NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared by Cadence Design Systems, Inc., or Cadence, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission, or the SEC. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP, have been condensed or omitted pursuant to such rules and regulations. However, Cadence believes that the disclosures contained in this Quarterly Report on Form 10-Q comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These condensed consolidated financial statements are meant to be, and should be, read in conjunction with the consolidated financial statements and the Notes thereto included in Cadence’s Annual Report on Form 10-K for the fiscal year ended January 2, 2016 . Certain prior period balances have been reclassified to conform to current period presentation.

The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q reflect all adjustments (which include only normal, recurring adjustments and those items discussed in these Notes) that are, in the opinion of management, necessary to state fairly the results of operations, cash flows and financial position for the periods and dates presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year. Management has evaluated subsequent events through the issuance date of the unaudited condensed consolidated financial statements.

Use of Estimates

Preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

New Accounting Standards

In March 2016, the Financial Accounting Standards Board, or FASB, issued a new accounting standard intended to simplify various aspects related to how stock-based awards are accounted for and presented in the financial statements. The new standard: (a) requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled, (b) requires classification of excess tax benefits as an operating activity in the statement of cash flows rather than a financing activity, (c) eliminates the requirement to defer recognition of an excess tax benefit until the benefit is realized through a reduction to taxes payable, (d) modifies statutory withholding tax requirements, and (e) provides for a policy election to account for forfeitures as they occur. The guidance is effective in the first quarter of fiscal 2017 and early adoption is permitted if all amendments are adopted in the same period. Cadence elected to early adopt the new standard during the first quarter of fiscal 2016. As a result of early adoption, Cadence recorded all income tax effects of share-based awards in its provision for income taxes in the condensed consolidated income statements. Cadence also recorded a cumulative effect adjustment of approximately $7.8 million as a reduction of opening accumulated deficit on Cadence’s condensed consolidated balance sheets. The cumulative effect adjustment was comprised of approximately $8.1 million related to the recognition of income tax benefits in excess of compensation expense, offset by $0.3 million related to the policy election to recognize the impact of forfeitures on stock-based compensation expense as they occur. Additionally, Cadence adopted the change in presentation in the condensed consolidated statement of cash flows related to excess tax benefits on a prospective basis. Accordingly, prior periods have not been adjusted. There was no impact for the change in presentation in the statement of cash flows related to statutory tax withholding requirements as Cadence has historically classified the statutory tax withholding as a financing activity in its consolidated statement of cash flows.

In April 2015, the FASB issued a new accounting standard requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the associated debt liability. The new standard became effective for Cadence in the first quarter of fiscal 2016 and required retrospective application. As a result, prior period balances have been reclassified to conform to the current period presentation. Adoption of this standard did not have a material impact on Cadence’s consolidated balance sheets.

In May 2014, the FASB issued a comprehensive revenue recognition standard for revenue associated with the delivery of goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB deferred the effective date of the new revenue standard for periods beginning after December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original effective date of December 15, 2016. Accordingly, the updated standard is effective for Cadence in the first quarter of fiscal 2018. In March 2016, the FASB finalized its amendments to the guidance in the new standard on assessing whether an entity is a principal or an agent in a revenue transaction. This conclusion impacts whether an entity reports revenue on a gross or net basis. In April 2016, the FASB finalized additional amendments to the guidance in the new revenue standard on identifying performance obligations and accounting for licenses of intellectual property. Cadence has not yet selected a transition method and is currently evaluating the effect that the updated standard, and the recently issued amendments, will have on its consolidated financial statements and related disclosures.

In January 2016, the FASB issued a new accounting standard that will impact certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The updated standard is effective for Cadence in the first quarter of fiscal 2018, and early adoption is permitted. Cadence is currently evaluating the effect the updated standard will have on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued a new accounting standard requiring, among other things, the recognition of lease assets and lease liabilities on the balance sheet by lessees for certain lease arrangements that are classified as operating leases under the previous standard. The updated standard is effective for Cadence in the first quarter of fiscal 2019, and early adoption is permitted. Cadence is currently evaluating the effect the updated standard will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued a new accounting standard intended to simplify the accounting for equity method investments when there is an increase in the level of ownership interest or degree of influence. The new standard is effective for Cadence in the first quarter of fiscal 2017 and requires prospective application. Adoption of this standard is not expected to have a material impact on Cadence’s consolidated financial statements.

Revolving Credit Facility

Cadence maintains a senior unsecured revolving credit facility with a group of lenders led by Bank of America, N.A., as administrative agent. The credit facility provides for borrowings up to $250.0 million , with the right to request increased capacity up to an additional $150.0 million upon the receipt of lender commitments, for total maximum borrowings of $400.0 million . The credit facility, as amended, expires on September 19, 2019 and has no subsidiary guarantors. Any outstanding loans drawn under the credit facility are due at maturity on September 19, 2019 . Outstanding borrowings may be paid at any time prior to maturity.

Interest accrues on borrowings under the credit facility at either LIBOR plus a margin between 1.25% and 2.0% per annum or at the base rate plus a margin between 0.25% and 1.0% per annum. The interest rate applied to borrowings is determined by Cadence’s consolidated leverage ratio as specified by the credit facility agreement. As of July 2, 2016 , the interest rate on Cadence’s revolving credit facility was 2.16% . Interest is payable quarterly. A commitment fee ranging from 0.20% to 0.35% is assessed on the daily average undrawn portion of revolving commitments.

The credit facility contains customary negative covenants that, among other things, restrict Cadence’s ability to incur additional indebtedness, grant liens, make certain investments (including acquisitions), dispose of certain assets and make certain payments, including share repurchases and dividends. In addition, the credit facility contains financial covenants that require Cadence to maintain a leverage ratio not to exceed 2.75 to 1, and a minimum interest coverage ratio of 3.00 to 1. As of July 2, 2016 and January 2, 2016 , Cadence was in compliance with all financial covenants associated with the revolving credit facility.

2019 Term Loan

On January 28, 2016, Cadence entered into a $300.0 million three -year senior unsecured non-amortizing term loan facility due on January 28, 2019 , or the 2019 Term Loan, with a group of lenders led by JPMorgan Chase Bank, N.A., as administrative agent. The 2019 Term Loan is unsecured, and the proceeds will be used for general corporate purposes, including the repurchase of common stock.

Amounts outstanding under the 2019 Term Loan initially accrue interest at a rate equal to LIBOR plus a margin of 1.125% per annum, which may increase to a rate equal to LIBOR plus a margin of up to 1.875% per annum, depending on Cadence’s leverage ratio. As of July 2, 2016 , the interest rate on Cadence’s 2019 Term Loan was 1.90% .

The covenants of the 2019 Term Loan are generally consistent with Cadence’s existing five-year senior unsecured revolving credit facility. In addition, the term loan agreement contains certain financial covenants that require Cadence to maintain a funded debt to EBITDA ratio not greater than 2.75 to 1 , with a step-up to 3.25 to 1 for one year following an acquisition by Cadence of at least $250.0 million that results in a pro forma leverage ratio between 2.50 to 1 and 3.00 to 1 . As of July 2, 2016 , Cadence was in compliance with all financial covenants associated with the 2019 Term Loan.

2024 Notes

In October 2014, Cadence issued $350.0 million aggregate principal amount of 4.375% Senior Notes due October 15, 2024, or the 2024 Notes. Cadence received net proceeds of $342.4 million from the issuance of the 2024 Notes, net of a discount of $1.4 million and issuance costs of $6.2 million . Both the discount and issuance costs are being amortized to interest expense over the term of the 2024 Notes using the effective interest method. Interest is payable in cash semi-annually in April and October. The 2024 Notes are unsecured and rank equal in right of payment to all of Cadence’s existing and future senior indebtedness.

Cadence may redeem the 2024 Notes, in whole or in part, at a redemption price equal to the greater of (a) 100% of the principal amount of the notes to be redeemed and (b) the sum of the present values of the remaining scheduled payments of principal and interest, plus any accrued and unpaid interest, as more particularly described in the indenture governing the 2024 Notes.

The indenture governing the 2024 Notes includes customary representations, warranties and restrictive covenants, including, but not limited to, restrictions on Cadence’s ability to grant liens on assets, enter into sale and lease-back transactions, or merge, consolidate or sell assets, and also includes customary events of default.

For information regarding the impact of new accounting standards on the presentation of debt issuance costs, see Note 1 under the heading “New Accounting Standards.”

The marketable debt securities included in short-term investments as of July 2, 2016 have contractual maturities of less than one year. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.

Realized gains and losses from the sale of marketable debt and equity securities are recorded in other income, net in the condensed consolidated income statements.

Cadence’s customers are primarily concentrated within the semiconductor and electronics systems industries. As of July 2, 2016 , no one customer accounted for 10% or more of Cadence’s total receivables. As of January 2, 2016 , one customer accounted for 12% of Cadence’s total receivables, and no other customer accounted for 10% or more of Cadence’s total receivables. As of July 2, 2016 and January 2, 2016 , approximately 45% of Cadence’s total receivables were attributable to the ten customers with the largest balances of total receivables.

NOTE 5. STOCK REPURCHASE PROGRAMS

In July 2015, Cadence’s Board of Directors approved an 18 -month plan to repurchase shares of Cadence common stock of up to an aggregate of $1.2 billion , beginning in the third quarter of fiscal 2015. The actual timing and amount of repurchases are subject to business and market conditions, corporate and regulatory requirements, acquisition opportunities and other factors. The stock repurchase program may be suspended, modified or discontinued at any time. As of July 2, 2016 , the remaining amount authorized for the repurchase of shares was $480 million .

The shares repurchased under Cadence’s repurchase authorizations and the total cost of repurchased shares, including commissions, during the three and six months ended July 2, 2016 and July 4, 2015 were as follows:

For additional information regarding share repurchases, see the discussion under Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds.”

Cadence had total unrecognized compensation expense related to stock option and restricted stock grants of $148.6 million as of July 2, 2016 , which will be recognized over the remaining vesting period. The remaining weighted-average vesting period of unvested awards is 2.2 years .

For information regarding the impact of new accounting standards impacting stock-based compensation, see Note 1 under the heading “New Accounting Standards.”

NOTE 7. ACQUISITIONS

During the six months ended July 2, 2016 , Cadence completed two business combinations for total cash consideration of $42.4 million , after taking into account cash acquired of  $1.8 million . The total purchase consideration was preliminarily allocated to the assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition dates. Cadence will also make payments to certain employees over a period of up to four years subject to continued employment and other conditions. Cadence recorded a total of $23.6 million of goodwill, $23.2 million of acquired intangible assets and $2.6 million of net liabilities consisting primarily of deferred revenue.

The recorded goodwill is primarily related to expected synergies from combining operations of the acquired companies. The weighted-average amortization period for definite-lived intangible assets acquired is approximately 8.0 years .

Results of operations and the estimated fair value of acquired assets and assumed liabilities are recorded in the consolidated financial statements from the date of acquisition. Pro forma results of operations for the business combinations completed during the six months ended July 2, 2016 have not been presented because the effects of these acquisitions, individually and in the aggregate, would not have been material to Cadence’s financial results. The fair values of acquired intangible assets and assumed liabilities were determined using significant inputs that are not observable in the market. For an additional description of these fair value calculations, see Note 11 in the notes to condensed consolidated financial statements.

A trust for the benefit of the children of Lip-Bu Tan, Cadence’s President, Chief Executive Officer, or CEO, and director, owned less than 2% of Rocketick Technologies Ltd., one of the acquired companies, and Mr. Tan and his wife serve as co-trustees of the trust and disclaim pecuniary and economic interest in the trust. The Board of Directors of Cadence reviewed the transaction and concluded that it was in the best interests of Cadence to proceed with the transaction. Mr. Tan recused himself from the Board of Directors’ discussion of the valuation of Rocketick Technologies Ltd. and on whether to proceed with the transaction. A financial advisor provided a fairness opinion to Cadence in connection with the transaction.

Acquired intangibles as of January 2, 2016 were as follows, excluding intangibles that were fully amortized as of January 3, 2015 :

Amortization expense from existing technology and maintenance agreements is included in cost of product and maintenance. Amortization of acquired intangibles for the three and six months ended July 2, 2016 and July 4, 2015 was as follows:

Estimated amortization expense for intangible assets with definite lives for the following five fiscal years and thereafter is as follows:

NOTE 9. RESTRUCTURING AND OTHER CHARGES

Cadence has initiated various restructuring plans in an effort to better align its resources with its business strategy. These restructuring plans have primarily been comprised of severance payments and termination benefits related to headcount reductions, estimated lease losses related to facilities vacated under the restructuring plans and charges related to assets abandoned as part of the restructuring plans. During the six months ended July 2, 2016 , Cadence initiated a restructuring plan, or the 2016 Restructuring Plan, and recorded restructuring and other charges of approximately $14.2 million related to severance payments and termination benefits. As of July 2, 2016 , total liabilities related to the 2016 Restructuring Plan were $3.0 million . Cadence expects to make cash payments for severance and related benefits for the 2016 Restructuring Plan through fiscal 2016.

The following table presents activity relating to Cadence’s restructuring plans during the six months ended July 2, 2016 :

The remaining accrual for Cadence’s restructuring plans is recorded in accounts payable and accrued liabilities in the condensed consolidated balance sheet.