Cadence Design Systems, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 27, 2020. Financial statements are unaudited. Cadence provides electronic design automation software, hardware, services and reusable IC design IP; management reports one operating segment.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $638.4 | $580.4 | $1,256.4 | $1,157.2 |
| Operating income | $152.0 | $133.7 | $291.3 | $262.1 |
| Net income | $131.3 | $107.2 | $255.3 | $227.8 |
| Diluted EPS | $0.47 | $0.38 | $0.91 | $0.81 |
| Operating cash flow | Not presented separately | Not presented separately | $562.8 | $431.8 |
- Q2 revenue rose 10%, operating income 14% and net income 22% year over year. First-half revenue rose 9%, operating income 11% and net income 12%.
- Q2 gross margin was approximately 88.2%, versus 89.4% a year earlier; operating margin was 23.8%, versus 23.0%; net margin was 20.6%, versus 18.5%. These percentages are calculated from reported results.
- Product and maintenance revenue was $601.4 million in Q2, up 10%; services revenue was $37.1 million, up 14%. Management attributed product growth principally to customer investment in complex designs, including AI, 5G, aerospace and defense, automotive and cloud data-center markets.
- First-half operating cash flow increased by $131.1 million year over year, primarily due to the timing of customer receipts and vendor disbursements. Capital expenditures were $43.5 million, implying first-half operating cash flow less capital expenditures of approximately $519.3 million.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $1.189 billion at June 27, 2020, up from $705.2 million at December 28, 2019. Net working capital was $487.9 million, compared with $497.0 million at year-end.
- Total debt carrying value was $696.4 million: $350.0 million drawn on the revolving credit facility and $346.4 million carrying value of the $350.0 million 4.375% notes due 2024. The revolver was borrowed in Q1 as a precautionary measure during COVID-19-related uncertainty; its stated interest rate was 1.53%. The facility matures January 2022, and Cadence reported compliance with its covenants.
- First-half investing cash outflow was $238.7 million, including $195.1 million net cash paid for acquisitions. Financing cash inflow was $165.0 million, including the $350.0 million revolver draw and $175.0 million of share repurchases.
- Approximately 43% of cash was held by foreign subsidiaries. Management said cash and expected operating cash flows should meet working-capital and other capital and liquidity needs for at least 12 months.
Changes, outlook and risks
- Cadence acquired AWR Corporation and Integrand Software in Q1 for approximately $195 million net of cash acquired. The acquisitions expand RF/microwave design capabilities related to 5G. They added $119.4 million of goodwill and $101.3 million of definite-lived intangible assets; management expected acquisition-related expenses, including amortization, to exceed acquired revenue during fiscal 2020.
- Contracted but unsatisfied performance obligations were approximately $3.7 billion at quarter-end, including $176.5 million of non-cancellable IP Access Agreement commitments for which customers had not yet selected products. Excluding those commitments, Cadence expected to recognize approximately 55% of the remaining obligations over the next 12 months.
- Cadence expects 85%–90% of annual revenue to be recurring. No specific revenue or earnings guidance for the full year is provided in the supplied filing text. Management expected marketing and sales, R&D and interest expense to increase during the rest of fiscal 2020 versus fiscal 2019, with hiring and acquisitions cited for operating expense growth. The company expected a fiscal 2020 effective tax rate of approximately 6%.
- California legislation enacted June 29, after quarter-end, limits use of certain tax credits and suspends net operating loss deductions for three years. Cadence expected a discrete Q3 tax benefit of approximately $19 million, partly offset by about $7 million of additional fiscal 2020 California taxes.
- COVID-19 had not materially adversely affected first-half financial results, according to management, but created ongoing uncertainty. Remote work and restricted site access delayed some hardware installations; payment-delay requests led Cadence to reduce revenue on affected contracts to amounts it expected to collect. Further disruptions could delay orders, deliveries and IP development, increase costs, and weaken collections or future revenue.
- Other notable risks include U.S. trade restrictions affecting certain Chinese customers, cyclical semiconductor and electronics demand, hardware supplier concentration, competition and technology changes, acquisition integration, foreign-exchange exposure, and debt and variable-rate interest exposure. The filing describes ordinary-course litigation but gives no clear quantified exposure for specific proceedings.
Important facts for investors to verify
- Whether COVID-19-related customer payment delays, hardware installation constraints and laboratory access restrictions affected subsequent-quarter bookings, collections or deliveries.
- Progress in integrating AWR and Integrand, realized contribution to revenue, and acquisition-related expenses relative to management’s expectations.
- Conversion and timing of the $3.7 billion remaining performance obligations into recognized revenue, including customer selections under IP Access Agreements.
- Use of the revolver, covenant headroom, cash location and availability, and the company’s ability to sustain repurchases while funding acquisitions and operations.
- The actual Q3 and full-year effect of California tax legislation, and whether the expected approximately 6% fiscal 2020 effective tax rate changes.