Grade: D — Significant Concerns
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2026-02-19) + Yahoo Finance
Auditor: PricewaterhouseCoopers LLP — Clean opinion
One-line verdict: Cadence delivered another year of disciplined growth — revenue up 14% to $5.3B, 86.4% gross margins, $1.7B in operating cash flow, and an M-Score of -2.54 (well below the manipulation threshold). Two red flags trip our screening: accounts receivable outpaced revenue for two consecutive years, and goodwill plus intangibles at $3.5B represent 63% of equity. But the broader picture is a high-quality software compounder with cash generation that consistently exceeds net income (CFFO/NI = 1.56), negative accruals (-6.1%), and manageable 1.4x Debt/EBITDA. The 10-K reveals a $128.5M loss from a contingent liability related to litigation, a growing hardware business that shifts revenue recognition timing, and China revenue that grew 19% to $680M despite export control headwinds. No customer exceeded 10% of revenue. The D grade reflects the two mechanical flags, not a fundamentally troubled business.
| Metric | Result |
|---|---|
| Red Flags | **2** |
| Watch Items | **0** |
| Checks Completed | **17/18** (1 N/A) |
| Beneish M-Score | **-2.54** (unlikely manipulator) |
| F-Score (Fraud Probability) | **1.12** (0.41% probability) |
| Altman Z-Score | **6.55** (safe zone — no solvency risk) |
| Auditor | PricewaterhouseCoopers LLP — Unqualified opinion |
| Fiscal Year | 2025 (ended December 31, 2025) |
| Report Date | 2026-04-05 |
The EDA and Computational Software Leader
Cadence describes itself in the 10-K as "a global market leader that develops computational, AI-driven software, accelerated hardware, and IP solutions for engineers and scientists." Revenue is diversified across three product categories:
| Category | FY2025 | FY2024 | Mix |
|---|---|---|---|
| Core EDA | 70% | 71% | Stable |
| Semiconductor IP | 14% | 13% | Growing |
| System Design & Analysis | 16% | 16% | Stable |
Per the filing, 80% of FY2025 revenue was recurring (down from 83% in FY2024), with the shift driven by more up-front hardware and IP sales. The filing notes: "No one customer accounted for 10% or more of total revenue during fiscal 2025 or 2024."
Revenue by geography:
| Region | FY2025 | FY2024 | YoY |
|---|---|---|---|
| United States | $2,311M | $2,160M | +7% |
| China | $680M | $573M | +19% |
| Other Asia | $1,005M | $856M | +17% |
| EMEA | $791M | $699M | +13% |
| Japan | $342M | $260M | +31% |
| Other Americas | $168M | $93M | +81% |
| **Total** | **$5,297M** | **$4,641M** | **+14%** |
China revenue grew 19% despite export control headwinds — a notable divergence from peer Synopsys, which disclosed "weakness" and export restrictions in China.
Revenue and Profitability
Per the consolidated income statement:
| Metric | FY2025 | FY2024 | FY2023 |
|---|---|---|---|
| Total Revenue | $5,297M | $4,641M | $4,090M |
| — Product & Maintenance | $4,822M | $4,214M | $3,834M |
| — Services | $475M | $428M | $256M |
| Gross Margin | $4,574M | $3,994M | $3,615M |
| Gross Margin % | **86.4%** | **86.0%** | **88.4%** |
| Operating Income | $1,379M | $1,405M | $1,266M |
| Operating Margin | **26.0%** | **30.3%** | **30.9%** |
| Net Income | $1,109M | $1,055M | $1,041M |
| EPS (diluted) | $4.05 | $3.84 | $3.81 |
Gross margin of 86.4% is best-in-class for any software company. The operating margin declined from 30.3% to 26.0%, primarily due to a "$128,545" thousand loss from a contingent liability and "$29,194" thousand in restructuring charges. Excluding these one-time items, adjusted operating margin would have been approximately 29%.
The filing explains cost increases: "Research and development" up 14% to $1,769M, reflecting continued investment in AI-driven design tools. R&D at 33% of revenue is the core engine of the business.
Cash Flow: Strong and Consistent
Per the filing's cash flow statement:
| Metric | FY2025 | FY2024 | FY2023 |
|---|---|---|---|
| Operating Cash Flow | $1,729M | $1,261M | $1,349M |
| Net Income | $1,109M | $1,055M | $1,041M |
| **CFFO / Net Income** | **1.56** | **1.20** | **1.30** |
| CapEx | -$142M | -$143M | -$102M |
| Free Cash Flow | $1,587M | $1,118M | $1,247M |
| FCF/NI | 1.43 | 1.06 | 1.20 |
This is what clean earnings look like. CFFO exceeds net income by a wide margin every year. The 1.56x ratio in FY2025 was driven by strong collections, depreciation and amortization of $227.8M, and stock-based compensation of $455.2M.
Key cash uses: $429.5M in acquisitions, $925M in share repurchases, and $142M in CapEx. The company generated $1.7B in operating cash flow while funding all these uses.
Balance Sheet
Per the filing:
| Metric | FY2025 | FY2024 |
|---|---|---|
| Cash & Equivalents | $3,001M | $2,644M |
| Total Current Assets | $5,475M | $4,634M |
| Goodwill | $2,749M | $2,379M |
| Acquired Intangibles, net | $718M | $595M |
| Total Assets | $10,153M | $8,974M |
| Long-term Debt | $2,480M | $2,476M |
| Total Equity | $5,474M | $4,674M |
| G+I / Equity | **63%** | **64%** |
Cash of $3.0B exceeds long-term debt of $2.5B — the company is net cash positive. The D1 flag fires because goodwill plus intangibles at $3.5B represent 63% of equity, above the 50% threshold. However, this is a modest level for a software company that has grown through targeted acquisitions.
The filing shows $429.5M in acquisitions during FY2025 and $3.2B in debt proceeds during the period (offset by $1.35B in repayments), suggesting a strategic balance sheet recapitalization. Interest paid: $112M.
The Contingent Liability: $128.5M
The filing discloses a notable one-time item: a "$128,545" thousand loss related to a contingent liability in operating expenses. This was not present in FY2023, with only "$8,322" thousand recognized in FY2024. The 10-K's risk factors warn: "Litigation, government investigations or regulatory proceedings could adversely affect our financial condition and operations." This unexplained $128.5M charge reduced operating margin by approximately 2.4 percentage points.
Remaining Performance Obligations
The filing reveals a significant backlog: "Contracted but unsatisfied performance obligations were $7.8 billion as of December 31, 2025." This provides multi-year revenue visibility. The filing notes that "We expect to recognize approximately 52% of this revenue over the next 24 months, with the remainder recognized thereafter."
The 18-Point Screening
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | PASS | DSO 34 days, +3 days YoY. Stable |
| A2 | AR vs Revenue Growth | **FAIL** | AR outpaced revenue for 2 consecutive years |
| A3 | Revenue vs CFFO | PASS | Revenue +14.1%, CFFO +37.1%. Cash ahead of revenue |
| B1 | Inventory vs COGS | PASS | Inventory +17.8% vs COGS +11.5%. Normal |
| B2 | CapEx vs Revenue | PASS | CapEx -0.5% vs revenue +14.1%. Normal |
| B3 | SG&A Ratio | PASS | SG&A/Gross Profit = 24.4%, excellent (<30%) |
| B4 | Gross Margin | PASS | 86.4%, +0.3pp. Rock-solid |
| C1 | CFFO vs Net Income | PASS | CFFO/NI = 1.56. Profits well-backed by cash |
| C2 | Free Cash Flow | PASS | FCF $1.6B, FCF/NI = 1.43 |
| C3 | Accruals Ratio | PASS | -6.1%. Negative accruals — clean signal |
| C4 | Cash vs Debt | PASS | Cash $3.0B covers debt $2.5B. Net cash positive |
| D1 | Goodwill + Intangibles | **FAIL** | $3.5B = 63% of equity. Above 50% threshold |
| D2 | Leverage | PASS | Debt/EBITDA = 1.4x. Healthy |
| D3 | Soft Asset Growth | PASS | Other assets +23.1% vs revenue +14.1%. Normal |
| D4 | Asset Impairment | N/A | No write-off data |
| E1 | Serial Acquirer FCF | PASS | FCF positive after acquisitions |
| E2 | Goodwill Surge | PASS | Goodwill + intangibles +17% YoY. Normal |
| F1 | Beneish M-Score | PASS | M-Score = -2.54 (< -2.22). Unlikely manipulator |
Beneish M-Score Component Breakdown:
| Component | Value | What It Measures | Concern? |
|---|---|---|---|
| DSRI | 1.099 | Days Sales in Receivables | Normal |
| GMI | 0.996 | Gross Margin Index — stable | Normal |
| AQI | 0.973 | Asset Quality Index — stable | Normal |
| SGI | 1.141 | Sales Growth Index — 14% growth | Normal |
| DEPI | 0.967 | Depreciation Index | Normal |
| SGAI | 0.948 | SG&A Index — operating leverage | Good |
| TATA | -0.061 | Total Accruals to Assets — negative | Good |
| LVGI | 0.946 | Leverage Index — stable | Good |
Every M-Score component is within normal ranges. This is one of the cleanest M-Score profiles in our coverage universe. The negative TATA (-0.061) confirms earnings are backed by cash, not accruals.
Key Risks from the 10-K
1. Customer Consolidation
The 10-K warns: "Customer consolidation could affect our operating results." While no customer exceeds 10% currently, the semiconductor industry trend toward consolidation means Cadence's customer base is increasingly concentrated among fewer, larger buyers with more negotiating power.
2. Competition from Synopsys-Ansys and AI Entrants
The filing states: "The competition in our industries is substantial, and we may not be able to continue to compete successfully." The Synopsys-Ansys merger creates a formidable integrated competitor spanning EDA, simulation, and analysis. Additionally, AI-driven design tools could disrupt traditional EDA workflows.
3. Hardware Supply Chain Risk
Per the filing: "We depend on a single supplier or a limited number of suppliers for certain hardware components and contract manufacturers for production of our hardware products, making us vulnerable to supply disruption and price fluctuation." The growing hardware business (emulation and prototyping systems) carries supply chain risk that pure software does not.
4. Export Controls and China
China contributed $680M (12.8%) of revenue. The filing warns about export control requirements "that could subject us to liability and restrict our ability to sell our products and services." Escalating U.S.-China trade restrictions pose a direct risk to this revenue stream, as demonstrated by the impact on competitor Synopsys.
5. Tax and Regulatory Changes
The filing warns: "Our results could be adversely affected by an increase in our effective tax rate as a result of U.S. and foreign tax law changes, outcomes of current or future tax examinations." With international operations generating a significant portion of revenue, changes to global minimum tax rules could impact profitability.
Key Financial Trends (3-Year)
| Metric | FY2023 | FY2024 | FY2025 |
|---|---|---|---|
| Revenue | $4,090M | $4,641M | $5,297M |
| Net Income | $1,041M | $1,055M | $1,109M |
| Gross Margin | 88.4% | 86.0% | 86.4% |
| Operating Margin | 30.9% | 30.3% | 26.0% |
| CFFO | $1,349M | $1,261M | $1,729M |
| CFFO/NI | 1.30 | 1.20 | 1.56 |
| FCF | $1,247M | $1,118M | $1,587M |
| Cash | $882M | $2,644M | $3,001M |
| Total Debt | ~$0 | $2,476M | $2,480M |
| Goodwill + Intangibles | $2,397M | $2,974M | $3,467M |
Summary
Grade: D. Two mechanical red flags on an otherwise clean financial profile.
Cadence's earnings quality is among the best in our screening universe. The M-Score of -2.54 is well below the manipulation threshold. CFFO exceeds net income by 56%. Accruals are negative. Gross margins are 86%. No single customer exceeds 10% of revenue. Cash exceeds debt. The backlog of $7.8B in unsatisfied performance obligations provides multi-year revenue visibility.
The two flags that fire are:
The one item that warrants deeper investigation is the $128.5M contingent liability loss. The filing does not fully explain its nature. Read the legal proceedings footnotes closely.
**Disclaimer**: This report is based on Cadence's fiscal year 2025 10-K filed with the SEC on February 19, 2026. This is NOT investment advice.
**About EarningsGrade**: We screen earnings reports for financial red flags using an 18-point forensic framework. Grade D means significant concerns were detected that warrant investigation.