Business context and reporting period
Cirrus Logic, Inc. designs high-performance, low-power integrated circuits for audio and voice processing. This Form 10-Q covers the third quarter and first nine months of fiscal 2017, ended December 24, 2016; comparisons are with the periods ended December 26, 2015. The company reports one operating segment, with revenue also presented for Portable Audio and Non-Portable Audio and Other.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | 9M FY2017 | 9M FY2016 |
|---|---|---|---|---|
| Net sales | $523.0 million | $347.9 million | $1,211.1 million | $937.3 million |
| Gross profit / margin | $255.2 million / 48.8% | $164.9 million / 47.4% | $593.5 million / 49.0% | $439.6 million / 46.9% |
| Operating income | $146.2 million | $63.9 million | $272.3 million | $158.0 million |
| Net income | $122.0 million | $41.4 million | $226.2 million | $109.6 million |
| Diluted EPS | $1.83 | $0.63 | $3.41 | $1.66 |
- Q3 revenue grew 50%; management attributed the increase primarily to higher Portable Audio shipments of boosted amplifiers and a HiFi digital headset codec. Portable Audio revenue was $483.7 million, versus $308.8 million; Non-Portable Audio and Other was approximately flat at $39.3 million.
- For the first nine months, revenue increased 29%. Portable Audio rose 35% to $1,083.2 million, while Non-Portable Audio and Other declined 6% to $127.9 million, primarily due to lower DAC sales. Management cited a known market-share shift at a large Android customer as it returned to dual sourcing, partly offset by new product shipments.
- Higher gross margins in both comparison periods were attributed primarily to favorable product mix. Q3 operating margin was approximately 28%, versus 18% a year earlier; nine-month operating margin was approximately 22%, versus 17%.
- Research and development expense increased 8% in Q3 and 11% year to date, mainly reflecting higher employee, facilities, and development costs. SG&A rose 7% in Q3 and 6% year to date.
Cash flow, liquidity, and debt
- For the first nine months, operating cash flow was $244.9 million, up from $116.3 million. The company cited a $61.2 million unfavorable working-capital change, primarily from increased accounts receivable and inventories.
- Investing activities used $26.4 million, including $35.3 million of capital expenditures and technology investments, partly offset by net marketable-security maturities and sales. Financing activities used $76.9 million, including $60.4 million of debt repayments and $15.4 million of share repurchases.
- At December 24, 2016, cash and equivalents were $310.4 million and marketable securities were $72.3 million, against $100.0 million of debt. Current assets were $825.2 million and current liabilities $212.7 million. The filing states management expects cash, investments, operating cash generation, and available borrowings to meet capital needs for at least 12 months.
- The amended senior secured revolving facility provides up to $300 million and matures July 12, 2021. The company reported covenant compliance and $100.0 million outstanding. The filing describes the facility’s financial and other restrictive covenants.
Material changes, outlook, and risks
- Apple represented approximately 85% of Q3 sales and 79% of nine-month sales, compared with 76% and 67%, respectively, in the prior-year periods. The ten largest end customers accounted for 94% of Q3 and 92% of nine-month sales. Management warns that customer concentration, pricing pressure, and customers’ ability to switch suppliers could materially affect revenue, margins, and earnings.
- The effective tax rate was 16.3% in both Q3 and the first nine months, versus 33.7% and 29.2% in the comparable prior-year periods. The lower current-year rate reflected lower-tax foreign income and adoption of new stock-compensation accounting. The company early adopted ASU 2016-09, recording excess tax benefits in income tax expense and operating cash flow; the filing reports a $5.6 million cumulative adjustment to retained earnings at the start of the fiscal year. These changes affected previously reported FY2017 quarterly results.
- Contingent consideration related to an acquisition was remeasured. Revised Tranche A milestone estimates reduced the liability by $3.6 million; a separate $0.3 million fair-value charge was recorded in research and development expense. The ending liability was $5.8 million, with a maximum potential milestone value of $10.0 million.
- Management provided no specific revenue or earnings guidance in the supplied filing text. It identified continued customer pricing pressure, dependence on key customers, international operating exposure, and uncertainty from Brexit as risks. Nearly all sales were outside the Americas (98% in Q3; 97% year to date).
- Management said it did not believe pending legal matters would have a material adverse effect, while noting that adverse outcomes could affect a particular reporting period. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Apple’s unusually high share of sales is sustainable and how customer sourcing decisions or pricing negotiations may affect future revenue and margins.
- Whether the strong Portable Audio shipments and favorable product mix persist, particularly given the disclosed market-share shift at an Android customer.
- How receivables and inventory convert to cash, and whether working-capital demands continue to constrain operating cash flow.
- The recurring earnings and cash-flow effects of stock-compensation tax benefits, contingent-consideration remeasurement, and the company’s effective tax rate.
- Current borrowing availability, covenant headroom, and the effect of secured-debt terms on capital allocation and liquidity.