Cirrus Logic, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended December 30, 2017; comparisons are with the quarter ended December 24, 2016. Fiscal 2018 has 53 weeks, with the extra week in the third quarter. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $482.7M | $523.0M | $1,229.0M | $1,211.1M |
| Gross profit / margin | $235.1M / 48.7% | $255.2M / 48.8% | $608.1M / 49.5% | $593.5M / 49.0% |
| Operating income / margin | $103.5M / 21% | $146.2M / 28% | $241.7M / 20% | $272.3M / 22% |
| Net income | $33.8M | $122.0M | $150.0M | $226.2M |
| Diluted EPS | $0.52 | $1.83 | $2.26 | $3.41 |
| Operating cash flow | Not reported by quarter | $213.0M | $244.9M |
- Revenue mix: Q3 portable-audio sales were $438.7M, down $45.1M year over year; non-portable audio and other sales were $44.1M, up $4.8M. Nine-month revenue rose 1%, primarily from higher portable-audio volumes.
- Costs and margins: Q3 gross margin was nearly unchanged; higher scrap and reserve expense was mostly offset by favorable mix. Nine-month gross margin improved with supply-chain efficiencies. Q3 research and development expense rose 27% to $97.0M, reflecting higher headcount and related costs, acquisition-intangible amortization, product development and tape-outs, and the absence of a prior-year sales-tax refund.
- Cash flow and investment: Nine-month operating cash flow fell to $213.0M. Investing used $149.2M, including net marketable-security purchases, capital expenditures, technology investment, and a $20.2M technology acquisition. Financing used $188.3M, principally for $115.6M of stock repurchases and $60.0M of revolver repayment. Cash and equivalents declined $124.5M to $226.6M.
- Liquidity and debt: At quarter end, cash and equivalents were $226.6M and marketable securities totaled $186.5M, including $173.7M classified as long-term. The company had no revolver borrowings and reported compliance with covenants on its $300M secured revolving facility, which matures in 2021. Management said existing cash, investments, expected cash generation, and available borrowing capacity should meet capital needs for at least 12 months.
Material changes and unusual items
- Q3 revenue decreased 8% year over year, while nine-month revenue increased 1%. Management attributed the Q3 portable-audio decline primarily to lower average selling prices at a key Android OEM and price reductions on other products.
- Net income fell substantially in Q3 and for the nine-month period. The Q3 tax provision was $71.0M versus $23.8M a year earlier; the 67.7% effective rate included a provisional $57.9M tax expense related to the Tax Cuts and Jobs Act: $51.8M for the transition tax on certain foreign earnings and $6.1M from remeasurement of deferred tax balances. The company had not completed its tax accounting and final amounts could differ materially.
- Apple represented approximately 86% of Q3 revenue and 82% of nine-month revenue. The ten largest end customers represented about 94% and 93%, respectively. Management identified customer concentration and pricing pressure as significant risks.
- The company repurchased 2.0M shares for $115.6M during the first nine months. In January 2018, the board authorized an additional $200M repurchase, supplementing $60.2M remaining under the prior authorization at quarter end.
- Contingent consideration was reduced from $4.7M to $0.7M after revised milestone-probability estimates, with the final amount to be determined early in Q4. Management reported no pending legal matters it believed could potentially have a material adverse effect, while noting ordinary-course proceedings remain subject to uncertainty.
Outlook, risks, and accounting matters
The filing provides no numerical revenue or earnings guidance. Management expects average selling prices for some products to decline and warns that customer order reductions or price pressure could materially affect sales, margins, and earnings. Revenue is highly concentrated in a limited number of customers, particularly Apple. The company also cited ordinary business and market risks, including foreign-currency and interest-rate exposure. It expected no material financial-statement modification from adopting the new revenue-recognition standard and anticipated modified-retrospective adoption.
Important facts for investors to verify
- Whether Apple and other major customers sustain orders, product designs, and pricing, given the concentration of revenue.
- Final Tax Act accounting and the resulting tax expense, deferred-tax balances, and ongoing effective tax rate.
- Q4 resolution of the $0.7M contingent-consideration estimate and any related adjustment.
- Working-capital trends: accounts receivable increased to $217.6M and inventory to $193.0M from March 25, 2017; management attributed the receivables increase partly to sales timing and seasonality.
- Execution and funding of the additional share-repurchase authorization, alongside investment, cash-generation, and liquidity needs.