CIRRUS LOGIC, INC. quarterly report, Q3 FY2016

Cirrus Logic, Inc. — Form 10-Q Summary

Business and period: Cirrus Logic develops analog and mixed-signal integrated circuits, including audio products. This filing covers the third quarter and first nine months of fiscal 2016, ended December 26, 2015; comparisons are with the corresponding fiscal 2015 periods. Amounts below are U.S. dollars.

Financial performance

Metric	Three months ended Dec. 26, 2015	Prior-year quarter	Nine months ended Dec. 26, 2015	Prior-year nine months
Net sales	$347.9 million	$298.6 million	$937.3 million	$661.4 million
Gross profit / margin	$164.9 million / 47.4%	$130.8 million / 43.8%	$439.6 million / 46.9%	$306.8 million / 46.4%
Operating income / margin	$63.9 million / 18.4%	$44.4 million / 14.9%	$158.0 million / 16.9%	$78.4 million / 11.8%
Net income / diluted EPS	$41.4 million / $0.63	$22.7 million / $0.35	$109.6 million / $1.66	$33.8 million / $0.52
Operating cash flow	Not separately reported for the quarter	Not separately reported for the quarter	$116.3 million	$59.7 million

Quarterly sales rose 16%; nine-month sales rose 42%. Portable Audio drove growth, increasing 22% in the quarter and 51% year to date. Non-Portable Audio and Other sales declined 14% in the quarter and increased 3% year to date.
Quarterly gross margin improved mainly because the prior-year comparison included sales of acquisition inventory marked up to fair value, and, to a lesser extent, product mix. Nine-month margin also benefited from the absence of that prior-year inventory impact.
Cash and cash equivalents were $159.6 million. Short- and long-term marketable securities totaled $89.5 million, for combined cash and securities of approximately $249.0 million. Current assets were $549.6 million and current liabilities $177.4 million.
Debt was $160.4 million, down $20.0 million from March 28, 2015. The company had a $250 million senior secured revolving facility maturing August 29, 2017. It was in compliance with covenants, including a maximum leverage ratio of 2.00 to 1.00 and a minimum $100 million cash-and-equivalents requirement.
Nine-month investing cash flow was $18.2 million provided, per the cash flow statement; financing cash flow was $51.4 million used. Capital spending on property, equipment and software was $33.7 million.

Material changes and notable items

Growth reflected organic portable-product demand and the inclusion of Wolfson, acquired in August 2014. In the second quarter of fiscal 2016, Cirrus Logic also acquired two small technology companies for $36.8 million net of cash obtained, to broaden software capabilities; purchase-price allocations were still being finalized.
Research and development expense increased 27% for the quarter and 45% year to date, primarily due to higher headcount, acquisition-related intangible amortization, software costs and facilities expenses. SG&A increased 10% for the quarter and 30% year to date.
The company recorded a $12.5 million cash receipt from selling certain LED-lighting patents, recognized as a recovery of previously incurred costs. It agreed to exit LED lighting and retained a license for other fields of use. Legal-settlement adjustment expense was $0.1 million in the quarter and $0.9 million for the first nine months.
Quarterly and nine-month effective tax rates were 33.7% and 29.2%, versus 46.2% and 45.1% in the prior-year periods. The lower current-year rates primarily reflected the permanent extension of the U.S. R&D credit; the nine-month period also included a one-time $4.6 million tax benefit.
During the first nine months, the company repurchased and retired $39.2 million of shares, in addition to $6.5 million of repurchases for employee tax withholding. The board authorized a further $200 million repurchase program in October 2015. No cash dividends were paid.

Outlook, risks and contingencies

Management said existing cash, investments, expected cash generation and credit availability were anticipated to meet capital requirements for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
Customer concentration is a significant risk: Apple represented approximately 76% of quarterly sales and 67% of nine-month sales; Samsung represented 11% and 15%, respectively. The ten largest end customers accounted for 92% of quarterly and 90% of nine-month sales. Management noted pricing pressure and expected average selling-price declines for some products.
Sales to foreign customers, principally in Asia, were 93% of quarterly sales and 95% of nine-month sales. Management reported no significant change in market-risk exposure since the latest annual report.
The company reported $13.8 million of unrecognized tax benefits, all of which would affect the effective tax rate if recognized. Fiscal 2013–2015 remained open to examination; the company reported no current major-jurisdiction tax audit.
Management did not believe pending legal matters would have a material adverse effect overall, while cautioning that an adverse outcome could materially affect a particular period’s results or cash flows. Disclosure controls were assessed as effective.

Important facts for investors to verify

Whether the high share of revenue from Apple and other major customers remains stable, and how customer pricing pressure and product mix affect margins.
Whether inventory growth to $137.7 million, including finished goods rising to $60.3 million, is absorbed by customer demand; management attributed the increase mainly to production ramps ahead of demand.
Acquisition integration, final purchase-price allocations and the performance of the recently acquired software businesses, including the $8.6 million contingent-consideration liability.
The filing’s liquidity discussion states investing cash flow of $19.6 million provided, while the cash flow statement reports $18.2 million; reconcile this difference with the filed financial detail.
Execution of the additional share-repurchase authorization, debt repayment and continued compliance with the credit facility’s covenants.