Cadence Design Systems, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016 (52 weeks). The filing is an annual report, not a standalone Q4 filing; it separately reports Q4 results. Cadence provides electronic-design-automation software, emulation and prototyping hardware, intellectual property, and engineering services.
Key financial results
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $1,816.1 million | $1,702.1 million | +7% |
| Operating income | $244.9 million | $285.4 million | -14% |
| Net income | $203.1 million | $252.4 million | -20% |
| Diluted EPS | $0.70 | $0.81 | -14% |
| Operating cash flow | $444.9 million | $378.2 million | +$66.7 million |
| Cash, cash equivalents and short-term investments | $468.3 million | $711.2 million | -$242.9 million |
| Debt carrying value | $693.5 million | $343.3 million | +$350.2 million |
| Net working capital | $116.5 million | $427.9 million | -$311.4 million |
Gross profit was approximately $1,559.6 million, or a calculated gross margin of 85.9%; operating margin was 13.5% and net margin was 11.2%. These compare with calculated FY2015 margins of approximately 86.0%, 16.8% and 14.8%, respectively. Fiscal 2014 was a 53-week year, unlike fiscal 2015 and 2016.
Q4 FY2016 revenue was $469.0 million, net income was $38.5 million, and diluted EPS was $0.14. Q4 FY2015 revenue was $441.1 million, net income was $80.4 million, and diluted EPS was $0.26; the prior-year quarter included tax benefits, including a $10.1 million benefit from the federal research tax credit.
Business and material changes
- Product and maintenance revenue rose 7% to $1,683.8 million; services revenue rose 7% to $132.3 million. Around 90% of revenue is recognized on a recurring basis over contract terms.
- Management attributed product growth mainly to demand for Palladium Z1 emulation hardware and digital IC products; IP revenue declined. Services growth reflected timing of revenue recognition on completed customer engagements.
- Research and development expense increased 15% to $735.3 million, reflecting additional hiring, acquisitions and higher stock-based compensation. Total operating expenses rose 9% to $1,255.6 million.
- Restructuring and other charges increased to $41.0 million from $4.5 million, primarily for severance, including a voluntary early-retirement program. The company recorded $24.5 million of restructuring liabilities at year-end.
- Cadence repurchased $960.3 million of stock during FY2016, repurchasing 40.5 million shares. Its prior $1.2 billion authorization ended in Q4; the board authorized a new program of up to $525 million in January 2017.
- Two FY2016 acquisitions involved $42.4 million of cash consideration, net of acquired cash. Cash used for acquisitions and asset purchases was $41.6 million.
Liquidity, debt and outlook
- Cash provided by operations was $444.9 million. Investing activities provided $1.4 million, while financing activities used $592.7 million, mainly reflecting share repurchases and debt-related transactions.
- At year-end, debt principal was $700 million: a $300 million unsecured term loan due in 2019 and $350 million of 4.375% senior notes due in 2024, plus $50 million drawn under the revolving credit facility. The term loan and revolver carry variable rates. Cadence reported compliance with its debt covenants.
- Approximately 63% of cash, cash equivalents and short-term investments was held outside the United States. Management said available liquidity, operating cash flow and borrowing capacity were expected to cover working-capital and other needs, including acquisitions and repurchases, for at least 12 months.
- Backlog was approximately $2.5 billion at year-end, versus $2.3 billion a year earlier. Management expected about $1.3 billion, or roughly 70% of FY2017 revenue, to come from year-end backlog; backlog conversion and revenue remain subject to business levels, delivery timing and contract terms.
- Management expected the FY2017 effective tax rate to be similar to FY2016’s 14.4%. The filing provides no broader quantified revenue or earnings guidance.
- After year-end, Cadence replaced its revolver with a five-year facility providing $350 million of borrowing capacity, with the option to seek up to $250 million more subject to lender commitments, and amended the term-loan agreement.
Risks, contingencies and unusual items
- Results depend on customer design spending and semiconductor/electronics industry conditions; long sales cycles and recurring revenue recognition can delay the impact of bookings changes.
- Competition, rapid technology shifts, advanced-node development, product quality, customer consolidation and the ability to integrate acquisitions may affect growth and margins. Hardware supply dependence and product-life-cycle inventory charges are additional risks.
- International operations and foreign exchange are significant: about 54% of FY2016 revenue came from outside the United States, and management noted currency, political, trade and tax risks.
- Debt, variable interest rates, restrictive covenants, and the concentration of cash overseas may constrain financial flexibility. No significant off-balance-sheet arrangements were reported.
- Tax outcomes are uncertain, including examinations, unrecognized tax benefits and potential taxes if indefinitely reinvested foreign earnings are repatriated. The company reported $98.5 million of gross unrecognized tax benefits at year-end.
- The company is involved in ordinary-course legal disputes, including intellectual-property, contract, acquisition and employee matters; the filing does not provide a clear quantified aggregate exposure. Management and the auditor reported effective internal control over financial reporting.
- FY2016 net income included a $17.2 million tax benefit related to stock-based compensation under an accounting standard adopted early in the year. This contributed to variability in the effective tax rate.
Investor facts to verify
- Whether backlog converts as expected, and whether product growth—particularly emulation hardware and digital IC offerings—offsets the decline in IP revenue.
- The sustainability of earnings and margins after the FY2016 increase in R&D spending and the substantial restructuring charges.
- Cash generation and liquidity after $960.3 million of repurchases, increased debt, and the fact that approximately 63% of cash and short-term investments was held overseas.
- Debt repayment capacity, variable-rate exposure, covenant headroom and the terms and availability of the new revolving facility.
- The effect of the FY2018 revenue-recognition standard, tax examinations and foreign-earnings tax exposure on future reported results and cash flows.