Cadence Design Systems, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 30, 2013; comparisons are with the three months ended March 31, 2012. Cadence develops electronic design automation software, intellectual property, hardware, maintenance and related services for semiconductor and electronics customers. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $354.3M | $315.8M | +12% |
| Product and maintenance revenue | $328.3M | $286.3M | +15% |
| Services revenue | $26.0M | $29.5M | -12% |
| Operating income | $58.1M | $45.4M | +28% |
| Operating margin | 16.4% | 14.4% | +2.0 percentage points |
| Net income | $78.6M | $31.1M | +153% |
| Diluted EPS | $0.27 | $0.11 | +$0.16 |
| Operating cash flow | $75.3M | $60.7M | +$14.6M |
Net income included a $27.6M income tax benefit (versus $8.1M tax expense in the prior-year quarter), primarily reflecting a $33.7M benefit from releasing uncertain tax benefits recorded in a prior business combination and a $5.9M retroactive research tax credit benefit, partly offset by tax expense. The reported increase in net income therefore substantially outpaced operating-income growth.
Costs of product and maintenance and services totaled $48.2M, implying a consolidated gross margin of approximately 86.4%, compared with 85.3% in the prior-year quarter. Marketing and sales, research and development, and general and administrative expenses together rose 11% to $244.3M. Research and development increased 14% to $124.1M.
Cash and cash equivalents were $810.2M and short-term investments were $101.0M at quarter-end, totaling $911.1M, up $84.1M from December 29, 2012. Net working capital was $251.3M, up $77.3M. Cash from operations was $75.3M; investing activities used $1.8M and financing activities provided $15.2M. Approximately 55% of cash, cash equivalents and short-term investments were held by foreign subsidiaries.
Convertible notes had $494.6M of principal outstanding and a $452.6M net carrying value. The $350M principal 2015 Notes became convertible for cash during March 31–June 29, 2013 under their stock-price condition and were classified as current; the company said it did not anticipate conversion but could be required to pay up to $350M of principal if holders converted. The $144.5M principal 2013 Notes mature in December 2013. The $250M revolving credit facility had no balance outstanding at quarter-end; Cadence borrowed $100M after quarter-end on April 23.
Material changes and business developments
- Product and maintenance growth was attributed to increased business levels and revenue recognized from prior-period bookings. More than 90% of bookings in both periods were of a type expected to generate recurring, ratable revenue.
- Services revenue fell as design-services engineers were redeployed to internal R&D and pre-sales work. Revenue from Europe, Middle East and Africa rose 32%; Japan revenue fell 5%, with the company citing yen devaluation and local economic conditions.
- Operating expenses increased with hiring, higher variable compensation, and employees added through the 2012 Sigrity acquisition. R&D spending also reflected engineers working on internal projects.
- Quarter-end receivables were $79.0M, down from $105.4M at year-end. One customer represented about 11% of receivables; the ten largest represented about 53%.
Outlook, risks and unusual items
- Management expected services revenue to decrease during the remainder of fiscal 2013, partly due to continued engineer redeployment; it also expected Japan revenue to decline further, citing expected yen weakness.
- Management expected operating expenses to increase during the remainder of fiscal 2013 because of planned R&D hiring and the Tensilica and Cosmic acquisitions. Acquired-intangible amortization was also expected to rise. The filing provides no clear numerical revenue or earnings guidance.
- Cadence completed its Tensilica acquisition on April 22, 2013, after quarter-end. Net cash paid at closing was approximately $326.4M, after estimated acquired cash of $25.0M; some consideration and employee payments are subject to retention or performance conditions. The proposed Cosmic Circuits acquisition, for approximately $61.2M in cash, remained subject to conditions, including regulatory approval. Cadence disclosed that its CEO had a relationship with Cosmic and recused himself from transaction discussions and negotiations.
- Management said existing liquidity, operating cash flow and available credit were expected to meet working-capital and other needs, including acquisitions, for at least the next 12 months. Foreign earnings designated as permanently reinvested may require additional taxes if repatriated.
- Key risks include cyclical semiconductor and electronics demand, uncertain customer design spending, competition and pricing pressure, dependence on technology development and key personnel, foreign-exchange exposure (particularly the yen), customer payment risk, acquisition integration, and potential dilution from note-related warrants. The company also highlighted possible cash demands from convertible-note conversion or maturity.
- The filing describes ordinary-course legal disputes but gives no clear quantified loss estimate. No material change in internal control over financial reporting was reported; management concluded disclosure controls were effective as of March 30, 2013.
Important facts for investors to verify
- How much of reported earnings growth is sustainable after excluding the quarter’s unusual tax benefit, and what the normalized tax rate may be.
- Whether holders convert the 2015 Notes, and how the $100M post-quarter credit draw and acquisition spending affect liquidity and debt levels.
- Integration progress, purchase accounting, retention and performance payments for Tensilica, and whether the Cosmic acquisition closes on the stated terms.
- Whether services and Japan revenue follow management’s expected declines, and whether recurring bookings translate into revenue and cash collections as expected.
- Receivables concentration, foreign-currency movements, and any changes in legal contingencies or other acquisition-related obligations.