Design: October 2008 Archives

The $8m goodbye

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Three of the Cadence Design Systems executives who resigned in the middle of the month have not quite left the building. In a regulatory filing about the resignations, Cadence has revealed that Kevin Bushby, Bill Porter, James Miller and RL Smith McKeithen have each agreed to stay on for six months, earning up to $250,000 apiece, "to provide services to Cadence related to the transition of his prior executive responsibilities".

They will not be the only payments the executives receive on the way out the door from the San Jose-based EDA company. At the end of July, the directors, along with former CEO Mike Fister had their contracts revised. The revisions centred around the benefits, such as healthcare, and payments the men would receive should they be "terminated without cause", which is what happened in mid-October according to the 20 October 8-K filing.

When Fister joined, his termination agreement was structured to provide him with a salary of $24,000 for a year on his departure together with a couple of lump-sum payments: 1.8x salary and 1.8x annual target bonus. In July, shortly after the cancellation of the bid for Mentor Graphics, Fister's contract was altered to provide him with a total of four times his peak annual salary. He earned a salary of $1m in 2007.

The termination contracts for Bushby, Porter and Miller, as well as acting co-CEO Kevin Palatnik, were also tinkered with. Unlike Fister's, the changes were not as substantial but confirmed that Bushby, Porter and Miller would receive roughly double their respective annual salaries. In Bushby's case, that means a total of $1m. Porter would net $900,000 and Miller $800,000. McKeithen's contract was altered at the start of April to pay him up to $800,000 on departure.

Two years' worth of the former directors' options also vest on their leaving. However, given how far underwater they must be right now, partly thanks to the misplaced $24m announced last week, that is not likely to mean much.

Totalling that lot up, it will cost Cadence in the region of $8m cash to say goodbye to the bulk of its former senior executive team.

And the costs keep rising for Cadence with two legal firms deciding to file class-action suits against the company over the events that led to its sudden loss in share value. Dyer & Berens and Federman & Sherwood have filed separate actions just today. Another three legal firms are understood to be looking at class actions.

If you were wondering how things are at Cadence Design Systems, which saw its CEO and other execs resign last week, you are going to have to wait a bit longer. Less than half an hour before the Q3 conference call was meant to start, the company claimed it had discovered a problem with its Q1 figures and was going to have to go back and restate them. As a consequence, Cadence decided to postpone the Q3 results and the accompanying conference call.

"Cadence initiated the review after preliminarily determining during its regular review of its third quarter results that approximately $24 million of revenue relating to these contracts was recognized during the first quarter of 2008, but should have been recognized ratably over the duration of the contracts commencing in the second quarter of 2008. Cadence expects to restate its financial statements for the first quarter of 2008 and the first half of 2008 to correct the revenue recognition with respect to these contracts.

"Cadence will release its third quarter 2008 financial results and conduct a Webcast as soon as practicable."

I wouldn't expect a lot of warning when that conference call actually happens.

There's a serious case of irony failure on the Barron's blog that is one of the first stories to appear online (aside from the press release itself) marking the resignation of Cadence Design Systems CEO Mike Fister. "What a surprise," remarked 'John'. The next commenter didn't quite get the joke but laid in with the perceived reasons why Fister got the, walked.

I didn't see the news until I got out of the radio silence of the underground bit of the BERR Conference Centre in Victoria Street this afternoon and, frankly, I wasn't going to cough up for WiFi in what is meant to be a government building for business. (There are, apparently, two picocells there. If anyone finds them, please let me know.)

It was both a surprise and inevitable. It was clear that Fister was no longer Mr Popular at Cadence, assuming there had been a period when he was. At an analysts event in September, CFO and now co-CEO Kevin Palatnik used faint praise to damning effect on one of Fister's strategies. This was just after telling analysts about the news that hasn't happened yet but will next week during the Q3 earnings call - that Cadence has potentially a lot of layoffs to make. This is from my online story of a couple of weeks ago at the IET's website:

At a September conference organised by Deutsche Bank Securities, Cadence chief financial officer Kevin Palatnik indicated that the company would make layoffs this year in a bid to improve operating margins. “I believe we can get back to 25 per cent [operating] margins. In the near term, we are very focused on expense management. So, we are looking at resizing the company. Our goal is, in the Q3 earnings call, to be public about our expense management actions. We will resize the company to the lower [sales] base plus the lower growth that we see in the next three to four years.”

Palatnik said attempts to improve pricing for EDA tools, in a market where tool complexity is increasing but the user base is not, did not pay off: “[CEO] Mike Fister came into the company in 2004 and one of his early initiatives was to stratify pricing by product capability, so we had good, better and best pricing...We stratified that [pricing] based on feature and function. Frankly, it has been moderately successful at best...We see some benefits [from stratification] at the high end in some sub-segments of our business but, overall, business has been relatively flat.”

When I heard the last bit on the recording, I thought that Fister was a goner. It's odd for a CFO to align his boss with a failed strategy unless that boss is not long for the company. However, rumours suggested that Fister was to be given "another chance" by the board to turn the company around after the failed attempt to buy Mentor Graphics. If Fister was to get another chance, the board clearly changed its mind.

Although we may look back at this in the context of extensive layoffs next week, What was surprising about today's news was the departure of some Cadence stalwarts. Field operations vice president Kevin Bushby and former head of Cadence in Europe is going as is Bill Porter, who had moved out of the CFO chair. Porter and two other veeps are not being replaced.

The guidance that Cadence has given for its Q3 results is the same as the range provided by Palatnik in the Q2 call, including a 26 cents per share or so loss, so no real surprises there. The one to watch out for next week is the full year amount, which was, in the middle of Q3, around $1.13bn in sales with earnings per share around 52 cents.