Cadence Design Systems, Inc. — FY2017 Form 10-K
Business context and reporting period
Cadence provides electronic-design automation software, emulation and prototyping hardware, design and verification IP, system-interconnect tools, maintenance and engineering services. This annual report covers the 52-week fiscal year ended December 30, 2017. The filing also reports fourth-quarter results; it is not a standalone quarterly filing.
Financial results and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $1,943.0 million | $1,816.1 million |
| Operating income | $324.0 million | $244.9 million |
| Net income | $204.1 million | $203.1 million |
| Diluted EPS | $0.73 | $0.70 |
| Cash from operating activities | $470.7 million | $444.9 million |
| Cash, cash equivalents and short-term investments | $692.5 million | $468.3 million |
| Total debt, carrying value | $729.4 million | $693.5 million |
Revenue increased 7.0%. Calculated from reported figures, gross margin was approximately 87.8% and operating margin 16.7%, versus approximately 85.9% and 13.5%, respectively, in FY2016; net margin was approximately 10.5%, versus 11.2%. Fiscal 2017 investing cash flow was negative $191.2 million, including $143.2 million net cash paid for acquisitions; financing cash flow was negative $70.1 million. Net working capital was $337.6 million. Cash less reported debt was approximately negative $36.9 million; about 80% of cash and short-term investments was held outside the United States.
Fourth-quarter revenue was $501.7 million. The quarter recorded a net loss of $14.4 million; the filing identifies a provisional $96.8 million FY2017 tax expense related to the Tax Act but does not clearly allocate that annual charge to the fourth quarter in the quarterly table.
Changes versus the prior comparable period
- Product and maintenance revenue rose 8% to $1,814.0 million, primarily from software and IP growth, partly offset by lower emulation and prototyping hardware revenue. Services revenue fell 2% to $129.0 million.
- Asia revenue rose 18% and Europe, Middle East and Africa revenue rose 11%; U.S. revenue was approximately flat. International operations generated approximately 58% of revenue, up from 54% in FY2016.
- Operating income increased about 32%, while net income was nearly unchanged. The effective tax rate rose to 35.2% from 14.4%, largely due to the Tax Act’s provisional charge.
- Research and development expense rose 9% to $804.2 million as the company continued investing in product development. Restructuring charges declined to $9.4 million from $41.0 million.
- Backlog increased to $2.7 billion from $2.5 billion. The company said approximately 70% of FY2017 revenue came from arrangements in prior-year-end backlog.
Outlook, commentary, risks and unusual items
- Management expects $1.4 billion, or approximately 70%, of FY2018 revenue to come from arrangements in backlog at December 30, 2017. It expects cash, operating cash flow and available revolving-credit borrowings to meet liquidity needs for at least 12 months.
- Management expects an FY2018 effective tax rate of approximately 13%, subject to further Tax Act analysis. FY2017 includes provisional Tax Act expense of $96.8 million: $67.2 million transition tax and $25.2 million deferred-tax remeasurement, with other effects also included in the overall estimate. The accounting remains incomplete.
- Cadence planned to adopt revenue standard Topic 606 in FY2018. Management expected approximately 3% of opening backlog to be adjusted through retained earnings, with FY2018 revenue slightly lower than under the prior standard; approximately 90% of revenue is expected to remain recognized over time.
- The company authorized up to $525 million in share repurchases, with approximately $425 million remaining at year-end, and expected to repurchase about $50 million in FY2018’s first quarter. The credit agreements restrict certain repurchases and dividends; Cadence has not paid cash dividends.
- FY2017 included two acquisitions for $142.8 million net cash consideration, including nusemi inc. Acquisitions, rapid technology change, competition, customer and industry cyclicality, foreign exchange, international operations, cybersecurity, tax uncertainty and reliance on hardware suppliers are key disclosed risks.
- Debt included a $300 million term loan due January 2019, $350 million principal of 4.375% notes due 2024 and $85 million drawn on a revolving facility. Variable-rate borrowing exposes the company to higher interest expense; debt agreements include covenants and restrictions.
- One customer represented 17% of year-end receivables, although no customer accounted for 10% or more of annual revenue. The filing describes ordinary-course litigation and contingencies but provides no clear quantified material loss estimate.
Important facts for investors to verify
- How final Tax Act accounting changes the reported tax expense, deferred-tax balances, cash taxes and FY2018 tax-rate outlook.
- How Topic 606 adoption affects revenue, retained earnings, deferred revenue and comparability with FY2017.
- Whether backlog converts on schedule and whether software/IP growth offsets weaker hardware and services revenue.
- The concentration and collectability of receivables, particularly the customer representing 17% of year-end receivables.
- Debt repayment, covenant headroom, foreign-held cash accessibility and the effect of any share repurchases or acquisitions on liquidity.