Synopsys, Inc. — FY2013 Form 10-K
Business context and reporting period. Synopsys provides electronic design automation software, semiconductor IP, hardware and services. This is an annual report for fiscal 2013, a 52-week year ended November 2, 2013 (presented as October 31); it is not a standalone fourth-quarter filing. Fiscal 2012 had 53 weeks, adding approximately $26 million of revenue and $16 million of expenses, which affects year-over-year comparisons.
Financial performance
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $1,962.2 million | $1,756.0 million | +12% |
| Gross profit / gross margin | $1,508.7 million / 76.9% | $1,363.3 million / 77.6% | Margin down about 0.7 percentage point |
| Operating income / margin | $246.5 million / 12.6% | $190.0 million / 10.8% | Income +30% |
| Net income | $247.8 million | $182.4 million | +36% |
| Diluted EPS | $1.58 | $1.21 | +31% |
| Cash from operations | $496.7 million | $486.1 million | +$10.6 million |
- Revenue mix: time-based licenses were $1,599.5 million (82% of revenue), upfront licenses $132.0 million (7%), and maintenance and services $230.7 million (12%). Management says about 90% of revenue is generally time-based, with recognition often reflecting sales made in prior periods.
- Operating expenses were $1,262.2 million, up 8%; R&D was $669.2 million, up 15%. Total cost of revenue and operating expenses rose 10%, slower than revenue growth. Acquisition-related headcount and higher amortization and depreciation were important cost drivers.
- Cash and cash equivalents were $1,022.4 million, up from $700.4 million. Current assets were $1,448.0 million and current liabilities $1,222.9 million, yielding $225.1 million of working capital versus negative $111.9 million a year earlier. Accounts receivable fell to $256.0 million; DSO improved to 46 days from 59.
- Total debt was $105 million ($30 million current, $75 million long-term), down from $135 million; the $350 million revolving facility was undrawn. More than half of cash was held abroad, and certain foreign earnings were treated as indefinitely reinvested.
- Investing cash outflow was $66.1 million, including $65.5 million of property and equipment purchases; financing cash outflow was $98.0 million, including $145.0 million of repurchases, $44.0 million to buy out SpringSoft’s remaining non-controlling interest, and debt repayment.
- Backlog was approximately $3.1 billion, up 15% from $2.7 billion, primarily due to renewals of large multi-year contracts; $1.5 billion was expected to be recognized after FY2014. The company cautions backlog may not predict revenue reliably.
Fourth-quarter data reported in the filing
For the quarter ended October 31, 2013, revenue was $504.9 million, gross profit $385.8 million, pretax income $59.1 million, net income $56.9 million, and diluted EPS $0.36. Quarterly results are unaudited.
Material changes and unusual items
- FY2013 revenue growth reflected organic growth and acquisitions completed in prior periods, notably SpringSoft, Magma and other FY2012 acquisitions. Upfront license revenue rose 26%, partly due to hardware and IP/system-level product sales; professional services and other revenue rose 19%, driven primarily by IP consulting.
- Operating income improved despite increased R&D and acquisition-related amortization. Amortization of intangible assets totaled $127.5 million, up 28%; no intangible-asset impairment was recorded.
- Other income was $29.2 million, versus $11.1 million, including an $18.5 million gain on deferred-compensation plan assets and $6.0 million of foreign-currency gains. The deferred-compensation asset gain was offset by an expense for the corresponding plan obligation, with no net-income impact.
- The reported tax provision was $27.9 million. FY2013 tax benefits included approximately $19.0 million from reinstatement of the federal research credit, $6.8 million from reversal of deferred taxes after a foreign-affiliate merger, and $1.1 million from an IRS settlement. The prior year included $36.9 million of tax-settlement benefits, making tax comparisons uneven.
- In November 2013, after year-end, Synopsys received a $6.4 million cash distribution from liquidation of an investment and expected to recognize the gain in FY2014 Q1. A further IRS settlement after year-end was expected to release approximately $10 million of unrecognized tax benefits in FY2014 Q1.
Outlook, risks and contingencies
- Management described the outlook as strong, citing product demand, mobile-electronics demand, customer relationships, time-based revenues, expense management and acquisitions. The filing provides no specific numerical revenue or earnings guidance.
- Key business risks include semiconductor-sector spending and design-start volatility, intense competition, customer and industry consolidation, acquisition integration and realization risks, and dependence on continued innovation and key employees. One customer, Intel and subsidiaries, represented 11.3% of FY2013 revenue; international sales were 52%.
- Currency fluctuations, foreign operations and tax complexity may affect results. Approximately $765.2 million of foreign subsidiary earnings had about $168.8 million of associated U.S. taxes not provided because the earnings were considered indefinitely reinvested.
- Patent litigation remains a contingency. Dynetix appealed a September 2013 judgment entered in Synopsys’s favor. Mentor Graphics litigation involving acquired EVE ZeBu products and related patent claims remained pending. The filing does not provide a clear estimate of potential loss.
- Contractual obligations totaled approximately $661.8 million, including $402.8 million of operating lease obligations, $95.3 million of purchase obligations and $105 million of term-loan principal. No significant off-balance-sheet arrangements were reported.
- The independent auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective.
Most important facts for investors to verify
- How much FY2013 growth is sustainable organically versus attributable to acquisitions, and how the extra FY2012 week affects comparisons.
- Backlog conversion, renewal terms and customer payment behavior, given the multiyear contract model and management’s backlog caveat.
- Whether margins can hold as R&D spending and acquisition-related amortization remain significant.
- Tax-credit availability, resolution of tax examinations and the potential cost or timing of repatriating foreign cash.
- Developments in the Mentor and Dynetix patent cases, and any resulting damages, injunctions or product restrictions.
- Cash availability by location, debt covenants and the balance between repurchases, investment and acquisition spending.