Cadence Design Systems, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. Cadence provides electronic design automation and system design enablement software, hardware, services, and intellectual property. This unaudited quarterly report covers the three months ended March 31, 2018; comparisons are with the three months ended April 1, 2017.
Key financial results
| Metric | Q1 2018 | Prior comparable quarter | Change |
|---|---|---|---|
| Revenue | $517.3 million | $476.9 million | +8% |
| Operating income | $85.8 million | $79.6 million | +8% |
| Operating margin | 16.6% | 16.7% | Down 0.1 percentage point |
| Net income | $72.9 million | $68.3 million | +7% |
| Diluted EPS | $0.26 | $0.25 | +4% |
| Cash provided by operating activities | $157.6 million | $92.4 million | +$65.2 million |
Product and maintenance revenue was $480.6 million, up 6%; services revenue was $36.7 million, up 44%. Product and maintenance growth reflected software and emulation/prototyping hardware, partly offset by lower IP revenue. Asia revenue increased 14%, while Japan revenue declined 7%. Approximately 90% of revenue was recognized over time.
Cash, cash equivalents, and short-term investments totaled $752.4 million at March 31, 2018, versus $692.5 million at December 30, 2017. Net working capital was $203.7 million, down from $337.6 million, primarily because the $300 million term loan due January 2019 was classified as current. Outstanding debt was $689.6 million: $299.8 million carrying value on the 2019 Term Loan, $344.8 million on the 2024 Notes, and $45.0 million on the revolving facility. The revolver balance was repaid in April 2018. The company reported compliance with debt covenants.
Material changes and comparability
- Cadence adopted ASC Topic 606 on the first day of fiscal 2018 using the modified retrospective method; prior periods were not restated. The filing cautions that periods are not directly comparable.
- The Topic 606 reconciliation shows Q1 2018 revenue would have been about $8.1 million higher and net income about $10.6 million higher under prior GAAP. Thus, reported year-over-year growth is affected by accounting changes.
- Research and development expense rose 13% to $224.2 million, primarily from employee-related costs and stock-based compensation. Total operating expenses increased 10%.
- Operating cash flow increased substantially, which management attributed primarily to the timing of customer receipts and vendor disbursements.
- Cadence repurchased approximately 1.29 million shares for $50.0 million; $375 million remained under the $525 million authorization.
Outlook, risks, and unusual items
- Management expected a fiscal 2018 effective tax rate of approximately 15%, while noting it could change as the company completes its Tax Act accounting and receives further guidance. The Q1 effective rate was 6.8%.
- Management expected research and development expense and stock-based compensation expense to increase during the remainder of fiscal 2018 compared with fiscal 2017.
- Management said existing liquidity, operating cash flows, and available revolving-credit borrowings should meet working-capital and other capital needs, including acquisitions and repurchases, for at least the next 12 months. Approximately 68% of cash, cash equivalents, and short-term investments were held by foreign subsidiaries.
- Adoption of the new lease accounting standard in fiscal 2019 is expected to materially affect the balance sheet, principally through recognition of operating-lease right-of-use assets and liabilities.
- Key disclosed risks include semiconductor and electronics industry cyclicality, customer and project spending, competition and pricing, technology changes, hardware supply dependence, foreign exchange exposure, tax uncertainty, cybersecurity, litigation, and debt obligations. The filing describes ordinary-course litigation and contingencies but gives no clear quantified exposure.
- Q1 included a $2.0 million restructuring credit and a $1.0 million gain on marketable equity securities. The company reduced its provisional estimate of the 2017 Tax Act transition tax by $2.6 million.
Important facts for investors to verify
- Assess underlying growth using the Topic 606 reconciliation; the filing’s prior-year results remain under prior GAAP.
- Review the January 2019 maturity of the $300 million term loan and the company’s refinancing or repayment plans.
- Monitor the expected fiscal 2018 tax rate and remaining Tax Act accounting adjustments.
- Evaluate the sustainability of operating cash flow, given management’s explanation that timing of receipts and disbursements drove much of the increase.
- Track the balance of foreign-held cash, repurchases, and planned investment needs, alongside the disclosed industry, supply, currency, and technology risks.