BEYOND the CHIP Cadence Annual Report 2005 at CADENCE, WE ARE FOCUSED on a BROADER SCOPE of SOLUTIONS THAT MEET OUR CUSTOMERS’ END GOALS
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BEYOND THE CHIP Cadence Annual Report 2005 AT CADENCE, WE ARE FOCUSED ON A BROADER SCOPE OF SOLUTIONS THAT MEET OUR CUSTOMERS’ END GOALS. FROM MOBILE PHONES TO Automobiles, WE UNDERSTAND THE GROWING DEMANDS OF THE ELECTRONICS INDUSTRY. AND BY EXCEEDING OUR CUSTOMERS’ EXPECTATIONS WE ARE REDEFINING WHAT IT MEANS TO BE A LEADING electronics DESIGN SOLUTIONS PROVIDER. DEAR FELLOW SHAREHOLDERS: In 2005, we rolled out a comprehensive strategy and plan of action to heighten our focus on enabling our customers’ success and continued growth of our business. I am pleased to report that we executed to plan and were rewarded with excellent financial results. Compared to 2004, our revenue grew 11 percent to $1.3 billion, operating margin improved 2 percentage points to 24 percent, and operating cash flow increased 15 percent to $426 million. Greater customer focus: IC and PCB design are at the core of how these capability to identify market opportunities and to Breadth, depth, and innovation products are developed. Cadence design solutions develop and deliver high-quality, high-performance Cadence® is committed to inventing new ways to enable our customers to take full advantage of and profitable products into the marketplace. enable our customers to achieve breakthrough state-of-the-art semiconductor process technology. To ensure that we stay connected to our customers, results. We use this as the guiding principle of With our move into the verification and manu- we have established a new series of customer- every aspect of our business. Our customers facturability adjacencies, companies increasingly led global user conferences, CDNLive!. design and manufacture incredibly complex inte- rely on us to provide them with solutions that The trend among our customers is to look to fewer grated circuits (ICs) and printed circuit boards predict and verify a design’s functional perform- but more capable strategic solution-providers (PCBs). Their markets are fiercely competitive, ance, and that also increase the manufacturing and to partner with them on complex, high-value leaving no room for missed product introductions, yield of their highest performing ICs. Cadence IC design projects. We believe that Cadence will poor or unpredicted functional performance, integrates all of these capabilities to provide an further benefit from this trend in 2006. Our focus or low manufacturing yield. We engage with end-to-end solution. on achieving greater productivity and efficiency customers at the enterprise level to address their in our research and development operations will product development challenges. During 2005, we introduced Cadence Kits to make our products and capabilities easier for customers continue, fostering innovation hand-in-hand We are the largest and most comprehensive to adopt and use. Kits reduce customers’ time-to- with customer success. provider of Electronic Design Automation (EDA) productivity by combining our solutions with We look to 2006 with optimism. Our leading prod- software, hardware, and services, and the reference designs and methodologies to efficiently uct portfolio, new initiatives such as kits, and an depth and breadth of our technology is unique address typical design challenges encountered enterprise approach to helping customers succeed in our industry. Customers expect Cadence in specific applications. Future kits will also address in their business, provide positive momentum for to provide them with end-to-end, dependable vertical market segments. In 2005, we also our business. I thank our stakeholders — customers, design solutions. began to segment our product lines into tiers that shareholders, and employees — for their support Our solutions bridge verification, digital and align product capability and cost with the size this year, and moving forward through 2006. analog chip design, manufacturability, IC package and complexity of our customers’ designs. We’ll Sincerely, design, and PCB design. These capabilities, plus introduce more kits and complete the product our enterprise approach, allow customers to take line segmentation in 2006. full advantage of our deep relationships within the global semiconductor ecosystem, in order to Efficiency across the company: meet their business and profitability objectives. Operations, consolidation, and leadership Michael J. Fister Improving operational excellence was an impor- President and Chief Executive Officer EDA and beyond: tant element of the 2005 strategy and plan. Verification, design, manufacturing, We functionally aligned product development and Cadence Kits and marketing organizations to increase our Our customers develop products for a variety of effectiveness in defining segment requirements, end markets — consumer electronics, automotive long-term product roadmaps and product devel- electronics, information technology and more. opment programs. We continue to sharpen our Cadence Annual Report 2005 THE NUMBERS Cadence Form 10-K 2005 SELECTED FINANCIAL DATA 2005 2004 2003 (in thousands) Revenue $1,329,192 $1,197,480 $1,119,484 Net income (loss) $49,343 $74,474 ($17,566) Net income (loss) per share, assuming dilution $0.16 $0.25 ($0.07) Cash, cash equivalents, and short-term investments $894,591 $593,008 $418,423 Total assets $3,401,312 $2,989,839 $2,817,902 Stockholders’ equity $1,844,704 $1,699,970 $1,572,281 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ¥ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Ñscal year ended December 31, 2005 OR n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission Ñle number 0-15867 CADENCE DESIGN SYSTEMS, INC. (Exact name of registrant as speciÑed in its charter) Delaware 77-0148231 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) IdentiÑcation No.) 2655 Seely Avenue, Building 5, San Jose, California 95134 (Address of Principal Executive OÇces, including Zip Code) (408) 943-1234 (Registrant's Telephone Number, including Area Code) Securities registered pursuant to Section 12(b) of the Act: None (Title of Each Class) (Names of Each Exchange on which Registered) Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value per share Indicate by check mark if the registrant is a well-known seasoned issuer, as deÑned in Rule 405 of the Securities Act. Yes ¥ No n Indicate by check mark if the registrant is not required to Ñle reports pursuant to Section 13 or Section 15(d) of the Act. Yes n No ¥ Indicate by check mark whether the registrant: (1) has Ñled all reports required to be Ñled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to Ñle such reports), and (2) has been subject to such Ñling requirements for the past 90 days. Yes ¥ No n Indicate by check mark if disclosure of delinquent Ñlers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in deÑnitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. n Indicate by check mark whether the registrant is a large accelerated Ñler, an accelerated Ñler, or a non-accelerated Ñler. See deÑnition of ""accelerated Ñler and large accelerated Ñler'' in Rule 12b-2 of the Exchange Act. (check one): Large accelerated Ñler ¥ Accelerated Ñler n Non-accelerated Ñler n Indicate by check mark whether the registrant is a shell company (as deÑned in Rule 12b-2 of the Act). Yes n No ¥ The aggregate market value of the voting and non-voting common equity held by non-aÇliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrant's most recently completed second Ñscal quarter July 2, 2005 was $3,821,749,525. On February 4, 2006, approximately 283,502,942 shares of the Registrant's Common Stock, $0.01 par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the deÑnitive proxy statement for the Cadence Design Systems, Inc. 2006 Annual Meeting are incorporated by reference into Part III hereof. CADENCE DESIGN SYSTEMS, INC. 2005 FORM 10-K ANNUAL REPORT Table of Contents Page PART I. Item 1. Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 Item 1A. Risk FactorsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10 Item 1B. Unresolved StaÅ Comments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22 Item 2. Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22 Item 3. Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23 Item 4. Submission of Matters to a Vote of Security Holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23 PART II. Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25 Item 6. Selected Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55 Item 8. Financial Statements and Supplementary DataÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55 Item 9.