Cirrus Logic, Inc. — Form 10-Q Summary
Reporting period: Second quarter of fiscal 2018, ended September 23, 2017; year-to-date figures cover the six months ended that date. Comparisons are with the corresponding fiscal 2017 periods. Cirrus Logic makes audio and voice signal-processing integrated circuits and reports one operating segment.
Financial performance
| Metric | Quarter ended September 23, 2017 | Six months ended September 23, 2017 |
|---|---|---|
| Net sales | $425.5 million, down 1% year over year | $746.3 million, up 8% |
| Gross profit / margin | $211.3 million / 49.7%, versus 49.4% | $373.0 million / 50.0%, versus 49.2% |
| Operating income | $90.9 million, versus $103.9 million | $138.2 million, versus $126.1 million |
| Net income | $73.3 million, versus $86.0 million | $116.2 million, versus $104.1 million |
| Diluted EPS | $1.10, versus $1.30 | $1.74, versus $1.58 |
| Operating cash flow | Not separately provided in the filing text | $80.7 million, versus $36.8 million |
- Quarterly portable-audio sales were $381.8 million, down $1.7 million; non-portable audio and other sales were $43.8 million, down $1.4 million. For the six months, portable-audio sales rose 11% to $662.4 million, while non-portable audio and other sales declined to $83.8 million.
- Quarterly R&D expense rose 19% to $90.4 million, with higher headcount, product-development spending, acquisition-related amortization, and other costs cited. Six-month R&D increased 16% to $173.9 million. Quarterly SG&A fell 6% to $30.0 million.
- Quarterly net income and diluted EPS declined despite slightly higher gross margin, reflecting lower sales and higher operating expenses. Six-month operating income, net income, and diluted EPS increased year over year.
Cash, debt, and liquidity
- At September 23, 2017, cash and cash equivalents were $180.2 million and marketable securities totaled $149.0 million, for combined cash and securities of $329.2 million. Total current assets were $670.0 million and current liabilities were $191.2 million.
- No debt was outstanding at quarter-end; the company repaid $60.0 million on its revolving facility during the six-month period. The $300 million secured revolver matures in July 2021, and the company reported compliance with its covenants.
- Six-month operating cash flow was $80.7 million. Working capital was a significant use of cash, including increases in receivables and inventory, partly offset by higher accounts payable. Investing activities used $96.7 million; financing activities used $154.9 million, including $95.6 million for repurchases and $60.0 million of debt repayments. Cash declined by $171.0 million from fiscal year-end.
- Management said expected cash earnings, existing cash and investments, and available revolver borrowings should be sufficient for capital requirements for at least the next 12 months, while noting additional funding could be sought or elected earlier.
Material changes, outlook, and risks
- Apple represented approximately 82% of quarterly sales and 80% of six-month sales, up from 78% and 74%, respectively, in the comparable prior-year periods. The ten largest customers represented about 93% of quarterly sales and 92% of six-month sales.
- Management attributed improved gross margin to supply-chain efficiencies. It cited lower average selling prices on certain products and anticipated continued declines in legacy non-portable products. No specific revenue or earnings guidance is provided in the filing text.
- A change in estimated achievement probabilities for acquisition-related contingent consideration reduced the liability by $4.0 million during the six months; the liability was $0.7 million at quarter-end. The adjustment is reflected in R&D expense. The company also acquired technology assets for $20.2 million.
- Key risks include dependence on a small number of customers, potential customer pricing pressure or order reductions, product-development and schedule demands, and exposure to foreign currency and interest-rate movements. The company reported no pending legal matters it believed would have a material adverse effect, but cautioned that litigation outcomes remain uncertain.
- Revenue recognition guidance (ASC 606) was being evaluated; management expected no material financial-statement modifications and anticipated modified retrospective adoption. The company early adopted an income-tax accounting update, reducing beginning retained earnings by $0.7 million.
Investor facts to verify
- Whether Apple’s unusually high share of revenue persists and how changes in its orders or pricing could affect sales and margins.
- Whether portable-audio growth, ASP pressure, and declines in legacy products develop as management describes.
- Whether R&D investment and the contingent-consideration adjustment affect future expense levels comparably.
- How receivables and inventory convert to cash, and whether liquidity remains adequate as cash declined and repurchases continued.
- The eventual effects of accounting-standard adoption, tax examinations, and the company’s $33.6 million of unrecognized tax benefits.