Cirrus Logic, Inc. — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended March 25, 2017 (52 weeks). Cirrus Logic designs high-performance, low-power audio and voice processing integrated circuits, principally for mobile devices. The company reports one operating segment and two product lines.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $1,538.9 million | $1,169.3 million | +32% |
| Gross profit / margin | $757.8 million / 49% | $554.8 million / 47% | Margin +2 percentage points |
| Operating income / margin | $317.1 million / 21% | $180.2 million / 15% | +76% income |
| Net income | $261.2 million | $123.6 million | +111% |
| Diluted EPS | $3.92 | $1.87 | +110% |
| Operating cash flow | $369.8 million | $149.0 million | +$220.7 million |
- Revenue mix: Portable audio sales rose 39% to $1,373.8 million, led by smart codecs and boosted amplifiers. Non-portable audio and other sales fell 8% to $165.1 million.
- Fourth-quarter context: FY2017 Q4 sales were $327.9 million and net income was $35.1 million, compared with $232.0 million and $14.0 million, respectively, in FY2016 Q4.
- Expenses: Research and development expense increased 13% to $303.7 million, reflecting higher R&D staffing and related costs. Selling, general and administrative expense increased 9% to $127.3 million.
- Tax: The effective tax rate was 17.1%, versus 29.8% in FY2016. Early adoption of stock-compensation accounting guidance reduced FY2017 tax expense by $22.9 million.
Cash, liquidity, and debt
- Cash and cash equivalents were $351.2 million, with $99.8 million in marketable securities; combined cash and securities totaled $451.0 million, up from $250.0 million a year earlier.
- Working capital was $631.9 million, compared with $378.0 million. Total assets were $1,413.5 million and stockholders’ equity was $1,151.7 million.
- Debt was $60.0 million at year-end, down from $160.4 million. The company had a $300 million secured revolving facility maturing July 2021 and reported compliance with its covenants.
- FY2017 investing cash outflow was $69.9 million; financing cash outflow was $117.5 million, including $100.4 million of revolver repayments. Capital expenditures and technology investments totaled approximately $51.3 million.
Changes, outlook, and notable items
- Sales growth and higher gross margin were driven mainly by portable audio, with management citing higher volumes and supply-chain efficiencies. A leading Android customer’s return to dual sourcing reduced sales of certain general-market smart codecs.
- Management anticipated modest revenue growth in FY2018, gross margin in the upper-40% range for the foreseeable future, and a long-term operating-profit target in the mid-20% range.
- A $9.8 million impairment charge was recorded on an Edinburgh building no longer expected to serve as the primary office. Inventory charges for excess, obsolete, or scrapped inventory were $6.7 million, up from $4.8 million.
- The company repurchased $15.4 million of shares in FY2017; $175.8 million remained authorized under its $200 million repurchase program. It paid no cash dividends.
- On April 14, 2017, the company acquired a small voice-and-speech technology group for an undisclosed, immaterial amount funded with cash.
Principal risks and contingencies
- Customer concentration: Apple represented approximately 79% of FY2017 sales, up from 66% in FY2016; the ten largest end customers represented 92%. Orders can be changed or canceled on short notice, and customer pricing pressure may affect margins.
- Product and market concentration: Results depend heavily on portable audio and a limited number of products. Changes in customer designs, in-house alternatives, integrated components, competition, or weaker smartphone demand could reduce sales.
- Supply chain: The fabless business depends on third-party foundries and assembly and test suppliers, many in Asia. Capacity constraints, yield problems, supplier disruption, or natural disasters could delay shipments or raise costs.
- Commitments and taxes: Contractual obligations totaled $373.7 million, including $182.3 million of wafer commitments. Unrecognized tax benefits were $30.9 million; approximately $201.3 million of foreign earnings were designated indefinitely reinvested, with an estimated $65.5 million related deferred tax liability not recorded.
- Other disclosed risks include price erosion, product-development execution, foreign operations and Brexit uncertainty, currency and tax changes, intellectual-property disputes, cybersecurity, and recruiting and retaining engineering talent. Management said no pending legal matter was then believed likely to have a material adverse effect, while noting that outcomes remain uncertain.
Important facts for investors to verify
- Whether Apple-related demand and the exceptionally high customer concentration remain sustainable, and whether customers continue to dual-source or change designs.
- Whether FY2018 revenue growth and the upper-40% gross-margin outlook are achieved, including the effects of product mix and pricing.
- How much of FY2017 earnings and the lower effective tax rate reflects the $22.9 million stock-compensation tax benefit, and whether such benefits recur.
- Whether operating cash generation remains strong as receivables and inventory rise, and how cash held overseas is available for domestic needs.
- Progress in diversifying revenue, scaling newer offerings such as MEMS microphones, and managing manufacturing commitments and supply risks.