Cadence Design Systems, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Cadence provides electronic-design software, hardware, services and design IP. Amounts below are in U.S. dollars; financial comparisons are affected by adoption of the new revenue-recognition standard, ASC 606.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $518.4m | $479.0m | $1,035.7m | $955.9m |
| Operating income | $93.1m | $82.7m | $178.9m | $162.3m |
| Net income | $75.1m | $69.1m | $148.0m | $137.4m |
| Diluted EPS | $0.27 | $0.25 | $0.53 | $0.49 |
| Operating margin | 17.9% | 17.3% | 17.3% | 17.0% |
- Revenue increased 8% in both the quarter and first half. Q2 product and maintenance revenue rose 10% to $487.9m, while services revenue fell 13% to $30.5m. Management cited growth in software, emulation/prototyping hardware and IP.
- First-half operating cash flow was $362.9m, up from $254.6m. Capital expenditures were $31.1m; cash increased by $131.5m to $819.5m. Cash, cash equivalents and short-term investments totaled $825.4m.
- At June 30, total debt carrying value was $644.8m: a $299.9m term loan due January 2019 and $344.9m carrying value of the 2024 notes. The revolving facility had no balance, with $350m of committed capacity available. Cadence reported compliance with debt covenants.
- Current assets were $1,129.1m and current liabilities $870.1m. Net working capital was $258.9m, down from $337.6m at fiscal year-end, mainly because the 2019 term loan was classified as current.
- Cadence repurchased $100.0m of shares in the first half; $325m remained under the $525m authorization.
Changes, accounting and unusual items
- Cadence adopted ASC 606 and other accounting standards at the start of fiscal 2018 using transition approaches that did not restate prior periods. Accordingly, reported year-over-year results are not fully comparable. ASC 606 changed the timing of certain license revenue and capitalized sales commissions. Its first-half impact on reported net income was a decrease of $8.6m versus prior-GAAP treatment; operating cash flow was unchanged.
- ASC 606 adoption increased opening retained earnings by $91.6m, before other adoption adjustments. The company said revenue under ASC 606 was expected to be slightly lower for fiscal 2018 than under prior GAAP, though actual period effects varied.
- First-half R&D expense rose 12% to $443.3m; management expects R&D expense to increase further during the remainder of fiscal 2018. Stock-based compensation was $78.9m for the half, up from $57.9m; management also expected higher stock-based compensation expense for the remainder of 2018.
- Restructuring and other items were a $2.4m credit in the first half, reflecting revised estimates for earlier plans. The remaining restructuring liability was $2.0m.
- The Tax Act accounting remained provisional. The company reduced its estimate of the 2017 transition tax by $2.6m during the half and said it expected to refine its accounting during the rest of fiscal 2018.
Outlook, risks and contingencies
- Management expected a fiscal 2018 effective tax rate of approximately 13%, with quarterly variation possible. No specific revenue or earnings forecast was provided in the filing.
- Contracted but unsatisfied performance obligations were approximately $2.5bn at June 30; Cadence expected to recognize about 60% over the next 12 months. Approximately 90% of revenue was recognized over time.
- Management expected available liquidity, operating cash generation and borrowing capacity to meet working-capital and other needs, including acquisitions and repurchases, for at least the next 12 months. About 42% of cash, equivalents and short-term investments was held by foreign subsidiaries.
- Operating risks include semiconductor-industry cyclicality, customer spending and consolidation, competition and pricing, rapid technology changes, hardware/IP delivery and supplier constraints, foreign exchange, tax-law uncertainty, cybersecurity, and the ability to retain skilled employees. The company also noted that hardware and IP delivery timing can make results fluctuate.
- Cadence anticipated that lease-accounting adoption in fiscal Q1 2019 would materially affect the balance sheet, principally through recognition of operating-lease assets and liabilities, but did not expect a material income-statement impact.
- The filing describes ordinary-course legal disputes and litigation but identifies no specific matter or clear quantified exposure. Management stated that outcomes are uncertain. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Assess growth and margins using the ASC 606 transition disclosures, since the prior-year periods were not restated and comparability is limited.
- Review repayment or refinancing plans for the $300m term loan due January 2019 and monitor covenant compliance.
- Track customer collections, deferred revenue and conversion of the $2.5bn remaining performance obligations into recognized revenue.
- Monitor R&D and stock-based compensation growth, share repurchases, and the final Tax Act accounting and effective tax rate.
- Evaluate exposure to industry downturns, trade restrictions, foreign-exchange movements, and hardware/IP supply or delivery disruptions.