Cirrus Logic, Inc. — Form 10-Q Summary
Business context and period: Cirrus Logic develops analog and mixed-signal integrated circuits for audio and energy markets. This report covers the first quarter of fiscal 2015, the three months ended June 28, 2014; comparisons are with the three months ended June 29, 2013. Financial amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $152.6 million | $155.1 million |
| Gross profit / margin | $75.4 million / 49.4% | $79.5 million / 51.2% |
| Operating income / margin | $15.9 million / 10% | $31.5 million / 20% |
| Net income | $10.2 million | $20.6 million |
| Diluted earnings per share | $0.16 | $0.31 |
| Cash from operating activities | $12.8 million | $36.7 million |
Revenue declined 2% year over year. Audio sales were $141.2 million, down 2%; energy sales were $11.4 million, essentially flat. Gross margin fell primarily because of product mix and lower average selling prices in portable audio. Research and development expense increased 39% to $39.8 million, reflecting development activity, tape-outs, an 18% increase in R&D headcount, and higher software and facilities costs. SG&A rose 3% to $19.7 million.
Financial position and liquidity
At June 28, 2014, cash and cash equivalents were $268.5 million and marketable securities totaled $115.2 million, versus $31.9 million and $352.7 million, respectively, at March 29, 2014. Total current assets were $573.4 million and current liabilities were $108.8 million. The company reported no borrowings under its new credit facility at quarter-end. The filing does not provide a separate total-debt figure beyond this disclosure and reported liabilities.
Operating cash flow decreased to $12.8 million; management attributed the quarter’s operating cash generation primarily to cash components of earnings, partly offset by an $8.7 million decrease in working capital. Investing activities provided $223.2 million, largely because of $246.9 million in marketable-security sale proceeds as Cirrus repositioned funds ahead of the planned acquisition. The company also paid $3.0 million in credit-facility issuance costs and purchased a $11.1 million foreign-currency hedge.
Material developments, outlook, and risks
- Wolfson acquisition: Cirrus agreed to acquire Wolfson Microelectronics for £2.35 per share, valuing the offer at approximately £291 million (about $488 million at the exchange rate cited). Wolfson shareholders approved the transaction, but court sanction and other conditions remained outstanding. Closing was expected in Q2 FY2015. Cirrus planned to fund the offer with existing cash and $225 million of debt financing and entered a nine-month currency hedge.
- Credit facility: The $225 million senior secured revolving facility was undrawn at quarter-end and matures no later than January 23, 2015. It is secured by substantially all of Cirrus’s and certain subsidiaries’ assets and includes a minimum $75 million cash covenant and a maximum 1.75-to-1 leverage ratio. Cirrus reported compliance with all covenants.
- Spending and liquidity outlook: Cirrus expected $18–20 million of costs over the next year for Austin facilities expansion and said it anticipated funding these costs from current cash sources. Management expected cash, investments, future cash generation, and facility availability to meet capital requirements for at least 12 months. No specific revenue or earnings guidance was provided.
- Customer concentration: Apple represented approximately 73% of quarterly sales, down from 77% a year earlier; the ten largest end customers represented 85%. The filing highlights the risk that customer order reductions or pricing pressure could materially affect revenue, margins, and earnings.
- Legal matters: A new patent suit filed June 17, 2014 alleges indirect infringement and seeks unspecified damages. Management could not estimate a possible loss range, intended to defend the case, and did not believe it would materially adversely affect financial condition based on available information. A prior Ethernet patent matter was settled for $0.7 million in the comparable prior-year quarter.
- Other items: The effective tax rate was 35.7%, versus 34.8% a year earlier. The company was evaluating the impact of the new revenue-recognition standard. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether the Wolfson acquisition received court sanction, closed as expected, and was funded on the stated terms.
- Post-acquisition debt, liquidity, covenant headroom, and ability to repay the facility by its stated maturity.
- Whether Apple and broader customer concentration, pricing pressure, and product mix continue to affect sales and gross margin.
- Whether increased R&D spending and facility expansion translate into expected products and returns, and remain within projected costs.
- Developments in the new patent litigation and any resulting estimate, accrual, or disclosure of potential loss.