Cadence Design Systems, Inc. — Q2 2021 Form 10-Q
Business context and period: Cadence provides software, hardware, services and intellectual property used to design electronic products and integrated circuits. This unaudited report covers the quarter and six months ended July 3, 2021, compared with the periods ended June 27, 2020. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $728.3m | $638.4m | $1,464.3m | $1,256.4m |
| Operating income | $185.4m | $152.0m | $389.4m | $291.3m |
| Net income | $155.9m | $131.3m | $343.1m | $255.3m |
| Diluted EPS | $0.56 | $0.47 | $1.23 | $0.91 |
| Operating margin | 25% | 24% | 27% | 23% |
| Operating cash flow | Not presented quarterly | $588.8m | $562.8m |
- Growth: Revenue increased 14% in Q2 and 17% for the six-month period. Product and maintenance revenue grew 14% and 17%, respectively; services revenue grew 9% and 6%.
- Cash and liquidity: Cash and cash equivalents were $847.2m at July 3, 2021, down from $928.4m at January 2, 2021. Net working capital was $530.4m, down $151.4m from year-end.
- Cash flows and uses: Six-month operating cash flow was $588.8m. Investing activities used $251.8m, including $220.7m net cash paid for business combinations. Financing activities used $419.4m, including $392.3m of share repurchases.
- Debt: Carrying value of debt was $347.2m, representing $350m principal of 4.375% senior notes due October 2024. No revolving credit facility borrowings were outstanding. The new five-year unsecured facility provides $700m of capacity, with a right to request up to $350m more subject to lender commitments.
- Revenue visibility: Contracted but unsatisfied performance obligations were approximately $3.9bn. Cadence expected to recognize about 55% (excluding non-cancellable IP Access Agreement commitments) over the next 12 months.
Changes, outlook and notable items
- Management attributed revenue growth primarily to customer investment in new and complex designs. Revenue increased across nearly all geographies; China revenue rose 29% in Q2 and 17% for the half year.
- Cadence acquired NUMECA and Pointwise in the first half to expand its computational fluid dynamics capabilities. Management said these acquisitions were expected to add more to expenses than revenue during fiscal 2021.
- A voluntary retirement program resulted in a one-time $26.8m charge in Q2. Related liabilities were $26.6m at July 3; $22.3m was expected to be paid within 12 months, with payments extending through fiscal 2023.
- Management does not expect operating margin to grow during the remainder of fiscal 2021 at the pace achieved in the first half, citing acquisition-related and employee costs and potentially higher travel, meeting and event expenses. It expects marketing and sales and R&D expenses to increase versus fiscal 2020.
- Cadence expected its fiscal 2021 effective tax rate to be approximately 16%; quarterly rates may vary. It said existing cash and operating cash flows should cover working capital and other liquidity needs for at least the next 12 months.
- Management reported no material adverse impact from COVID-19 on first-half results, liquidity or cash flows, but noted uncertainty, remote-work impacts and occasional delays in hardware and IP deliveries and customer payments.
Risks and contingencies
- Cadence disclosed a February 2021 administrative subpoena from the U.S. Bureau of Industry and Security seeking records related to certain China sales. The company said it was cooperating and conducting an internal review; the outcome is uncertain. Export restrictions have limited support for certain China customers and may continue to affect revenue and competitiveness.
- Other key risks include COVID-19 disruption, hardware-component supply constraints and the global semiconductor shortage, customer payment delays, competition, foreign exchange movements, acquisition integration, cybersecurity, and dependence on timely hardware and IP deliveries.
- The filing describes ordinary-course disputes and litigation but does not provide a clear quantified estimate of potential losses. One customer represented 11% of receivables at July 3, 2021; no customer represented 10% or more of revenue in the reported periods.
Important facts for investors to verify
- Track whether revenue growth and operating margins hold up as acquisition, hiring, and other operating costs rise.
- Monitor conversion of the $3.9bn remaining performance obligations into revenue, including the timing of hardware and IP deliveries.
- Assess developments in the BIS subpoena and China-related export restrictions, including any effect on sales, collections, or compliance costs.
- Review cash deployment, including share repurchases, acquisitions, and the geographic location and accessibility of cash balances.
- Check subsequent disclosures for changes to the retirement-program payments, acquisition purchase accounting, customer receivables concentration, or the company’s outlook.