Cirrus Logic, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2015, ended September 27, 2014. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions. The filing is unaudited.
Business context and results
Cirrus Logic develops analog and mixed-signal integrated circuits, primarily for portable audio and non-portable audio and other markets. It completed its acquisition of Wolfson Microelectronics on August 21, 2014; Wolfson’s results are included from that date. The company reports one operating segment and presents revenue in two product lines.
| Metric | Quarter ended Sep. 27, 2014 | Prior-year quarter | Six months ended Sep. 27, 2014 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $210.2m | $190.7m | $362.8m | $345.8m |
| Gross profit | $100.6m | $99.4m | $175.9m | $178.9m |
| Gross margin | 47.8% | 52.2% | 48.5% | 51.7% |
| Operating income | $18.1m | $50.7m | $34.0m | $82.2m |
| Net income | $0.9m | $33.4m | $11.1m | $54.0m |
| Diluted EPS | $0.01 | $0.50 | $0.17 | $0.82 |
| Operating cash flow | Not presented by quarter | $(1.7)m | $91.1m |
Financial position and liquidity
- At September 27, 2014, cash and cash equivalents were $48.2m, marketable securities were $95.0m, and total current assets were $426.9m. Total assets were $1.065bn.
- Current liabilities were $139.4m. Long-term debt was $226.4m; the company had no debt at March 29, 2014.
- Cash decreased by $1.7m from operating activities over the six-month period. Investing activities used $210.9m, primarily reflecting the $444.1m net cash acquisition payment, partly offset by net proceeds from securities sales. Financing activities provided $228.9m, principally from revolver borrowings.
- The company had a $250m senior secured revolving facility maturing August 29, 2017, with $226.4m borrowed at quarter-end. It was in compliance with the facility’s covenants, including a maximum leverage ratio of 2.00 to 1.00 and a minimum $100m cash and cash-equivalents requirement.
Material changes and unusual items
- Quarterly sales rose 10%; six-month sales rose 5%. Wolfson contributed $13.0m of reported quarterly revenue. Portable Audio Products generated $163.6m of quarterly sales; Non-Portable Audio and Other Products generated $46.7m.
- Gross margin declined year over year. Management cited the absence of a prior-year sale of previously reserved inventory, acquisition-related costs, and lower-margin new portable products; current-quarter purchase accounting charges were $1.6m.
- Operating expenses rose substantially, including $14.9m of acquisition-related costs, higher R&D expense from increased headcount, acquired intangibles and product development, and $1.5m of restructuring costs related primarily to severance.
- Other expense was $12.0m in the quarter and $11.5m for the six months, associated with foreign-currency losses related to the acquisition and hedging. Interest expense was $2.8m for the quarter and $3.5m for the six months.
- The acquisition’s preliminary purchase-price allocation included $176.0m of identifiable intangible assets and $249.0m of goodwill; the allocation remained subject to completion and could be materially adjusted.
- The effective tax rate was 75.0% for the quarter and 42.7% for the six months, which management attributed principally to foreign losses recognized after the acquisition at foreign statutory rates below the U.S. federal rate.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management expected cash earnings, existing cash and investments, and available credit to meet capital requirements for at least 12 months, while noting that additional funding could be required or elected.
- Approximately $6m had been spent on Austin facilities expansion in fiscal 2015; the company anticipated about $14m of additional costs over the next year, expected to be funded from current cash sources.
- Customer concentration is significant: Apple represented 73% of both quarterly and six-month sales, versus 80% and 79%, respectively, in the comparable prior-year periods. The top ten end customers represented 86% of sales for the quarter and six months.
- The company identified risks from customer concentration and pricing pressure, debt and covenant obligations, foreign-currency movements, and dependence on customer product designs and orders. It had not paid cash dividends and intended to retain earnings for reinvestment.
- A patent case brought by Enterprise Systems Technologies alleges infringement and seeks unspecified damages; the related district-court case was stayed pending an ITC investigation. The ITC complainant seeks a limited exclusion order against certain Apple products incorporating Cirrus components. Management said it could not estimate possible loss, did not then expect a material adverse effect on financial condition, and intended to defend the matter.
- Management reported disclosure controls were effective as of quarter-end. It was evaluating the impact of the new revenue-recognition standard, effective for periods beginning after December 15, 2016, with early adoption not permitted.
Important facts for investors to verify
- Whether the preliminary Wolfson purchase accounting, integration costs, and acquired business performance change materially as valuation work is completed.
- Whether sales and margins remain resilient given Apple’s 73% revenue concentration and the company’s stated customer pricing pressures.
- Cash generation and working-capital trends, particularly receivables and inventory growth, and the company’s ability to comply with credit-facility covenants.
- The size, timing, and financial consequences of acquisition-related foreign-exchange exposure and the pending patent/ITC proceedings.
- Whether forecast Austin expansion spending and other capital needs remain consistent with management’s stated liquidity outlook.