Cadence Design Systems, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 29, 2013; comparisons are with the periods ended June 30, 2012. Cadence provides electronic design automation software, intellectual property, hardware, maintenance, and engineering services.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $362.5 million | $326.5 million | $716.7 million | $642.3 million |
| Operating income | $45.1 million | $50.6 million | $103.3 million | $96.0 million |
| Operating margin | 12.4% | 15.5% | 14.4% | 14.9% |
| Net income | $9.4 million | $36.4 million | $88.0 million | $67.5 million |
| Diluted EPS | $0.03 | $0.13 | $0.30 | $0.24 |
- Q2 product and maintenance revenue rose 14% to $338.0 million; services revenue fell 15% to $24.5 million. For the first half, these categories rose 14% and fell 14%, respectively. Management attributed product and maintenance growth to stronger business levels, revenue recognized from prior-period bookings, and acquisitions; services declined partly because design-services engineers were reassigned to R&D and presales.
- Cash from operations was $150.2 million for the first half, versus $128.2 million. Investing used $410.9 million, including $392.1 million for acquisitions; financing provided $122.7 million, including a $100.0 million revolver draw. Cash and cash equivalents ended at $577.2 million.
- Cash, cash equivalents, and short-term investments totaled $678.5 million, down from $827.1 million at year-end 2012. Net working capital was negative $96.4 million, versus positive $174.0 million.
- Debt principal was approximately $594.6 million ($558.2 million carrying value): $350.0 million of 2015 notes, $144.5 million of 2013 notes, and $100.0 million drawn on the $250.0 million revolving facility. Cadence reported compliance with facility covenants.
Material changes and notable items
- Revenue increased 11% in Q2 and 12% for the first half, while operating income declined in Q2 and increased modestly year to date. Operating expenses rose 20% in Q2 and 15% for the first half, reflecting acquisition-related staffing, additional R&D and sales hiring, and higher variable compensation.
- Q2 net income was affected by a $28.2 million tax provision (74.9% effective rate), versus $9.3 million in Q2 2012. First-half tax provision was only $0.6 million (0.7% effective rate), primarily reflecting benefits of $33.7 million from releasing a prior-business-combination uncertain tax position and $5.9 million from a retroactively enacted research credit. These benefits make the first-half earnings comparison less indicative of recurring tax expense.
- Cadence acquired Tensilica on April 22 and Cosmic Circuits on May 23, and completed other smaller acquisitions. The acquisitions added goodwill and intangible assets; management said their impact for the rest of fiscal 2013 was expected to increase operating expenses more than revenue, partly due to deferred-revenue fair-value adjustments.
- Foreign-currency translation losses were $17.9 million for the first half. Japan revenue declined 16% in Q2 and 10% for the first half; management expected Japan revenue to continue declining for the remainder of fiscal 2013.
Outlook, risks, and contingencies
- No numeric revenue or earnings guidance is provided. Management expected operating expenses, R&D expense, and acquired-intangible amortization to rise during the remainder of fiscal 2013, citing acquisitions and planned hiring. It stated that cash, operating cash flow, and available revolver capacity should cover at least the next 12 months, including the 2013 notes maturity.
- The $144.5 million 2013 notes mature in December 2013. The 2015 notes, with $350.0 million principal, were convertible for cash from June 30 through September 28, 2013 after the share-price condition was met; Cadence classified their $316.7 million net carrying value as current. Management did not anticipate conversion but said it could fund a conversion of up to $350 million using liquidity and credit access.
- About 60% of cash, cash equivalents, and short-term investments were held by foreign subsidiaries and certain earnings were intended to remain permanently reinvested. Repatriation could trigger additional taxes. Other principal risks include semiconductor-industry cyclicality, technology and competitive pressures, customer project and spending uncertainty, foreign exchange, sole-source hardware components, acquisition integration, intellectual-property claims, and debt and warrant-related liquidity or dilution.
- Potential contingent payments for prior acquisitions could total up to $14.4 million over the next 34 months, subject to performance conditions. Ordinary-course legal proceedings are disclosed, but the filing does not provide a clear quantified aggregate exposure. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and recurring bookings continue to offset declining services revenue and weakness in Japan.
- How acquisition integration, hiring, and intangible amortization affect operating margins and cash generation.
- The cash requirements and settlement outcome for the December 2013 notes and the 2015 notes’ conversion window; monitor covenant compliance and revolver usage.
- How much of the unusually low first-half tax provision reflects nonrecurring tax benefits, and what tax rate applies in subsequent periods.
- Whether the expected acquisition synergies materialize, and whether contingent payments, foreign-held cash, currency exposure, and potential warrant dilution affect liquidity or per-share results.