolidated financial statements. Other Income (Expense), Net Other income (expense), net consists primarily of interest earned on cash, cash equivalents and investments in debt securities, realized and unrealized gains and losses from our investments in equity securities of other companies, gains and losses from investments held in the Nonqualified Deferred Compensation (“NQDC”) trust and foreign exchange gains and losses. Other income (expense), net increased during fiscal 2024, as compared to fiscal 2023, primarily due to increased interest earned from deposits and net gains from our investments in equity securities of publicly held companies. For additional information about other income (expense), net, see Note 12 in the notes to consolidated financial statements. Income Taxes The following table presents the provision for income taxes and the effective tax rate for fiscal 2024 and 2023: [[GREPCENT_TABLE]] [["","2024","","2023"],["","(In millions, except percentages)"],["Provision for income taxes","$","340.3","","","$","240.8"],["Effective tax rate","24.4","%","","18.8","%"]] [[/GREPCENT_TABLE]] Our provision for income taxes for fiscal 2024 was primarily attributable to federal, state and foreign income taxes on our fiscal 2024 income. We also recognized tax benefits of $42.9 million related to stock-based compensation that vested or was exercised during the period. During fiscal 2024, we received best judgment tax audit assessments of approximately $26.0 million from the Israel Tax Authority (“ITA”) for the tax years 2017, 2018 and 2019. The best judgment tax audit assessments were primarily related to transfer pricing and withholding taxes. We disagree with the ITA’s positions and have appealed or are in the process of appealing the tax assessments. In 2021, the OECD announced Pillar Two Model Rules which call for the taxation of large multinational corporations, such as Cadence, at a global minimum tax rate of 15%. Many non-U.S. tax jurisdictions, including Ireland and Hungary, have either recently enacted legislation to adopt certain components of the Pillar Two Model Rules beginning in fiscal 2024 or announced their plans to enact legislation in future years. The currently enacted Pillar Two Model Rules did not have a material impact to our provision for income taxes for fiscal 2024. Our provision for income taxes for fiscal 2023 was primarily attributable to federal, state and foreign income taxes on our fiscal 2023 income, partially offset by the tax benefit of $54.0 million related to stock-based compensation that vested or was exercised during the period. We also recognized a tax benefit of $24.8 million due to the recognition of previously unrecognized federal tax benefits from the expiration of the applicable statute of limitations and a tax benefit of $14.0 million primarily related to a change in R&D expenses that were capitalized in fiscal 2022. 40 Table of Contents Our future effective tax rates may also be materially impacted by tax amounts associated with our foreign earnings at rates different from the United States federal statutory rate, research credits, the tax impact of stock-based compensation, accounting for uncertain tax positions, business combinations, closure of statutes of limitations or settlement of tax audits and changes in tax law. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and Hungary. Our future effective tax rates may be adversely affected if our earnings were to be lower in countries where we have lower statutory tax rates. We currently expect that our fiscal 2025 effective tax rate will be approximately 25%. We expect that our quarterly effective tax rates will vary from our fiscal 2025 effective tax rate as a result of recognizing the income tax effects of stock-based awards in the quarterly periods that the awards vest or are settled and other items that we cannot anticipate. For additional discussion about how our effective tax rate could be affected by various risks, see Part I, Item 1A, “Risk Factors.” For further discussion regarding our income taxes, see Note 8 in the notes to consolidated financial statements. Liquidity and Capital Resources [[GREPCENT_TABLE]] [["","As of","","Change"],["","December 31, 2024","","December 31, 2023","","","","2024 vs. 2023"],["","(In millions)"],["Cash and cash equivalents","$","2,644.0","","","$","1,008.2","","","","","$","1,635.8"],["Net working capital","2,646.0","","","385.4","","","","","2,260.6"]] [[/GREPCENT_TABLE]] Cash and Cash Equivalents As of December 31, 2024, our principal sources of liquidity consisted of $2,644.0 million of cash and cash equivalents as compared to $1,008.2 million as of December 31, 2023. Our primary sources of cash and cash equivalents during fiscal 2024 were proceeds from debt, cash generated from operations, proceeds from the issuance of common stock resulting from stock purchases under our employee stock purchase plan and stock options exercised during the year and proceeds from the sale and maturity of investments. Our primary uses of cash and cash equivalents during fiscal 2024 were payments related to employee salaries and benefits, operating expenses, payments on debt, cash paid for acquired businesses, repurchases of our common stock, purchases of inventory, payments for income taxes, payment of employee taxes on vesting of restricted stock and purchases of property, plant and equipment. Approximately 34% of our cash and cash equivalents was held by our foreign subsidiaries as of December 31, 2024. Our cash and cash equivalents held by our foreign subsidiaries may vary from period to period due to the timing of collections and repatriation of foreign earnings. We expect that current cash and cash equivalent balances and cash flows that are generated from operations and financing activities will be sufficient to meet the needs of our domestic and international operating activities and other capital and liquidity requirements, including acquisitions, investments and share repurchases, for at least the next 12 months and thereafter for the foreseeable future. Net Working Capital Net working capital is comprised of current assets less current liabilities, as shown on our consolidated balance sheets. Our net working capital varies from period to period due to changes in operating assets and liabilities and the timing of investing and financing activities. Cash Flows from Operating Activities Cash flows from operating activities during fiscal 2024 and 2023 were as follows: [[GREPCENT_TABLE]] [["","","","Change"],["","2024","","2023","","","","2024 vs. 2023"],["","(In millions)"],["Cash provided by operating activities","$","1,260.6","","","$","1,349.2","","","","","$","(88.6)"]] [[/GREPCENT_TABLE]] Cash flows provided by 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 customer agreements. The decrease in cash flows from operating activities during fiscal 2024, as compared to fiscal 2023, was primarily due to the timing of cash receipts from customers and the timing of cash disbursements for operating assets and liabilities. 41 Table of Contents Cash Flows Used for Investing Activities Cash flows used for investing activities during fiscal 2024 and 2023 were as follows: [[GREPCENT_TABLE]] [["","","","Change"],["","2024","","2023","","","","2024 vs. 2023"],["","(In millions)"],["Cash used for investing activities","$","(837.1)","","","$","(412.2)","","","","","$","(424.9)"]] [[/GREPCENT_TABLE]] Cash used for investing activities increased during fiscal 2024, as compared to fiscal 2023, primarily due to increased payments for business combinations and purchases of property, plant and equipment, partially offset by a decrease in cash used for investments in equity and debt securities. We expect to continue our investing activities, including purchasing property, plant and equipment, purchasing intangible assets, acquiring other companies and businesses, and making investments. Cash Flows Provided by (Used for) Financing Activities Cash flows provided by (used for) financing activities during fiscal 2024 and 2023 were as follows: [[GREPCENT_TABLE]] [["","","","Change"],["","2024","","2023","","","","2024 vs. 2023"],["","(In millions)"],["Cash provided by (used for) for financing activities","$","1,239.2","","","$","(803.6)","","","","","$","2,042.8"]] [[/GREPCENT_TABLE]] Cash from financing activities increased during fiscal 2024, as compared to fiscal 2023, primarily due to an increase in proceeds from debt, increased proceeds from the issuance of common stock resulting from stock purchases under our employee stock purchase plan and stock options exercised during the period, and a decrease in repurchases of common stock. These factors were partially offset by an increase in payments on debt and payments of employee taxes on vesting of restricted stock. Other Factors Affecting Liquidity and Capital Resources Senior Notes In September 2024, we issued $2.5 billion aggregate principal amount of senior notes, consisting of $500.0 million aggregate principal amount of 4.200% Senior Notes due 2027 (the “2027 Notes”), $1.0 billion aggregate principal amount of 4.300% Senior Notes due 2029 (the “2029 Notes”) and $1.0 billion aggregate principal amount of 4.700% Senior Notes due 2034 (the “2034 Notes” and together with the 2027 Notes and the 2029 Notes, the “New Notes”). Interest on the New Notes is payable semi-annually in arrears in March and September of each year, beginning in March 2025. As of December 31, 2024, we were in compliance with all covenants associated with the New Notes. We used a portion of the net proceeds of the New Notes issued in September 2024 to fully prepay the outstanding principal and accrued interest of our term loan facility due on September 7, 2025 (the “2025 Term Loan”) and our term loan facility due on May 20, 2026 (the “2026 Term Loan”). In October 2024, we also settled the outstanding principal of $350.0 million and accrued interest on the 4.375% Senior Notes that were due October 15, 2024 (the “2024 Notes”) at maturity. Revolving Credit Facility In August 2024, we terminated our existing revolving credit facility, dated June 30, 2021, and amended in September 2022, and entered into a five-year senior unsecured revolving credit facility with a group of lenders led by Bank of America, N.A., as administrative agent (the “2024 Credit Facility”). The 2024 Credit Facility provides for borrowings up to $1.25 billion, with the right to request increased capacity up to an additional $500.0 million upon receipt of lender commitments, for total maximum borrowings of $1.75 billion. The 2024 Credit Facility expires on August 14, 2029. Any outstanding loans drawn under the 2024 Credit Facility are due at maturity on August 14, 2029, subject to an option to extend the maturity date. Outstanding borrowings may be repaid at any time prior to maturity. Interest rates associated with the 2024 Credit Facility are variable, so interest expense is impacted by changes in the interest rates, particularly for periods when there are outstanding borrowings under the revolving credit facility. Interest is payable quarterly. As of December 31, 2024, there were no borrowings outstanding under the 2024 Credit Facility, and we were in compliance with all covenants associated with such credit facility. For additional information relating to our debt arrangements, see Note 5 in the notes to consolidated financial statements. Stock Repurchase Program We are authorized to repurchase shares of our common stock under a publicly announced program that was most recently increased by our Board of Directors in August 2023. The actual timing and amount of repurchases are subject to business and market conditions, corporate and regulatory requirements, stock price, acquisition opportunities and other factors. Our repurchase authorization does not obligate us to acquire a minimum amount of shares, does not have an expiration date and may be modified, suspended or terminated without prior notice. As of December 31, 2024, approximately $0.8 billion of the share repurchase authorization remained available to repurchase shares of our common stock. See Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for additional information on share repurchases. 42 Table of Contents Other Liquidity Requirements A summary of other capital and liquidity requirements as of December 31, 2024, is as follows: [[GREPCENT_TABLE]] [["","Total","","Due in LessThan 1 Year"],["","(In millions)"],["Operating lease obligations(1)","$","173.6","","","$","46.2"],["Purchase obligations","78.3","","","58.9"],["Contractual interest payments","748.0","","","111.0"],["Income tax payable","40.4","","","40.4"],["Other long-term contractual obligations (2)","94.5","","","\u2014"],["Total","$","1,134.8","","","$","256.5"]] [[/GREPCENT_TABLE]] _________________ (1) Includes future payments under leases that had commenced as of December 31, 2024 as well as leases that had been signed but not yet commenced as of December 31, 2024. (2)    Included in other long-term contractual obligations are long-term income tax liabilities of $55.8 million related to unrecognized tax benefits. The remaining portion of other long-term contractual obligations is primarily liabilities associated with defined benefit retirement plans and acquisitions. We expect that current cash and cash equivalent balances, cash flows that are generated from operations and financing activities will be sufficient to meet the needs of our domestic and international operating activities and other capital and liquidity requirements, including acquisitions, investments and share repurchases, for at least the next 12 months and thereafter for the foreseeable future. As of December 31, 2024, we did not have any significant off-balance sheet arrangements that are reasonably likely to have a material current or future effect on our operating results or financial condition. Critical Accounting Estimates In preparing our 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 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. We believe that the assumptions, judgments and estimates involved in revenue recognition, the accounting for income taxes and business combinations have the greatest potential impact on our consolidated financial statements; therefore, we consider these to be our critical accounting estimates. For information on our significant accounting policies, see Note 2 in the notes to consolidated financial statements. Revenue Recognition Our contracts with customers often include promises to transfer multiple software and/or IP licenses, hardware and services, including professional services, technical support services, and rights to unspecified updates to a customer. These contracts require us to apply judgment in identifying and evaluating any terms and conditions in contracts which may impact revenue recognition. Determining whether licenses and services are distinct performance obligations that should be accounted for separately, or not distinct and thus accounted for together, requires significant judgment. In some arrangements, such as most of our IP license arrangements and the license of certain software, we have concluded that the licenses and associated services are distinct from each other. In other arrangements, like the majority of our time-based software arrangements, the licenses and certain services are not distinct from each other. These time-based software arrangements include multiple software licenses and updates to the licensed software products, as well as technical support, and we have concluded that these promised goods and services are a single, combined performance obligation. Judgment is required to determine the stand-alone selling prices (“SSPs”) for each distinct performance obligation. We rarely license or sell products on a standalone basis, so we are required to estimate the SSP for each performance obligation. In instances where the SSP is not directly observable because we do not sell the license, product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual performance obligations due to the stratification of those items by classes of customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region of the customer in determining the SSP. 43 Table of Contents Revenue is recognized over time for our combined performance obligations that include software licenses, updates, and technical support as well as for maintenance and professional services that are separate performance obligations. For our professional services, revenue is recognized over time, generally using costs incurred or hours expended to measure progress. Judgment is required in estimating project status and the costs necessary to complete projects. A number of internal and external factors can affect these estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. For our other performance obligations recognized over time, revenue is generally recognized using a time-based measure of progress reflecting generally consistent efforts to satisfy those performance obligations throughout the arrangement term. If a group of agreements are so closely related that they are, in effect, part of a single arrangement, such agreements are deemed to be one arrangement for revenue recognition purposes. We exercise significant judgment to evaluate the relevant facts and circumstances in determining whether the separate agreements should be accounted for separately or as, in substance, a single arrangement. Our judgments about whether a group of contracts comprise a single arrangement can affect the allocation of consideration to the distinct performance obligations, which could have an effect on results of operations for the periods involved. We are required to estimate the total consideration expected to be received from contracts with customers. In some circumstances, the consideration expected to be received is variable based on the specific terms of the contract or based on our expectations of the term of the contract. Generally, we have not experienced significant returns or refunds to customers. These estimates require significant judgment and the change in these estimates could have an effect on our results of operations during the periods involved. Accounting for Income Taxes We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating and estimating our provision for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. Our provision for income taxes could be adversely affected by our earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize the related tax benefit, changes in foreign currency exchange rates, entry into new businesses and geographies and changes to our existing businesses, acquisitions and investments, changes in our deferred tax assets and liabilities including changes in our assessment of valuation allowances, changes in the relevant tax laws or interpretations of these tax laws, and developments in current and future tax examinations. We only recognize the tax benefit of an income tax position if we judge that it is more likely than not that the tax position will be sustained, solely on its technical merits, in a tax audit including resolution of any related appeals or litigation processes. To make this judgment, we must interpret complex and sometimes ambiguous tax laws, regulations and administrative practices. If we judge that an income tax position meets this recognition threshold, then we must measure the amount of the tax benefit to be recognized by estimating the largest amount of tax benefit that has a greater than 50% cumulative probability of being realized upon settlement with a taxing authority that has full knowledge of all of the relevant facts. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible settlement outcomes. We must reevaluate our income tax positions on a quarterly basis to consider factors such as changes in facts or circumstances, changes in tax law, effectively settled issues under audit, the lapse of applicable statute of limitations, and new audit activity. Such a change in recognition or measurement would result in recognition of a tax benefit or an additional charge to the tax provision. For a more detailed description of our unrecognized tax benefits, see Note 8 in the notes to consolidated financial statements. Business Combinations When we acquire businesses, we allocate the purchase price to the acquired tangible assets and assumed liabilities, including deferred revenue, liabilities associated with the fair value of contingent consideration and acquired identifiable intangible assets. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires us to make significant estimates in determining the fair values of these acquired assets and assumed liabilities, especially with respect to intangible assets and goodwill. These estimates are based on information obtained from management of the acquired companies, our assessment of this information, and historical experience. These estimates can include, but are not limited to, the cash flows that an acquired business is expected to generate in the future, the cash flows that specific assets acquired with that business are expected to generate in the future, the appropriate weighted average cost of capital, and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable, and if different estimates were used, the purchase price for the acquisition could be allocated to the acquired assets and assumed liabilities differently from the allocation that we have made to the acquired assets and assumed liabilities. In addition, unanticipated events and circumstances may occur that may affect the accuracy or validity of such estimates, and if such events occur, we may be required to adjust the value allocated to acquired assets or assumed liabilities. We also make significant judgments and estimates when we assign useful lives to the definite-lived intangible assets identified as part of our acquisitions. These estimates are inherently uncertain and if we used different estimates, the useful life over which we amortize intangible assets would be different. In addition, unanticipated events and circumstances may occur that may impact the useful life assigned to our intangible assets, which would impact our amortization of intangible assets expense and our results of operations. 44 Table of Contents During fiscal 2024, we acquired intangible assets of $366.0 million, primarily through our acquisitions of BETA CAE and Invecas. The fair value of the intangible assets acquired was determined using variations of the income approach that utilizes unobservable inputs classified as Level 3 measurements. For existing technology, the fair value was determined by applying the relief-from-royalty method. This method is based on the application of a royalty rate to forecasted revenue to quantify the benefit of owning the intangible asset rather than paying a royalty for use of the asset. To estimate royalty savings over time, we projected revenue from the acquired existing technology over the estimated remaining life of the technology, including the effect of assumed technological obsolescence, before applying an assumed royalty rate. We assumed technological obsolescence at a rate of 10% annually, before applying an assumed royalty rate of 30% and a discount rate of 10%. For agreements and relationships, the fair value was determined by using the multi-period excess earnings method. This method reflects the present value of the projected cash flows that are expected to be generated from existing customers, less charges representing the contribution of other assets to those cash flows. Projected income from existing customer relationships was determined using customer retention rates between 85% and 92%. The present value of operating cash flows from existing customers was determined using discount rates between 10% and 14%. We believe that our estimates and assumptions related to the fair value of our acquired intangible assets are reasonable, but significant judgment is involved. New Accounting Standards For additional information about the adoption of new accounting standards, see Note 2 in the notes to consolidated financial statements.