Cadence Design Systems, Inc. — FY2013 Form 10-K
Business context and reporting period. Cadence develops electronic design automation software, emulation hardware, semiconductor design and verification intellectual property, maintenance, and engineering services. This annual report covers the fiscal year ended December 28, 2013 (52 weeks); fiscal 2014 is expected to be a 53-week year.
Financial performance and position
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $1,460.1 million | $1,326.4 million | +10% |
| Product and maintenance revenue | $1,357.9 million | $1,212.4 million | +12% |
| Services revenue | $102.2 million | $114.0 million | -10% |
| Gross profit and margin | $1,259.9 million; 86.3% | $1,135.3 million; 85.6% | Margin +0.7 percentage points |
| Operating income and margin | $189.0 million; 12.9% | $211.7 million; 16.0% | Income -11% |
| Net income and diluted EPS | $164.2 million; $0.56 | $439.9 million; $1.57 | Net income -63% |
| Cash from operating activities | $367.6 million | $316.0 million | +$51.6 million |
FY2013 net income included a $5.2 million income tax benefit, compared with a $251.7 million benefit in FY2012, which included a substantial deferred-tax-valuation-allowance release and a California tax settlement. The prior-year tax benefits materially inflate the reported year-over-year decline in net income.
Fourth-quarter FY2013 revenue was $376.7 million and net income was $37.7 million, or $0.13 diluted EPS. In fourth-quarter FY2012, revenue was $345.6 million and net income was $313.9 million, or $1.10 diluted EPS; the prior-year quarter included major tax benefits.
Liquidity and debt. Cash, cash equivalents, and short-term investments totaled $633.0 million at year-end, down from $827.1 million. Net working capital was $72.9 million, versus $174.0 million. The company reported $350.0 million principal amount of 2.625% convertible notes due June 2015, carried at $324.8 million net of discount and classified as current because holders could convert during the following quarter. The $250 million revolving facility had no outstanding balance at year-end. About 70% of cash and short-term investments were held outside the United States. Management said available liquidity and expected operating cash flows were sufficient for at least 12 months.
Material changes and notable items
- Revenue growth was led by product and maintenance; services revenue declined, reflecting redeployment of design-services engineers into internal IP research and development.
- Operating costs rose 14% to $1,033.5 million. Research and development increased 18% to $534.0 million, reflecting acquisitions and hiring. Operating income fell despite higher revenue.
- Cash used for acquisitions and asset purchases was $392.8 million. Key FY2013 acquisitions included Tensilica and Cosmic Circuits, expanding design IP offerings. Goodwill rose to $456.9 million; acquired intangibles rose to $311.7 million.
- Restructuring charges were $18.0 million, primarily severance. The company expected to pay a further $14.2 million for restructuring obligations, mainly in FY2014.
- Investing activities used $426.9 million, while financing activities used $116.3 million. The company paid $144.6 million to retire the remaining 2013 and 2023 notes and drew and repaid $100 million under its revolver during the year.
Outlook, commentary, and risks
- Management expected FY2014 product and maintenance revenue to increase, driven by software and IP. It expected operating expenses generally to rise due to a full year of acquired and newly hired employees; hardware margins were expected to decline as emulation products entered the fourth year of their product life cycle. No specific full-year revenue or earnings forecast was provided.
- Approximately $1.1 billion, or about 70% of expected FY2014 revenue, was expected to come from arrangements already in year-end backlog. Total backlog was approximately $1.9 billion, versus $1.7 billion a year earlier.
- Management expected a $50 million share repurchase in FY2014, subject to credit-facility restrictions. Cadence had paid no cash dividends and did not plan to do so in the foreseeable future.
- Key risks include cyclicality in semiconductor and electronics spending, dependence on customers’ design-project activity, technology change and competition, long sales cycles, sole-source hardware components, acquisition integration and returns, foreign-exchange exposure, cybersecurity and intellectual-property claims.
- The 2015 notes could require up to $350 million in cash if converted or repurchased in specified circumstances. Their associated warrants may dilute shareholders when the stock price exceeds $10.78. The company reported no significant off-balance-sheet arrangements; ordinary-course litigation was disclosed, but no clear aggregate potential loss value was provided.
Important facts for investors to verify
- Whether FY2014 revenue growth, expense trends, and backlog conversion aligned with management’s expectations, including the effects of the 53-week fiscal year.
- Whether the Tensilica and Cosmic Circuits acquisitions generated expected revenue, product integration, and returns relative to acquisition spending and rising amortization.
- How the $350 million 2015 notes were ultimately settled, and the resulting effects on cash, liquidity, and potential warrant dilution.
- Whether cash held overseas was accessible for U.S. needs without additional tax cost, and whether liquidity remained adequate after acquisitions and planned repurchases.
- Whether restructuring savings, hardware margins, and growth in design IP offset higher research and development, stock-based compensation, and acquired-intangible amortization.