Cadence Design Systems, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 28, 2019 (52 weeks). Although the request identifies 2019 Q4, this is an annual filing; quarterly figures are noted separately below. Cadence provides electronic-design software, hardware, IP and services used to develop chips and electronic systems.
Financial performance and position
| Metric | FY2019 | FY2018 | Change / context |
|---|---|---|---|
| Revenue | $2,336.3M | $2,138.0M | Up 9%; product and maintenance revenue rose 10% to $2,204.6M; services fell 6% to $131.7M. |
| Operating income | $491.8M | $396.2M | Up 24%; operating margin approximately 21.0%, versus 18.5%. |
| Net income | $989.0M | $345.8M | Includes a $575.6M non-cash tax benefit from transfers of intangible property rights to Ireland. |
| Diluted EPS | $3.53 | $1.23 | Reported growth was substantially affected by the tax benefit. |
| Operating cash flow | $729.6M | $604.8M | Up $124.8M. |
| Cash and cash equivalents | $705.2M | $533.3M | 43% was held by foreign subsidiaries. |
| Debt | $346.0M carrying value | $445.3M | $350.0M principal on 4.375% senior notes due 2024; no revolver borrowings at year-end. |
| Net working capital | $497.0M | $242.1M | Improved year over year. |
Gross margin was approximately 88.6%, compared with 87.9% in FY2018. Fourth-quarter revenue was $599.6M and net income was $659.7M, with the quarter’s net income also reflecting the $575.6M tax benefit. The company reported no customer representing 10% or more of annual revenue.
Material changes versus FY2018
- Revenue increased across all geographic areas and product categories; Other Asia grew 16% and China 15%. Growth in China slowed in the second half as export restrictions limited support or deliveries to certain customers.
- Research and development expense rose 6% to $935.9M, and marketing and sales expense rose 10% to $481.7M, principally reflecting higher staffing and technical sales investment.
- Cash from operations increased, while investing cash outflow declined to $105.7M. Financing cash outflow was $443.9M, including $306.1M of share repurchases.
- Remaining performance obligations increased to approximately $3.6B from $3.0B. About 55% of the amount excluding non-cancellable IP Access Agreement commitments was expected to be recognized over the next 12 months.
- FY2019 results include the adoption of new lease accounting; prior-year balance-sheet figures were not restated. The company states FY2019 and FY2018 are not directly comparable with FY2017 for revenue and results because of adoption of the revenue-recognition standard.
Outlook, risks and unusual items
- Management expected an approximately 20% effective tax rate in FY2020. The FY2019 effective rate of negative 106.5% is not a representative operating rate, primarily because of the one-time $575.6M tax benefit. Realization of the associated deferred tax asset depends on future taxable income in Ireland; failure to realize it could cause material tax expense.
- Cadence expected the January and February 2020 AWR and Integrand acquisitions, for approximately $195M cash consideration, to add more expense than revenue in FY2020. The acquisitions target RF/microwave design opportunities associated with 5G.
- FY2020 is a 53-week fiscal year. Management expected existing cash, operating cash generation and available revolving-credit borrowings to cover working capital and other needs, including acquisitions and repurchases, for at least 12 months.
- Export controls: U.S. Entity List restrictions had limited support or product delivery to certain Chinese customers and were expected to continue affecting FY2020 revenue. Broader trade restrictions could also affect sales, collections and competitiveness.
- Key business risks include semiconductor-industry cycles and customer design spending, rapid technological change and competition, long sales cycles, dependence on specialized hardware suppliers, foreign-exchange exposure, cybersecurity, litigation and tax uncertainty. The filing also identifies the coronavirus outbreak as a potential operational and customer disruption risk.
- Other notable items: the company repurchased $306.1M of shares in FY2019, with $369M remaining under its authorization at year-end; restructuring charges were $8.6M; and management reported effective disclosure controls and internal control over financial reporting.
Investor verification priorities
- Separate recurring operating performance from the $575.6M non-cash tax benefit; verify the assumptions supporting the Irish deferred tax asset and the FY2020 tax-rate outlook.
- Track the revenue and customer impact of Entity List and other export restrictions, particularly in China.
- Assess whether revenue growth, operating margins and operating cash flow remain strong after higher R&D and sales investment.
- Review the realization, timing and composition of the $3.6B remaining performance obligations, including the $205.7M of IPAA commitments with product selections still pending.
- Monitor acquisition integration and FY2020 costs for AWR and Integrand, plus repurchases, debt service and liquidity after acquisition spending.