Cadence Design Systems, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended January 3, 2015 (53 weeks; FY 2013 had 52 weeks). The filing also reports fourth-quarter results. Cadence develops electronic design automation software, emulation and prototyping hardware, design and verification IP, maintenance, and engineering services for semiconductor and electronics customers.
Financial performance
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue | $1,580.9 million | $1,460.1 million | +8% |
| Operating income | $206.6 million | $189.0 million | +9% |
| Operating margin | 13.1% | 12.9% | +0.2 percentage points |
| Net income | $158.9 million | $164.2 million | -3% |
| Diluted EPS | $0.52 | $0.56 | -7% |
| Cash from operations | $316.7 million | $367.6 million | -$50.9 million |
- Product and maintenance revenue increased 9% to $1,479.2 million; services revenue was essentially flat at $101.8 million. Approximately 90% of revenue was recurring in nature.
- Approximate gross margin was 85.9%, versus 86.3% in FY 2013. Product and maintenance costs rose 18%, partly reflecting lower emulation-hardware margins, inventory reserves, and higher amortization of acquired intangibles.
- Research and development expense increased 13% to $603.0 million; total operating expenses rose 8% to $1,116.3 million.
- Fourth-quarter revenue was $423.1 million, net income $65.0 million, and diluted EPS $0.21, versus $376.7 million, $37.7 million, and $0.13 in fourth-quarter FY 2013. The extra fiscal week contributed approximately $15 million of FY 2014 revenue, recognized in Q4.
- Cash, cash equivalents, and short-term investments totaled $1,022.6 million at year-end, up from $633.0 million. Net working capital was $458.6 million, versus $72.9 million.
- Outstanding debt had approximately $700 million principal value ($691.2 million carrying value): $350 million of 2.625% convertible notes due June 2015 and $350 million of 4.375% senior notes due October 2024. The $250 million revolving facility was undrawn; capacity could increase to $400 million subject to lender commitments.
Material changes and notable items
- Revenue growth reflected higher business levels, acquisitions, and the additional fiscal week. Asia revenue grew 25%; Japan revenue fell 12%, primarily due to yen depreciation and difficult customer conditions.
- Operating income improved, but net income declined. FY 2014 included a 12.2% effective tax rate and an $8.1 million research-credit tax benefit; FY 2013 had tax benefits that make the year-over-year net-income comparison less representative of underlying operations.
- Operating cash flow fell mainly because of customer-receipt timing, working-capital needs, restructuring and early-retirement payments, and higher net cash taxes. Investing used $198.0 million, including $167.1 million for acquisitions; financing provided $289.0 million, substantially reflecting the 2024 notes issuance.
- Cadence issued the $350 million 2024 notes and amended its revolving credit facility. It repurchased $100.1 million of shares in FY 2014. No cash dividends have been paid, and the company does not plan to pay them in the foreseeable future.
- Acquisitions included Jasper Design Automation; acquisition activity increased goodwill and acquired intangible assets. Expected amortization of acquired intangibles rises to approximately $64.2 million in FY 2015.
Outlook, risks, and contingencies
- The filing gives no specific FY 2015 revenue or earnings guidance. Management expects operating expenses to increase, citing hiring and a full year of costs for personnel added in FY 2014; it also expects the FY 2015 effective tax rate to exceed FY 2014’s.
- Management expected approximately $1.2 billion, or about 70% of FY 2015 revenue, to come from arrangements already in backlog at year-end. Total backlog was approximately $2.1 billion, versus $1.9 billion a year earlier. Backlog is not a guarantee of revenue or timing.
- Management expected available cash, operating cash flow, 2024-note proceeds, and revolver access to cover operating needs and obligations, including the 2015 notes, for at least 12 months. Approximately 45% of cash and investments was held outside the United States; repatriating indefinitely reinvested foreign earnings could trigger additional taxes.
- Approximately $53.9 million principal value of 2015 notes had been tendered for conversion by February 19, 2015. The notes mature in June 2015; associated hedges are intended to offset conversion value above principal, while warrants with a $10.78 strike could dilute shareholders as they expire in 2015.
- Key risks include semiconductor-industry cyclicality and dependence on customers’ new design projects; intense competition and technology change; sole-source hardware components; foreign-exchange exposure; acquisition integration; cybersecurity and IP litigation; and substantial debt and restrictive covenants. Ordinary-course legal matters are disclosed, but the filing does not provide a clear quantified aggregate exposure.
- Restructuring charges were $10.3 million in FY 2014, and a voluntary early-retirement program generated approximately $9.7 million of operating expense. No significant off-balance-sheet arrangements were reported. Management and the auditor reported effective internal controls; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether recurring bookings, backlog conversion, and customer demand support FY 2015 growth, and how much of reported growth reflects the extra week or acquisitions.
- The cash requirement and final settlement of the June 2015 convertible notes, hedge-counterparty performance, and resulting warrant dilution.
- Cash available for U.S. obligations after considering the foreign-held balance, repatriation taxes, debt service, and share repurchases.
- Whether emulation-hardware margins stabilize and whether acquisition integration and acquired-intangible amortization meet expectations.
- The effect of the expected higher FY 2015 tax rate and increased operating expenses on earnings and cash generation.