Synopsys, Inc. — FY2011 Form 10-K Summary
Business context and reporting period
Synopsys supplies electronic design automation software, semiconductor intellectual property, system-level design tools, hardware, and related services. This annual report covers fiscal 2011, a 52-week year ended October 29, 2011; the filing presents dates as October 31 for convenience. It also includes unaudited fourth-quarter results.
More than 90% of revenue was recurring, primarily from time-based licenses, maintenance, and services. Revenue outside the United States was 54%; one customer accounted for 10.6% of total revenue.
Financial performance and liquidity
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Revenue | $1,535.6 million | $1,380.7 million | +11% |
| Gross profit / margin | $1,195.2 million / 77.8% | $1,099.6 million / 79.6% | Margin down 1.8 percentage points |
| Operating income / margin | $212.8 million / 13.9% | $184.1 million / 13.3% | Operating income +16% |
| Income before taxes | $219.1 million | $198.7 million | +10% |
| Net income | $221.4 million | $237.1 million | -7% |
| Diluted EPS | $1.47 | $1.56 | -6% |
| Cash from operating activities | $440.3 million | $341.0 million | +29% |
Net income exceeded pretax income because of a $2.3 million income tax benefit, including a $32.8 million IRS settlement benefit. FY2010 included a larger $94.3 million IRS settlement benefit; excluding IRS settlements, the reported effective tax rates were 13.9% in FY2011 and 28.2% in FY2010.
Cash, cash equivalents, and short-term investments totaled $1,004.1 million, up from $938.6 million. Working capital was $329.2 million versus $326.0 million; total assets were $3,367.3 million and stockholders’ equity was $2,101.3 million. The company had no borrowings under its $350 million revolving credit facility and reported covenant compliance. Approximately 77% of worldwide cash and short-term investments were held outside the United States.
Operating cash flow rose partly due to customer collections and billing timing. Capital expenditures were $57.3 million. Share repurchases used $401.8 million, with an additional $33.3 million paid for an equity forward contract. Backlog was approximately $2.5 billion, up 4%, but management cautioned it is not necessarily a reliable predictor of future revenue.
Material changes versus the prior comparable period
- Time-based license revenue rose 9% to $1,260.3 million; upfront license revenue rose 32% to $90.5 million; maintenance and service revenue rose 20% to $184.8 million. Professional services growth, including acquired contracts, drove much of the service increase.
- Cost of revenue increased 21% to $340.5 million, faster than revenue; acquisition-related amortization increased by $18.7 million. R&D expense increased 10% to $491.9 million, while operating expenses overall rose 7%.
- Net income fell despite higher operating income, mainly because FY2011’s tax benefits were lower than FY2010’s unusually large tax settlement benefit.
- Cash used in investing activities declined to $88.8 million from $238.7 million, largely reflecting lower acquisition payments. Financing cash outflow increased to $277.6 million, principally due to higher share repurchases.
Outlook, risks, and unusual items
Management described its outlook as positive, citing semiconductor-industry growth forecasts, customer relationships, expense management, and an expanded product portfolio from acquisitions. It also noted cautious customer spending and continuing global-market uncertainty. Management anticipated modest semiconductor-industry growth in 2012 and said Synopsys would monitor conditions and adjust its business if customer spending weakened. Fiscal 2012 is a 53-week year, which management said will affect revenue, expenses, and operating results. The filing provides no specific fiscal 2012 revenue or earnings guidance.
On November 30, 2011, after year-end, Synopsys agreed to acquire Magma Design Automation for approximately $507 million net of cash and debt acquired, funded with cash and debt. Closing was expected around the end of the second calendar quarter of 2012, subject to approvals. The transaction faced shareholder lawsuits seeking to block the deal and damages. A separate December 2011 patent lawsuit alleges infringement by Synopsys’s VCS multicore technology; the company said it did not consider losses probable or reasonably estimable.
Other significant risks include semiconductor-industry cyclicality, customer concentration and payment defaults, intense competition, acquisition integration and financing, foreign exchange and international operations, tax audits and uncertain tax positions, intellectual-property claims, product defects, and security or business-continuity events. Long-term operating lease obligations were $467.1 million. The filing reported no significant off-balance-sheet arrangements. KPMG gave an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and backlog convert into recognized revenue and cash collections, given the timing-sensitive license model and customer payment risks.
- Whether gross-margin pressure and acquisition-related amortization and costs persist as the company integrates acquired businesses.
- The sustainability of earnings after excluding IRS settlement benefits, and the outcomes and timing of tax examinations and uncertain tax positions.
- Completion, funding, integration benefits, and litigation or regulatory risks associated with the Magma acquisition.
- The status and potential exposure from the Dynetix patent case and the Magma shareholder lawsuits.
- Cash accessibility and funding needs: most cash was held abroad, while the Magma transaction was expected to require debt financing.