Cirrus Logic, Inc. — Form 10-Q Summary
Business context and period: Cirrus Logic designs high-performance, low-power audio and voice signal-processing chips. This report covers the first quarter of fiscal 2017, the three months ended June 25, 2016; comparisons are with the three months ended June 27, 2015. The company reports as one operating segment, with revenue disclosed for Portable Audio and Non-Portable Audio and Other.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $259.4 million | $282.6 million | Down 8% |
| Gross profit / margin | $126.7 million / 48.8% | $132.5 million / 46.9% | Margin up 1.9 percentage points |
| Operating expenses | $104.5 million | $82.5 million | Up $22.0 million |
| Operating income / margin | $22.2 million / 8.6% | $50.0 million / 17.7% | Down 56% |
| Net income | $15.9 million | $33.4 million | Down 52% |
| Diluted EPS | $0.24 | $0.50 | Down 52% |
| Operating cash flow | $12.2 million | $43.2 million | Down $31.0 million |
Revenue declined mainly because Portable Audio sales fell 8%, reflecting lower shipments after a large Android customer returned to dual sourcing for core chipsets. Non-Portable Audio and Other sales fell 7%, primarily due to lower DAC sales. Portable Audio revenue was $216.1 million; Non-Portable Audio and Other revenue was $43.4 million.
Gross margin improved on favorable product mix, partly offset by higher manufacturing spending for new product lines. Research and development expense increased 12% to $73.9 million, primarily due to a 23% increase in headcount, higher depreciation and amortization, and facilities costs. SG&A increased 5% to $30.5 million. Prior-year operating expenses included a $12.5 million recovery of previously incurred costs from the sale of LED-lighting patents; the company exited LED lighting under that agreement.
Cash, liquidity, and debt
- Cash and cash equivalents were $143.6 million at June 25, 2016, versus $168.8 million at March 26, 2016. Short- and long-term marketable securities totaled $95.0 million, bringing cash and securities to approximately $238.6 million.
- Operating cash flow was $12.2 million. Working capital changes were an unfavorable $31.3 million, primarily due to accounts receivable and inventory. Investing cash outflow was $24.3 million, including $13.8 million of net securities purchases and $10.5 million of capital expenditures and technology investments. Financing cash outflow was $13.1 million, including $16.0 million of share repurchases and employee tax-withholding repurchases.
- Long-term debt was $160.4 million, borrowed under a $250 million senior secured revolving facility. The company reported compliance with its covenants, including a minimum $100 million cash-and-cash-equivalents requirement; the filing’s covenant definition also includes marketable securities. Management said available cash, investments, operating cash generation, and facility borrowings were expected to cover capital needs for at least 12 months.
- On July 12, 2016, after quarter-end, Cirrus entered a new five-year $300 million revolving credit facility, with a $25 million letter-of-credit sublimit. The amended agreement includes a maximum leverage ratio of 3.00 to 1.00 and a minimum fixed-charge coverage ratio of 1.25 to 1.00.
Outlook, risks, and other notable items
- The filing provides no quantified revenue or earnings guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Customer concentration is substantial: Apple represented approximately 68% of sales, compared with 62% a year earlier; Samsung represented 12%, compared with 18%. The ten largest end customers accounted for approximately 88% of sales in both periods. Management identifies customer loss, order reductions, and pricing pressure as material risks.
- Approximately 96% of sales were outside the United States, principally in Asia, and sales were primarily denominated in U.S. dollars. The company cited potential operational, tax, trade, staffing, and regulatory effects from Brexit; it had no foreign-currency hedging contracts during the quarter.
- The company repurchased 0.5 million shares for $15.4 million at an average price of $32.13. A $200 million repurchase authorization had $175.8 million remaining at quarter-end.
- Unrecognized tax benefits were $20.1 million; approximately $2.3 million could decrease within 12 months due to statute-of-limitations expirations. Management did not believe pending legal matters would have a material adverse effect, while noting that an adverse outcome could materially affect a particular period.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the large Android customer’s dual-sourcing change, and the resulting Portable Audio shipment decline, persist or affect future revenue and margins.
- How customer concentration—particularly Apple’s 68% share of quarterly sales—affects negotiating leverage, pricing, and earnings volatility.
- Whether the higher R&D investment and expanded headcount yield new products and revenue sufficient to offset expense growth.
- Cash conversion and working-capital trends, given the quarter’s sharp decline in operating cash flow and increases in receivables and inventory.
- Terms, borrowing costs, covenant headroom, and future use of the amended $300 million facility, as well as the company’s ability to meet its financial covenants.
- Potential tax, legal, market, and international-operating exposures, including the $20.1 million of unrecognized tax benefits and risks identified around Brexit.