Cadence Design Systems, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 29, 2018 (52 weeks). The filing also reports fourth-quarter results. Cadence sells electronic-design software, hardware, services and reusable semiconductor intellectual property to systems and semiconductor customers.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $2.138 billion | $1.943 billion |
| Operating income | $396.2 million | $324.0 million |
| Net income | $345.8 million | $204.1 million |
| Diluted EPS | $1.23 | $0.73 |
| Cash from operations | $604.8 million | $470.7 million |
| Cash and cash equivalents, year-end | $533.3 million | $688.1 million |
| Debt, carrying value, year-end | $445.3 million | $729.4 million |
| Net working capital, year-end | $242.1 million | $337.6 million |
- Revenue increased 10%; operating income rose 22%. Reported operating margin was approximately 18.5% and net margin approximately 16.2%. Gross profit was approximately $1.879 billion, or an 87.9% gross margin.
- Product and maintenance revenue rose 10% to $1.998 billion; services revenue rose 9% to $140.1 million. Approximately 90% of revenue was recognized over time.
- Fourth-quarter revenue was $569.9 million and net income was $98.4 million, or diluted EPS of $0.35. In Q4 2017, revenue was $501.7 million and the company reported a $14.4 million net loss, primarily amid the prior-year tax charge.
- Cash from investing activities was negative $173.8 million, including $115.8 million for non-marketable investments and $61.5 million for capital expenditures. Financing activities used $567.9 million, including repayment of the $300 million term loan and $250.1 million in share repurchases.
- Year-end debt comprised $350 million principal of 4.375% notes due 2024 and $100 million outstanding under the revolving facility. The company prepaid its $300 million term loan in July 2018. It reported covenant compliance.
- About 75% of cash was held by foreign subsidiaries. Management said available cash, operating cash flow and revolver capacity should meet liquidity needs, including acquisitions and repurchases, for at least 12 months.
Changes, outlook and notable items
- Cadence adopted ASC 606 using the modified retrospective method in FY2018; prior periods were not restated. The company said FY2018 results are not directly comparable with earlier periods. Under the prior accounting basis, FY2018 revenue would have been about $2.145 billion and net income about $351.3 million, versus reported $2.138 billion and $345.8 million.
- The effective tax rate was 8.1%, compared with 35.2% in FY2017. FY2017 included a substantial Tax Act charge; FY2018 tax results included tax credits and stock-based compensation benefits. Management expected an approximately 10% effective tax rate for FY2019, subject to variability and further tax-law guidance.
- Remaining performance obligations were approximately $2.9 billion at year-end; Cadence expected to recognize about 60% as revenue over the next 12 months. This is not a revenue forecast and includes amounts to be invoiced later.
- Management attributed growth to customer investment in complex designs and growth across product categories, particularly in the United States and Asia. Research and development expense increased 10% to $884.8 million; the company expects stock-based compensation expense to rise in FY2019. No specific FY2019 revenue or earnings guidance was provided.
- FY2018 restructuring and other charges were $11.1 million net; the fourth-quarter restructuring plan recorded $13.8 million in charges before revisions to prior plans. In December, Cadence made a minority investment of approximately $116 million; it invested a further approximately $34 million in a private company in January 2019.
- The board authorized an additional $500 million share-repurchase program in February 2019; $175 million remained under the previous authorization at year-end. Cadence has never paid a cash dividend.
Risks, contingencies and controls
- Key risks include cyclicality and uncertainty in semiconductor and electronics spending, customer consolidation, pricing and competition, rapid technology change, and execution of the System Design Enablement strategy.
- Other disclosed risks include international trade and export restrictions, foreign-exchange exposure, tax-law changes and audits, cybersecurity and cloud security, reliance on hardware suppliers, intellectual-property claims, litigation, and employee retention.
- Cadence reported ordinary-course litigation and contingencies but did not provide a clear quantified total exposure in the filing text. It reported no significant off-balance-sheet arrangements and no significant hardware warranty or customer-indemnification losses in the periods presented.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management reported effective controls as of year-end.
Important facts for investors to verify
- Assess the effect of ASC 606 and the one-time Tax Act effects when comparing FY2018 growth and earnings with prior periods.
- Track whether the $2.9 billion of remaining performance obligations converts to revenue and cash on the expected schedule.
- Monitor collections and credit exposure: receivables rose to $303.1 million including long-term balances, and one customer represented 11% of year-end receivables.
- Review liquidity and capital allocation alongside debt obligations, the large foreign-held cash balance, strategic investments and expanded repurchase authorization.
- Evaluate whether continued R&D investment, rising stock-based compensation and restructuring yield sustained growth and margins amid industry, trade, tax and currency risks.