Cirrus Logic, Inc. — Form 10-Q Summary
Business context and reporting period
Cirrus Logic designs high-performance, low-power integrated circuits for audio and voice applications. This report covers the first quarter of fiscal 2018, the three months ended June 24, 2017, and compares results with the three months ended June 25, 2016. The company reports one operating segment and presents revenue across two product lines.
Financial performance and liquidity
| Metric | Quarter ended June 24, 2017 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $320.7 million | $259.4 million | Up 24% |
| Gross profit / gross margin | $161.7 million / 50.4% | $126.7 million / 48.8% | Margin up 1.6 percentage points |
| Operating income / operating margin | $47.3 million / 14.7% | $22.2 million / 8.6% | Improved |
| Net income | $42.9 million | $18.1 million | Up about 137% |
| Diluted EPS | $0.64 | $0.27 | Up |
| Operating cash flow | $(3.8) million | $12.8 million | Turned negative |
| Cash and cash equivalents | $163.9 million | $351.2 million at March 25, 2017 | Down |
| Marketable securities | $146.2 million | $99.8 million at March 25, 2017 | Up |
| Debt outstanding | None | $60.0 million at March 25, 2017 | $60.0 million repaid |
Portable Audio revenue rose 30% to $280.7 million, primarily on content gains and demand for digital headset codecs and boosted amplifiers. Non-Portable Audio and Other revenue declined to $40.0 million from $43.4 million. Operating expenses were $114.4 million, including $83.6 million of R&D and $30.9 million of SG&A. The effective tax rate fell to 10.4% from 16.6%.
Operating cash flow was negative despite higher net income, as working capital changes used cash—particularly higher accounts receivable and inventory. Investing activities used $77.9 million, including net marketable-security purchases, capital and technology spending, and a technology acquisition. Financing activities used $105.5 million, principally for repayment of the revolver and $45.6 million of share repurchases. Cash, cash equivalents, and marketable securities totaled approximately $310.1 million at quarter-end. The company had no revolver borrowings and reported compliance with its credit-facility covenants.
Material changes and unusual items
- Revenue growth was concentrated in Portable Audio. Gross margin improved, which management attributed mainly to supply-chain efficiencies from higher volume; the prior-year quarter also had higher manufacturing spending related to product ramps.
- Apple represented approximately 76% of current-quarter sales, up from 68% a year earlier. The ten largest end customers represented 91% of sales, versus 88%.
- A revised assessment of milestone achievement probabilities reduced contingent consideration by $4.0 million, recorded as a reduction of R&D expense. The liability was $0.6 million at quarter-end, versus $4.7 million at March 25, 2017.
- The company paid $20.2 million for tangible and intangible assets in a technology acquisition. It also made a £1.5 million pension-scheme contribution; the scheme was reported as funded by $3.8 million at quarter-end.
- The company early adopted accounting guidance for intra-entity transfers of non-inventory assets, reducing beginning retained earnings by $0.7 million, and early adopted guidance clarifying the definition of a business for a current-quarter asset acquisition.
Outlook, commentary, and risks
Management stated that existing cash, cash equivalents, investments, expected future cash earnings, and available revolver borrowings were expected to meet capital requirements for at least the next 12 months. The filing provides no specific revenue or earnings guidance. Management noted future capital needs depend on sales growth, product acceptance, R&D, acquisitions, and sales and marketing expansion.
Customer concentration is a key risk: customers may reduce or stop orders with limited notice, and the company faces pricing pressure and expected average selling-price declines for certain products. Approximately 96% of sales were outside the Americas, including sales to U.S.-based customers whose products are manufactured overseas. The company reported no material change in market-risk exposure and no pending legal matters believed likely to have a material adverse effect, while cautioning that legal outcomes remain uncertain. Unrecognized tax benefits were $30.8 million; management said approximately $1.1 million could decrease within 12 months due to statute expirations.
Important facts for investors to verify
- Whether Apple and other major customers sustain orders, product content, and pricing, given the high sales concentration.
- Whether receivables and inventory growth converts to cash and whether operating cash flow improves.
- Whether higher Portable Audio demand and improved gross margins persist, and how expected selling-price declines affect profitability.
- Whether the technology acquisition and contingent-consideration estimates produce the anticipated results or further expense adjustments.
- Whether liquidity and covenant compliance remain adequate as the company funds R&D, capital spending, acquisitions, and repurchases.
- The eventual financial-statement effects of accounting standards still under evaluation, including revenue recognition and leases.