Cadence Design Systems, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended April 1, 2017; compared with the three months ended April 2, 2016. Financial statements are unaudited. Cadence provides electronic design automation software, hardware, services, and reusable IC design IP.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $476.9 million | $447.9 million | +6% |
| Product and maintenance revenue | $451.4 million | $411.7 million | +10% |
| Services revenue | $25.5 million | $36.1 million | -29% |
| Income from operations | $79.6 million | $58.0 million | +37% |
| Net income | $68.3 million | $50.6 million | +35% |
| Diluted EPS | $0.25 | $0.17 | +$0.08 |
| Cash from operations | $92.4 million | $83.2 million | +$9.2 million |
Operating margin was approximately 16.7%, up from 13.0%; net margin was approximately 14.3%, up from 11.3%. Revenue growth was led by software and IP. Services revenue declined primarily because the prior-year quarter included revenue recognized at completion of a customer contract. Asia revenue grew 23% and EMEA grew 15%; U.S. revenue declined 2%.
Balance sheet, cash flow, and capital
- Cash, cash equivalents, and short-term investments totaled $547.6 million at April 1, 2017, up $79.3 million from year-end 2016. Net working capital was $224.2 million, versus $116.5 million.
- Operating cash flow was $92.4 million; investing cash use was $14.7 million, including $14.8 million of capital expenditures; financing cash use was $0.5 million. Cash ended the quarter at $544.1 million.
- Total debt carrying value was $693.7 million: $50.0 million drawn on the revolving facility, a $299.6 million term loan, and $344.1 million of 2024 notes. Cadence reported compliance with debt covenants.
- Approximately 62% of cash and short-term investments were held by foreign subsidiaries. Management said available liquidity, operating cash flows, and borrowing capacity should meet working capital and other needs for at least 12 months.
Material changes and unusual items
- Operating expenses rose 8% to $333.4 million, including a 10% increase in R&D to $198.3 million, reflecting hiring, acquisition-related headcount, and continued product investment.
- Restructuring and other charges included a $1.8 million credit from revised estimates for 2016 restructuring plans; the prior-year quarter recorded $14.6 million of charges. Remaining restructuring liabilities were $13.4 million.
- The effective tax rate was 8.0%, versus 12.0% a year earlier, including a $7.2 million tax benefit from stock-based compensation. Management estimated a fiscal 2017 effective tax rate of approximately 12%, excluding certain items.
- In January 2017 Cadence replaced its revolving credit facility with a five-year facility of up to $350 million, with potential additional capacity subject to lender commitments. The company also amended term-loan covenants to align with the new facility.
- The Board authorized up to $525 million of share repurchases in January; the full amount remained available at quarter-end.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management expects continued significant R&D investment and notes that results can vary with hardware and IP delivery timing; about 90% of revenue is recognized over time.
- Cadence was preparing to adopt the new revenue standard in Q1 2018, expecting changes particularly for multiple-element arrangements and contract acquisition costs. It anticipated a material balance-sheet effect from the lease standard effective in Q1 2019.
- Key risks include semiconductor and electronics industry cyclicality, customer spending and consolidation, competition and pricing pressure, technology shifts, hardware supply disruptions, foreign exchange exposure, and dependence on international operations. Debt, variable interest rates, restrictive covenants, and the concentration of cash overseas also pose risks.
- Tax authorities were examining Cadence in certain jurisdictions, including Germany, Israel, and South Korea. The filing warns that required deposits during appeals could temporarily reduce liquidity. Ordinary-course litigation and other contingencies are discussed, but the filing does not provide a clear quantified exposure.
Important facts for investors to verify
- Whether product and IP growth persists and offsets weakness in services and variability in hardware deliveries.
- How R&D and other expense growth affects margins as revenue expands.
- The realized fiscal 2017 tax rate and any outcomes or cash deposits arising from tax examinations.
- Debt service, covenant headroom, and the location and accessibility of cash held overseas.
- The eventual revenue-recognition and balance-sheet impacts of adopting the new accounting standards.
- Execution and timing of the $525 million repurchase authorization, which was unused at quarter-end.