Cirrus Logic, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2015, ended December 27, 2014; comparisons are with the periods ended December 28, 2013. Amounts are in U.S. dollars unless noted.
Business context and material developments
Cirrus Logic develops analog and mixed-signal integrated circuits, primarily for audio and voice applications. It reports one operating segment, with revenue presented as Portable Audio Products and Non-Portable Audio and Other Products.
Cirrus completed its acquisition of Wolfson Microelectronics on August 21, 2014, for approximately $469.5 million. The acquisition added $30.8 million of third-quarter revenue and $43.8 million for the post-acquisition period in the first nine months. Purchase accounting remains preliminary; acquired goodwill was $248.5 million. Management cited expanded technology, software capabilities, and development capacity as strategic benefits.
Financial performance
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Net sales | $298.6 million | $218.9 million | $661.4 million | $564.7 million |
| Gross margin | 43.8% | 47.4% | 46.4% | 50.1% |
| Operating income | $44.4 million | $52.8 million | $78.4 million | $135.0 million |
| Net income | $22.7 million | $41.5 million | $33.8 million | $95.5 million |
| Diluted EPS | $0.35 | $0.63 | $0.52 | $1.45 |
| Operating cash flow | Not separately presented for the quarter | $59.7 million | $163.0 million |
Third-quarter sales increased 36% year over year, with portable audio revenue up 39%. Nine-month sales increased 17%. Profitability declined despite higher sales: management attributed lower gross margin to acquisition inventory fair-value charges, product mix, and acquisition-related costs; higher research and development and SG&A expenses also weighed on operating income. Third-quarter gross margin was reduced by approximately 2.3 percentage points from the sell-through of acquired inventory valued at fair value.
For the first nine months, operating expenses included $18.1 million of acquisition-related costs and $1.5 million of restructuring costs. Other expense was $12.6 million, primarily reflecting foreign-exchange hedge losses related to the acquisition and losses on expired contracts. The nine-month tax rate was 45.1% versus 29.5% a year earlier; management cited foreign losses and noted that the prior-year comparison benefited from a $6.3 million one-time tax benefit.
Liquidity, debt, and cash flow
At December 27, 2014, cash and cash equivalents were $66.6 million and marketable securities totaled $109.5 million, compared with $31.9 million and $352.7 million, respectively, at March 29, 2014. Accounts receivable was $148.4 million, up from $63.2 million at fiscal year-end. Total current assets were $436.2 million and current liabilities were $130.2 million.
Long-term debt was $200.4 million, with no debt reported at March 29, 2014. The debt was drawn under a $250 million senior secured revolving facility maturing August 29, 2017. The facility includes a maximum leverage ratio of 2.00:1 and a minimum $100 million cash-and-cash-equivalents covenant. Cirrus reported compliance with all covenants at quarter-end.
Nine-month operating cash flow fell to $59.7 million from $163.0 million, primarily reflecting working-capital use, including a $73.1 million increase in accounts receivable. Investing cash outflow was $234.8 million, including $444.1 million paid net of acquired cash for Wolfson, partly offset by net proceeds from marketable securities. Financing cash inflow was $209.9 million, principally from revolver borrowings. Capital spending was approximately $13 million on Austin facility expansion; management expected a further approximately $8 million over the next year.
Management stated that expected future cash generation, existing cash and investments, and credit availability were sufficient to meet capital requirements for at least the next 12 months, while noting that additional funding could be sought or elected earlier. The company did not pay dividends and intended to retain earnings for reinvestment.
Outlook, risks, and contingencies
- The filing provides no specific revenue, earnings, or margin guidance.
- Customer concentration is substantial: Apple represented approximately 78% of third-quarter sales and 75% of nine-month sales. The ten largest end customers represented 88% and 87%, respectively. The filing warns that reduced orders, pricing pressure, or loss of a key customer could materially affect sales and profitability.
- Debt adds interest and covenant obligations and is secured by substantially all of the company’s and guarantor subsidiaries’ assets, subject to exclusions.
- A patent case filed by Enterprise Systems Technologies is stayed pending an International Trade Commission investigation concerning products incorporating Cirrus components. The plaintiff seeks unspecified damages and a limited exclusion order affecting certain Apple products; the investigation target date is December 21, 2015. Management could not estimate a possible loss but did not believe, based on available information, that the matter would materially adversely affect financial condition.
- Foreign-currency exposure includes British-pound costs and acquisition-related USD/GBP risk; hedging may reduce, but not eliminate, currency effects. The company also faces market risk on debt and marketable securities.
- Management reported effective disclosure controls as of December 27, 2014, and no material change in internal control over financial reporting during the quarter. Wolfson’s internal controls were excluded from the annual assessment.
Important facts for investors to verify
- Whether sales growth and the high contribution from Apple are sustainable, and how customer pricing or product-design decisions may affect future results.
- Whether post-acquisition synergies and revenue can offset lower margins, increased R&D and SG&A, and acquired-intangible amortization.
- Final Wolfson purchase-price allocation, including the valuation of acquired intangibles, inventory, taxes, and liabilities.
- Working-capital trends, especially accounts receivable, and the company’s ability to maintain cash generation and meet debt covenants.
- Developments and potential business impact of the patent investigation and litigation.