Cadence Design Systems, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended January 2, 2021. Fiscal 2020 comprised 53 weeks; fiscal 2019 comprised 52 weeks. The filing also reports fourth-quarter results. Amounts below are in U.S. dollars.
Business context
Cadence sells electronic-design software, hardware, intellectual property (IP), maintenance and engineering services used to design and verify integrated circuits, systems-on-chip and electronic systems. Management describes 85%–90% of annual revenue as recurring. The company reports as one operating segment.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change / context |
|---|---|---|---|
| Revenue | $2,682.9 million | $2,336.3 million | Up 15% |
| Product and maintenance revenue | $2,536.6 million | $2,204.6 million | Up 15% |
| Services revenue | $146.3 million | $131.7 million | Up 11% |
| Gross margin | About 88.6% | About 88.6% | Approximately stable |
| Operating income | $645.6 million | $491.8 million | Up 31% |
| Operating margin | 24% | 21% | Up 3 percentage points |
| Net income | $590.6 million | $989.0 million | Down; prior year included a large tax benefit |
| Diluted EPS | $2.11 | $3.53 | Down for the same tax-related reason |
| Cash provided by operations | $904.9 million | $729.6 million | Up $175.3 million |
| Cash and cash equivalents | $928.4 million | $705.2 million | Up $223.2 million |
| Total debt | $346.8 million | $346.0 million | Primarily 4.375% senior notes due 2024 |
Approximate free cash flow, calculated as operating cash flow less capital expenditures, was $810.1 million, compared with $655.0 million in FY2019. Net working capital was $681.8 million, up from $497.0 million. The $350 million revolving facility had no outstanding balance at year-end; $350 million was available, with potential capacity increases subject to lender commitments. Approximately 61% of cash was held by foreign subsidiaries.
FY2020 revenue included approximately $45 million attributable to the additional fiscal week; the extra week also added approximately $35 million of expense. China revenue rose 68% to $406.6 million, or 15% of total revenue, from 10% in FY2019. No customer represented 10% or more of annual revenue.
Material changes and unusual items
- Revenue growth reflected higher customer investment in complex designs and growth in software, IP and hardware. China and the United States were notable contributors.
- R&D expense rose 10% to $1,033.7 million, while total operating expenses rose 9% to $1,704.6 million. Management cited increased hiring and investment in product development and technical sales, partly offset by lower travel and event costs during the pandemic.
- FY2019 net income included a $575.6 million non-cash tax benefit from transfers of certain intangible property rights to an Irish subsidiary. FY2020 income tax expense was $42.1 million, with an effective tax rate of 6.7%, versus a FY2019 tax benefit of $510.0 million and a negative 106.5% effective rate.
- Cadence acquired AWR and Integrand for aggregate net cash consideration of approximately $195.6 million in early 2020. The acquisitions added technology and goodwill and increased amortization and other expenses.
- The company repurchased $380.1 million of shares in FY2020. At year-end, $739 million remained under its repurchase authorization; no cash dividends have been paid.
- Contracted but unsatisfied performance obligations were approximately $3.9 billion, including $133.6 million of non-cancellable IP Access Agreement commitments. Excluding those commitments, management expected to recognize about 55% over the next 12 months.
Outlook, management commentary and risks
- Management expected FY2021 effective tax rate to be approximately 14%, with quarterly variation possible. It expected operating-margin growth to moderate due to acquisition-related costs and amortization, and potentially higher travel, meeting and event expenses if pandemic restrictions eased.
- Management expected China revenue as a share of total revenue during FY2021 to be consistent with the first half of FY2020. U.S. export restrictions on certain China customers had already limited maintenance and support delivery and could continue to affect revenue and competitiveness.
- Cadence reported that COVID-19 had not materially adversely affected FY2020 results, liquidity or cash flows. However, it cited remote-work disruption, hardware delivery timing volatility, customer requests to defer payments and uncertainty about broader economic effects.
- Management stated that cash, operating cash flows and available revolver capacity should meet working-capital and other capital and liquidity needs for at least 12 months. This is a forward-looking assessment, not a guarantee.
- Other key risks include semiconductor-industry cyclicality, competition and pricing pressure, dependence on specialized hardware suppliers, foreign-exchange exposure, cybersecurity, acquisition integration, tax examinations, intellectual-property litigation and the ability to attract and retain technical employees.
- A January 2021 agreement to acquire NUMECA, a computational-fluid-dynamics company, was expected to close in FY2021 Q1, subject to customary conditions, and be funded with cash on hand. Purchase accounting was incomplete when the filing was prepared.
Fourth-quarter snapshot
FY2020 Q4 revenue was $759.9 million, net income was $173.7 million and diluted EPS was $0.62. FY2019 Q4 revenue was $599.6 million, net income was $659.7 million and diluted EPS was $2.36; the prior-year quarter included the $575.6 million tax benefit. FY2020 Q4 included the additional fiscal week.
Important facts for investors to verify
- Underlying earnings and EPS trends excluding the unusually large FY2019 tax benefit, and the assumptions supporting the Irish deferred tax asset.
- Whether elevated China demand is sustainable and how export-control restrictions affect customer access, revenue and receivables.
- Conversion and timing of the $3.9 billion remaining performance obligations, including the portion dependent on later IP product selections.
- FY2021 margin and tax-rate expectations against acquisition costs, amortization and any return of travel and event spending.
- Cash accessibility given the foreign-held cash balance, the 2024 note maturity and the revolving facility’s January 2022 expiration.
- Integration and expected returns from AWR, Integrand and the proposed NUMECA acquisition, alongside ongoing repurchases and capital needs.