Cadence Design Systems, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter ended October 2, 2021; year-to-date results cover the nine months ended that date. Comparisons are with the corresponding 2020 periods. Cadence provides electronic design automation software, hardware, IP and services. Figures below are in U.S. dollars.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $750.9 million | $666.6 million | $2,215.2 million | $1,923.0 million |
| Income from operations | $194.0 million | $169.3 million | $583.4 million | $460.6 million |
| Operating margin | 26% | 25% | 26% | 24% |
| Net income | $176.3 million | $161.6 million | $519.4 million | $416.9 million |
| Diluted EPS | $0.63 | $0.58 | $1.86 | $1.49 |
| Operating cash flow | Not stated for the quarter | $885.1 million | $769.4 million |
Q3 revenue rose 13% year over year; product and maintenance revenue increased 12% and services revenue 23%. For the first nine months, revenue grew 15%. Management attributed growth primarily to customer investment in complex designs and increased software offerings; U.S. hardware sales also contributed. China revenue declined 14% in Q3, mainly from lower hardware and IP revenue. Management said operating margin improved because revenue growth exceeded cost growth.
For the first nine months, operating cash flow increased $115.7 million year over year, primarily due to the timing of customer receipts and vendor payments. Investing cash use was $269.9 million, including $220.0 million of net cash paid for business combinations; financing cash use was $528.1 million, including $502.3 million of share repurchases. Cash and cash equivalents were $1,013.8 million at October 2, 2021, up from $928.4 million at January 2, 2021. Net working capital was $635.8 million.
Debt carrying value was $347.4 million, representing $350 million principal of 4.375% senior notes due October 2024. No revolving-credit borrowings were outstanding. The new five-year unsecured facility provides $700 million of capacity, with an option to request up to $350 million more subject to lender commitments. Cadence reported compliance with its financial covenants. Approximately 64% of cash was held by foreign subsidiaries.
Material changes and notable items
- Revenue growth exceeded expense growth, and reported operating margin expanded year over year. R&D expense rose 15% in Q3 and 14% year to date, reflecting continued product investment; marketing and sales expense also increased.
- The effective tax rate was 6.6% in Q3 and 9.6% year to date, versus 2.5% and 6.6% in the comparable 2020 periods. The prior-year comparison included a $19.0 million benefit from a partial release of a California R&D tax-credit valuation allowance. Cadence estimated a fiscal 2021 effective tax rate of approximately 12%.
- Cadence acquired NUMECA and Pointwise in 2021 to expand its computational-fluid-dynamics capabilities. Acquisition cash payments totaled $220.0 million in the first nine months. Management expected the acquisitions to add more expense than revenue during fiscal 2021.
- A voluntary retirement program resulted in a one-time $26.8 million charge in Q2. Related liabilities were $21.5 million at October 2, with $20.5 million expected to be paid within 12 months.
- The board added $1 billion to the share-repurchase authorization in August. Cadence repurchased $502.3 million of shares during the first nine months; approximately $1.2 billion remained authorized at quarter-end.
Outlook, risks and contingencies
- Management expected marketing and sales and R&D expenses to increase for the remainder of fiscal 2021 compared with fiscal 2020, reflecting additional headcount from hiring and acquisitions. Cadence expected 85%–90% of annual revenue to be recurring.
- Contracted but unsatisfied performance obligations were approximately $3.7 billion, including $89.1 million of non-cancellable IP Access Agreement commitments with product selections still to be determined. Cadence expected to recognize about 55% of the obligations, excluding those commitments, over the next 12 months.
- Management stated that cash balances and operating cash flows were expected to meet working-capital and other liquidity needs for at least the next 12 months. The filing does not provide a specific revenue or EPS forecast.
- Cadence said COVID-19 had not materially adversely affected results, financial condition, liquidity or cash flows through the first three quarters, but cited uncertainty around future disruption, remote work, customer-site access and hardware delivery timing.
- U.S. export restrictions on certain China customers continued to affect the business; management expected restrictions to continue to affect revenue from certain customers. Cadence also disclosed a February 2021 administrative subpoena from the Bureau of Industry and Security concerning certain China sales; it was cooperating and conducting an internal review. The outcome is uncertain.
- Other principal risks include semiconductor and electronics industry cycles, hardware supply constraints and delivery delays, competition, foreign-exchange exposure, tax-law and audit uncertainty, cybersecurity threats, acquisition integration, and customer payment or collection risk. One customer represented 13% of receivables at quarter-end, although no customer accounted for 10% or more of revenue in the reported periods.
Investor verification priorities
- Track whether revenue growth, operating-margin expansion and cash-flow improvement persist, particularly as R&D and selling costs rise.
- Assess the export-control subpoena and restrictions affecting China customers, including any change in sales, collections or compliance exposure.
- Monitor hardware and IP delivery timing, semiconductor-component availability and the degree to which quarterly results depend on point-in-time deliveries.
- Verify acquisition performance and integration costs, and compare realized revenue and cash generation with the $3.7 billion remaining-performance-obligation balance.
- Review cash location and accessibility, the 2024 notes maturity, repurchase pace and the concentration of receivables in one customer.