CDNS

Cadence Design Systems, Inc. - 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 28, 1997, and the six months ended on that date. Cadence Design Systems, Inc. is a provider of electronic design automation (EDA) software and services. The reporting period is significantly impacted by two major corporate events: the deconsolidation of Integrated Measurement Systems, Inc. (IMS) due to a reduction in ownership to 37%, and the acquisition of Cooper & Chyan Technology, Inc. (CCT) via a pooling of interests on May 7, 1997.

Key Financial Metrics

Note: Revenue breakdown includes Product ($116.5M), Services ($39.6M), and Maintenance ($54.3M) for the quarter.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 19% for the quarter and 17% for the six-month period compared to the prior year. Product revenue grew 18% (quarter) and 16% (six months), while Services revenue surged 49% and 48% respectively.
• Unusual Items: The company recorded $22.4 million in unusual items for the quarter and $34.1 million for the six months. These costs included $16.0 million related to the CCT merger, $6.4 million for international restructuring, and $4.9 million for the write-off of in-process R&D from the Synthesia acquisition.
• Operating Income: Despite revenue growth, operating income decreased from $43.4 million to $37.4 million for the quarter, and from $82.0 million to $75.7 million for the six months, primarily due to the unusual items and increased operating expenses.
• IMS Deconsolidation: Results for IMS are no longer consolidated, removing approximately $10.1 million in product revenue and associated costs from the current period compared to the prior year.
• CCT Acquisition: The merger added $8.5 million in product revenue for the quarter ended June 28, 1997.

Guidance, Outlook, and Risks

Management Commentary: Management attributes revenue growth to increased demand for custom integrated circuit design tools and deep submicron designs. International revenue accounted for 48% of total revenue in the quarter, with strong growth in Japan offset by a $6.1 million negative impact from foreign currency fluctuations.

Liquidity: The company maintains strong liquidity with $361.3 million in cash and short-term investments and a $120 million revolving line of credit (currently unutilized). The board rescinded the general stock repurchase program to comply with pooling of interests accounting for the CCT merger but continues systematic repurchases for the Employee Stock Purchase Plan.

Risks and Contingencies:

• Legal Proceedings: Ongoing litigation with Avant! Corporation regarding trade secrets and antitrust allegations. The court has stayed most activity pending criminal proceedings against Avant! and ordered a $5 million bond. Management believes the outcome will not have a material adverse impact.
• Market Risks: Rapid technological changes in the EDA industry, potential obsolescence of software tools, and risks associated with integrating acquired businesses.
• Foreign Exchange: Significant exposure to currency fluctuations, particularly the Japanese yen, which could materially affect results.

Investor Verification Checklist

• Unusual Item Impact: Verify the sustainability of earnings by excluding the $34.1 million in one-time merger, restructuring, and R&D write-off costs.
• IMS Deconsolidation: Confirm that year-over-year comparisons are adjusted for the removal of IMS revenue and costs to accurately assess organic growth.
• CCT Integration: Monitor the realization of synergies and revenue contributions from the newly acquired CCT business.
• Legal Exposure: Track the status of the Avant! litigation and the potential for the $5 million bond to be utilized.
• EPS Methodology: Note that the filing uses pre-SFAS 128 EPS calculations; basic EPS would have been higher ($0.29 vs $0.27 diluted) had the new standard been applied.