CADENCE DESIGN SYSTEMS INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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 (this "Quarterly Report") and in conjunction with our Annual
Report on Form 10-K for the fiscal year ended January 1, 2022. This Quarterly
Report contains statements that are not historical in nature, are predictive, or
that depend upon or refer to future events or conditions or contain other
forward-looking statements. 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 and services,
statements regarding our reliance on third parties, statements regarding the
impact on our business of the COVID-19 pandemic and related public health
measures or mandates, and other statements using words such as "anticipates,"
"believes," "could," "estimates," "expects," "forecasts," "intends," "may,"
"plans," "projects," "should," "targets," "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 "Results of Operations," "Quantitative and Qualitative
Disclosures About Market Risk," and "Liquidity and Capital Resources" sections
contained in this Quarterly Report, the "Risk Factors" section contained in our
Annual Report on Form 10-K for the fiscal year ended January 1, 2022, and the
risks discussed in our other Securities and Exchange Commission ("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.

Company overview


Cadence is a leader in electronic system design, building upon more than 30
years of computational software expertise. We enable our customers to develop
electronic products. Our products and services are designed to give our
customers a competitive edge in their development of integrated circuits
("ICs"), systems-on-chip ("SoCs"), and increasingly sophisticated electronic
devices and systems. Our products and services do this by optimizing
performance, minimizing power consumption, shortening the time to bring our
customers' products to market, improving engineering productivity and reducing
their design, development and manufacturing costs. We offer software, hardware,
services and reusable IC design blocks, which are commonly referred to as
intellectual property ("IP").

Our strategy, which we call Intelligent System Design™, is to provide the
technology necessary for our customers to develop electronic products across a
variety of vertical markets including consumer, hyperscale computing, mobile, 5G
communications, automotive, aerospace and defense, industrial and healthcare.
Our products and services enable our customers to develop complex and innovative
electronic products, so demand for our technology is driven by our customers'
investment in new designs and products. Historically, the industry that provided
the tools used by IC engineers was referred to as Electronic Design Automation
("EDA"). Today, our offerings include and extend beyond EDA.

We group our products into categories related to the main design activities:


•Custom IC Design and Simulation;
•Digital IC Design and Signoff;
•Functional Verification;
•IP; and
•System Design and Analysis.

Consistent with our Intelligent System Design strategy, we recently acquired FFG
Holdings Limited ("Future Facilities") and announced a definitive agreement to
acquire OpenEye Scientific Software, Inc. ("OpenEye"). Both of these
acquisitions will add important, new technologies and capabilities to our
portfolio that we believe will enhance our ability to pursue attractive
opportunities in the markets we serve. These acquisitions are expected to
increase expenses, including amortization of acquired intangible assets, more
than revenue for at least the remainder of fiscal 2022. For information about
these acquisitions, see Note 15 in the notes to condensed consolidated financial
statements.

For additional information about our products, see the discussion in Item 1,
"Business," under the heading "Products and Product Strategy," in our Annual
Report on Form 10-K for the fiscal year ended January 1, 2022.

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."
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Covid-19 pandemic


The effects of the ongoing COVID-19 pandemic have been widespread and have
resulted in authorities implementing numerous measures to contain the virus,
including travel bans and restrictions, quarantines, shelter-in-place orders and
business limitations and shutdowns. We are unable to accurately predict the full
impact that COVID-19 will have on our results of operations, financial
condition, liquidity and cash flows due to numerous uncertainties, including the
duration and severity of the pandemic and containment measures and the
distribution, acceptance and effectiveness of vaccines. Our efforts to comply
with these containment measures have impacted our day-to-day operations and
could disrupt our business and operations, as well as that of our key customers,
suppliers (including contract manufacturers) and other counterparties, for an
indefinite period of time.
To support the health and well-being of our employees, customers, partners and
communities, a majority of our employees are still working remotely as of
July 25, 2022. In April 2022, we reopened many of our facilities in multiple
regions to allow our employees the option of using our facilities, as an
alternative to working from home. As a result, we currently have a large number
of employees who operate in a hybrid work environment, choosing to alternate
between working from home and working from our facilities.

Since its inception, the COVID-19 pandemic has caused some volatility in our
delivery timing for our hardware and IP products to certain customers. Many of
our customers' employees are working remotely, and, in some cases, we have
experienced delivery lead times that are longer than normal because of delays in
getting access to customer sites to complete our deliveries. In other cases, the
amount of our hardware and IP products that we have been able to deliver has
been greater than we originally anticipated at the beginning of the respective
period. Despite the challenges the COVID-19 pandemic has posed to our
operations, it has not had a material, adverse impact on our results of
operations, financial condition, liquidity or cash flows. We will continue to
evaluate the nature and extent of the impact of COVID-19 on our business.

Russia-Ukraine conflict


During the first half of fiscal 2022, due to the ongoing conflict between Russia
and Ukraine and the corresponding sanctions imposed by the United States and
other countries, we terminated our operations in Russia. The termination of our
operations in Russia has not limited our ability to develop or support our
products and has not had a material impact on our results of operations,
financial condition, liquidity or cash flows. We do not have operations or
employees in Ukraine. We will continue to monitor the future developments
relative to this conflict and the potential impacts it could have on our
employees and our ability to provide products and services to our global
customer base.

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 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.

For more information about our critical accounting estimates, see the discussion in Section 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 fiscal year ended
January 1, 2022.

New accounting standards

For more information on the adoption of the new accounting standards, refer to note 1 of the notes to the condensed consolidated financial statements.

Operating results

Financial results for the three and six months ended July 2, 2022compared to the three and six month periods ended July 3, 2021reflects the following:

•growth in turnover exceeding the growth in our costs and expenses;

•increasing revenue from software, intellectual property and other arrangements where revenue is recognized over time;

•growth in revenue from emulation and prototyping hardware and IP where revenue is recognized in advance;

•continued investment in research and development and technical-commercial assistance activities; and

• increase in the provision for income taxes mainly due to changes in tax laws in
United States.

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Revenue


We primarily generate revenue from licensing our software and IP, selling or
leasing our emulation and prototyping hardware technology, 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.

Generally, between 85% and 90% of our annual revenue is characterized as
recurring revenue. Recurring revenue includes revenue recognized over time from
our software arrangements, services, royalties, maintenance on IP licenses and
hardware, 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 emulation and prototyping hardware and individual IP licenses. The
percentage of our recurring and up-front revenue and fluctuations in revenue
within our geographies are impacted by delivery of hardware and IP products to
our customers in any single fiscal period.

The following table shows the percentage of our revenue that is classified as
recurring or up-front for the three months ended July 2, 2022 and July 3, 2021:

                                                            Three Months Ended                             Six Months Ended
                                                      July 2,                July 3,                July 2,                July 3,
                                                       2022                   2021                   2022                   2021
Revenue recognized over time                                84  %                   84  %                 82  %                   83  %
Revenue from arrangements with non-cancelable
commitments                                                  2  %                    3  %                  2  %                    3  %
Recurring revenue                                           86  %                   87  %                 84  %                   86  %
Up-front revenue                                            14  %                   13  %                 16  %                   14  %
Total                                                      100  %                  100  %                100  %                  100  %



While the percentage of revenue characterized as recurring compared to revenue
characterized as up-front may vary between fiscal quarters, the overall mix of
revenue is relatively consistent on an annual basis or over the course of twelve
consecutive months. The following table shows the percentage of recurring
revenue for the twelve-month periods ending concurrently with our five most
recent fiscal quarters:
                                                Trailing Twelve Months Ended
                             July 2,               April 2,      January 1,      October 2,      July 3,
                               2022                  2022           2022            2021          2021
Recurring revenue                        87  %         87  %           88  %           87  %        87  %
Up-front revenue                         13  %         13  %           12  %           13  %        13  %
Total                                   100  %        100  %          100  %          100  %       100  %


Revenue by Period

The following table presents our revenues for the three months ended July 2, 2022
and July 3, 2021 and the change in revenue between periods:

                               Three Months Ended                   Change
                              July 2,          July 3,
                                2022            2021        Amount       Percentage
                                      (In millions, except percentages)
Product and maintenance   $    802.3          $ 687.9      $ 114.4             17  %
Services                        55.2             40.4         14.8             37  %
Total revenue             $    857.5          $ 728.3      $ 129.2             18  %


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The following table presents our revenues for the six months ended July 2, 2022 and
July 3, 2021 and the change in revenue between periods:

                               Six Months Ended                  Change
                            July 2,        July 3,
                             2022           2021         Amount       Percentage
                                     (In millions, except percentages)
Product and maintenance   $ 1,648.5      $ 1,386.9      $ 261.6             19  %
Services                      110.8           77.4         33.4             43  %
Total revenue             $ 1,759.3      $ 1,464.3      $ 295.0             20  %


Product and maintenance revenue increased during the three and six months ended
July 2, 2022, as compared to the three and six months ended July 3, 2021, due to
increased revenue in each of our five product categories. This growth was driven
by our customers investing in new, complex designs for their products that
include the design of electronic systems for consumer, hyperscale computing,
mobile, 5G communications, automotive, aerospace and defense, industrial and
healthcare.

Services revenue increased during the three and six months ended July 2, 2022,
as compared to the three and six months ended July 3, 2021, primarily due to
increased revenue from our custom IP offerings. Services revenue may fluctuate
from period to period based on the timing of fulfillment of our services and IP
performance obligations.

No customer represented 10% or more of total revenue during the three and six months ended July 2, 2022 Where July 3, 2021.

Turnover by product category


The following table shows the percentage of revenue contributed by each of our
five product categories and services for the past five consecutive quarters:
                                                                                       Three Months Ended
                                         July 2,               April 2,                 January 1,                 October 2,                 July 3,
                                          2022                   2022                      2022                       2021                     2021
Custom IC Design and Simulation               23  %                    22  %                      24  %                      23  %                   23  %
Digital IC Design and Signoff                 27  %                    27  %                      29  %                      29  %                   28  %
Functional Verification, including
Emulation and Prototyping Hardware            24  %                    28  %                      21  %                      23  %                   25  %
IP                                            14  %                    13  %                      14  %                      14  %                   13  %
System Design and Analysis                    12  %                    10  %                      12  %                      11  %                   11  %
Total                                        100  %                   100  %                     100  %                     100  %                  100  %


Revenue by product category fluctuates from period to period based on demand for
our products and services, our available resources and our ability to deliver
and support them. 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.
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Revenue by Geography

                                      Three Months Ended                   Change
                                     July 2,          July 3,
                                       2022            2021        Amount       Percentage
                                             (In millions, except percentages)
United States                    $    369.0          $ 313.1      $  55.9             18  %
Other Americas                         12.0             10.2          1.8             18  %
China                                 113.2             99.6         13.6             14  %
Other Asia                            152.0            134.4         17.6             13  %
Europe, Middle East and Africa        158.0            124.5         33.5             27  %
Japan                                  53.3             46.5          6.8             15  %
Total revenue                    $    857.5          $ 728.3      $ 129.2             18  %


The increase in revenue in the United States, Europe, Middle East and Africa and
Japan during the three months ended July 2, 2022, as compared to the three
months ended July 3, 2021, was primarily due to increased revenue from our
software and hardware offerings. Revenue in China and Other Asia increased
during the three months ended July 2, 2022, as compared to the three months
ended July 3, 2021, primarily due to increased revenue from our software
offerings.

                                      Six Months Ended                  Change
                                   July 2,        July 3,
                                    2022           2021         Amount       Percentage
                                            (In millions, except percentages)
United States                    $   782.5      $   639.5      $ 143.0             22  %
Other Americas                        23.9           19.9          4.0             20  %
China                                253.1          189.0         64.1             34  %
Other Asia                           310.6          268.2         42.4             16  %
Europe, Middle East and Africa       288.7          254.7         34.0             13  %
Japan                                100.5           93.0          7.5              8  %
Total revenue                    $ 1,759.3      $ 1,464.3      $ 295.0             20  %


The increase in revenue in the United States and China during the six months
ended July 2, 2022, as compared to the six months ended July 3, 2021, was
primarily due to increased revenue from our software, hardware and IP offerings.
The increase in revenue in Other Asia and Europe, Middle East and Africa during
the six months ended July 2, 2022, as compared to the six months ended July 3,
2021, was primarily due to increased revenue from our software offerings.

Revenue by geographic area as a percentage of total revenue

                                        Three Months Ended                  Six Months Ended
                                       July 2,           July 3,          July 2,          July 3,
                                        2022              2021             2022             2021
United States                                  43  %        43  %                45  %        44  %
Other Americas                                  2  %         1  %                 1  %         1  %
China                                          13  %        14  %                14  %        13  %
Other Asia                                     18  %        19  %                18  %        18  %
Europe, Middle East and Africa                 18  %        17  %                16  %        18  %
Japan                                           6  %         6  %                 6  %         6  %
Total                                         100  %       100  %               100  %       100  %


Most of our revenue is transacted in the United States dollar. However, certain
revenue transactions are denominated in foreign currencies. For an additional
description of how changes in foreign exchange rates affect our condensed
consolidated financial statements, see the discussion under Item 3,
"Quantitative and Qualitative Disclosures About Market Risk - Foreign Currency
Risk."
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Revenue cost


The following tables show our cost of revenue for the three and six months ended
July 2, 2022 and July 3, 2021 and the change in cost of revenue between periods:

                                        Three Months Ended                    Change
                                       July 2,           July 3,
                                         2022             2021        Amount      Percentage
                                               (In millions, except percentages)
Cost of product and maintenance   $     68.7            $  55.8      $ 12.9             23  %
Cost of services                        23.9               20.9         3.0             14  %


                                      Six Months Ended                  Change
                                    July 2,        July 3,
                                      2022          2021        Amount      Percentage
                                            (In millions, except percentages)

Product and maintenance cost $141.5 $120.7 $20.8

      17  %
Cost of services                        49.0         40.0         9.0             23  %

Product and maintenance cost


Cost of product and maintenance includes costs associated with the sale and
lease of our emulation and prototyping hardware 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 technology or IP.

Here is a summary of the cost of the product and maintenance:

                                              Three Months Ended                    Change
                                             July 2,           July 3,
                                               2022             2021        Amount      Percentage
                                                     (In millions, except percentages)
Product and maintenance-related costs   $     58.6            $  43.6      $ 15.0             34  %
Amortization of acquired intangibles          10.1               12.2        (2.1)           (17) %
Total cost of product and maintenance   $     68.7            $  55.8      $ 12.9             23  %


                                            Six Months Ended                  Change
                                          July 2,        July 3,
                                            2022          2021        Amount      Percentage
                                                  (In millions, except percentages)

Product and maintenance costs $119.5 $96.7 $22.8

             24  %

Amortization of intangible assets acquired 22.0 24.0 (2.0)

            (8) %

Total cost of product and maintenance $141.5 $120.7 $20.8

             17  %


Changes in product and maintenance costs for the three and six months ended July 2, 2022compared to the three- and six-month periods ended July 3, 2021were due to the following:

                                                                                            Change
                                                                               Three Months          Six Months
                                                                                  Ended                Ended
                                                                                         (In millions)
Emulation and prototyping hardware costs                                    

$14.8 $22.0


Other items                                                                           0.2                  0.8
Total change in product and maintenance-related costs                       

$15.0 $22.8

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Costs associated with our emulation and prototyping hardware products include
components, assembly, testing, applicable reserves and overhead. These costs
make our cost of emulation and prototyping hardware products higher, as a
percentage of revenue, than our cost of software and IP products. Emulation and
prototyping hardware costs increased during the three and six months ended
July 2, 2022, as compared to the three and six months ended July 3, 2021,
primarily due to increased revenue from emulation and prototyping hardware
products.

Cost of services


Cost of services primarily includes employee salary, benefits and other
employee-related costs to perform work on revenue-generating projects and costs
to maintain the infrastructure necessary to manage a services organization. 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.

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, our annual, mid-year promotion and pay raise cycle,
stock-based compensation, restructuring and other employment separation
activities (such as the voluntary retirement program we offered to certain
employees during the second quarter of fiscal 2021), foreign exchange rate
movements, acquisition-related costs, volatility in variable compensation
programs that are driven by operating results, and charitable donations.

Many of our operating expenses are transacted 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 in Item 3, "Quantitative and
Qualitative Disclosures About Market Risk - Foreign Currency Risk."

Our operating expenses for the three and six months ended July 2, 2022 and
July 3, 2021 were the following:

                                  Three Months Ended                   Change
                                 July 2,          July 3,
                                   2022            2021        Amount      Percentage
                                         (In millions, except percentages)
Marketing and sales          $    139.3          $ 136.0      $  3.3              2  %
Research and development          286.6            285.2         1.4              -  %
General and administrative         51.4             40.3        11.1             28  %
Total operating expenses     $    477.3          $ 461.5      $ 15.8              3  %


                                 Six Months Ended                  Change
                               July 2,        July 3,
                                 2022          2021        Amount      Percentage
                                       (In millions, except percentages)
Marketing and sales          $    279.5      $ 268.8      $ 10.7              4  %
Research and development          577.5        556.2        21.3              4  %
General and administrative        100.4         80.3        20.1             25  %
Total operating expenses     $    957.4      $ 905.3      $ 52.1              6  %

Our operating expenses, as a percentage of total revenue, for the three and six months ended July 2, 2022 and July 3, 2021 were the following:

                                    Three Months Ended                  Six Months Ended
                                   July 2,           July 3,          July 2,          July 3,
                                    2022              2021             2022             2021
Marketing and sales                        16  %        19  %                16  %        18  %
Research and development                   33  %        39  %                33  %        38  %
General and administrative                  6  %         6  %                 6  %         5  %
Total operating expenses                   55  %        64  %                55  %        61  %


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Marketing and Sales


The increase in marketing and sales expense for the three and six months ended
July 2, 2022, as compared to the three and six months ended July 3, 2021, was
due to the following:
                                                                                          Change
                                                                            Three Months           Six Months
                                                                                Ended                Ended
                                                                                      (In millions)
Salary, benefits and other employee-related costs                          $        3.2          $       9.4
Marketing programs and events                                                       3.2                  3.3
Stock-based compensation                                                            2.6                  3.2
Voluntary retirement program                                                       (6.7)                (6.7)
Other items                                                                         1.0                  1.5
Total change in marketing and sales expense                                

$3.3 $10.7

Salaries, benefits and other employee-related costs included in marketing and sales expenses increased in the three and six months ended July 2, 2022compared to the three and six month periods ended July 3, 2021mainly due to the increase in variable compensation.

Research and development


The increase in research and development expense for the three and six months
ended July 2, 2022, as compared to the three and six months ended July 3, 2021,
was due to the following:
                                                                                          Change
                                                                            Three Months           Six Months
                                                                                Ended                Ended
                                                                                      (In millions)
Salary, benefits and other employee-related costs                          $        4.6          $      18.4
Stock-based compensation                                                            5.8                  8.0
Professional services                                                               2.3                  4.4
Facilities and other infrastructure costs                                           1.8                  3.8
Voluntary retirement program                                                      (14.7)               (14.7)
Other items                                                                         1.6                  1.4
Total change in research and development expense                           

$1.4 $21.3

Salaries, benefits and other personnel costs included in research and development expenses increased during the three and six months ended July 2, 2022compared to the three and six month periods ended July 3, 2021mainly due to the increase in the workforce resulting from hiring.

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General and administrative


The increase in general and administrative expense for the three and six months
ended July 2, 2022, as compared to the three and six months ended July 3, 2021,
was due to the following:

                                                                                         Change
                                                                            Three Months          Six Months
                                                                               Ended                Ended
                                                                                      (In millions)
Professional services                                                      $      10.7          $      11.1
Stock-based compensation                                                           5.3                  9.3
Charitable contributions                                                          (0.2)                 3.3
Salary, benefits and other employee-related costs                                  1.7                  2.4
Voluntary retirement program                                                      (2.6)                (2.6)
Foreign service tax refund                                                        (5.1)                (5.1)
Other items                                                                        1.3                  1.7
Total change in general and administrative expense                         

$11.1 $20.1



Professional services included in general and administrative expense increased
during the three and six months ended July 2, 2022, as compared to the three and
six months ended July 3, 2021, primarily due to an increase in
acquisition-related professional services and legal fees and costs for other
matters. Stock-based compensation included in general and administrative expense
increased during the three and six months ended July 2, 2022, as compared to the
three and six months ended July 3, 2021, primarily due to equity awards granted
to executives.

Operating Margin

Operating margin represents operating income as a percentage of total revenue. Our operating margin for the three and six months ended July 2, 2022and the three and six months ended July 3, 2021 was the following:

                            Three Months Ended                  Six Months Ended
                           July 2,           July 3,          July 2,          July 3,
                            2022              2021             2022             2021
Operating margin                   33  %        25  %                34  %        27  %


Operating margin increased during the three and six months ended July 2, 2022,
as compared to the three and six months ended July 3, 2021, primarily because
revenue growth in each of our five product categories exceeded growth in cost of
revenue and operating expense. Generally, our operating margin during the second
half of the fiscal year is impacted by incremental costs associated with our
annual, mid-year promotion and pay raise cycle. Additionally, during the second
half of fiscal 2022, we expect up-front revenue to be lower as a percentage of
total revenue than during the first half of 2022, and incremental expense from
our acquisitions, including amortization of acquired intangibles.

Interest Expense
                                         Three Months Ended                   Six Months Ended
                                       July 2,            July 3,           July 2,          July 3,
                                         2022               2021             2022              2021
                                                             (In millions)
Contractual interest expense:
2024 Notes                              3.8                   3.8      $     7.6            $    7.6
Revolving credit facility               0.2                   0.1            0.4                 0.3
Amortization of debt discount:
2024 Notes                              0.2                   0.2            0.4                 0.4
Other                                   0.1                   0.2              -                 0.2
Total interest expense           $      4.3              $    4.3      $     8.4            $    8.5


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Income taxes

The following table shows the provision for income taxes and the effective tax rate for the quarters and six months ended July 2, 2022 and July 3, 2021:

                                                    Three Months Ended                            Six Months Ended
                                                July 2,             July 3,                  July 2,                 July 3,
                                                  2022                2021                    2022                     2021
                                                                                         (In millions, except percentages)
Provision for income taxes                   $     85.7           $    27.4          $            160.3            $    42.6
Effective tax rate                                 31.4   %            14.9  %                     27.5    %            11.0  %


The United States enacted the Tax Cuts and Jobs Act in December 2017, which
requires companies to capitalize all of their R&D costs, including software
development costs, incurred in tax years beginning after December 31, 2021.
Beginning in fiscal 2022, we began capitalizing and amortizing R&D costs over
five years for domestic research and 15 years for international research rather
than expensing these costs as incurred. As a result, we expect our fiscal 2022
effective tax rate and our cash tax payments to increase significantly as
compared to fiscal 2021. We also expect to recognize increases to our deferred
tax assets as we begin to capitalize domestic research costs.

Our provision for income taxes for the three and six months ended July 2, 2022
was primarily attributable to federal, state and foreign income taxes on our
anticipated fiscal 2022 income. We also recognized tax benefit (expense) of
$(5.3) million and $18.9 million related to stock-based compensation that vested
or was exercised during each period. Our provision for income taxes for the
three and six months ended July 2, 2022, reflected the impact of the Tax Cuts
and Jobs Act, which requires the capitalization and amortization of R&D costs
incurred after December 31, 2021.

Our provision for income taxes for the three and six months ended July 3, 2021
was primarily attributable to federal, state and foreign income taxes on our
anticipated fiscal 2021 income, partially offset by the tax benefits of $15.9
million and $44.8 million, respectively, related to stock-based compensation
that vested or was exercised during each period.

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, changes in
valuation allowance 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 2022 effective tax rate will be approximately 28%. We expect
that our quarterly effective tax rates will vary from our fiscal 2022 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," in
our Annual Report on Form 10-K for the fiscal year ended January 1, 2022.

Cash and capital resources

                                       As of
                              July 2,       January 1,
                               2022            2022         Change
                                         (In millions)
Cash and cash equivalents   $ 1,029.5      $  1,088.9      $ (59.4)
Net working capital             615.1           744.5       (129.4)


Cash and Cash Equivalents

From July 2, 2022our primary sources of cash consisted of approximately $1.0 billion cash and cash equivalents compared to $1.1 billion of the January 1, 2022.


Our primary sources of cash and cash equivalents during the six months ended
July 2, 2022 were cash generated from operations and proceeds from the issuance
of common stock resulting from stock purchases under our employee stock purchase
plan and stock options exercised during the period.
                                       27

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Our primary uses of cash and cash equivalents during the six months ended
July 2, 2022 were payments related to employee salaries and benefits, operating
expenses, repurchases of our common stock, payment of employee taxes on vesting
of restricted stock, and purchases of property, plant and equipment.

Approximately 68% of our cash and cash equivalents were held by our foreign
subsidiaries as of July 2, 2022. 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 and share repurchases, for at least the
next 12 months and thereafter for the foreseeable future.

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Abdul J. Gaspar