Cirrus Logic, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 27, 2015, the company’s first quarter of fiscal 2016. The financial statements are unaudited. Cirrus Logic develops analog and mixed-signal integrated circuits, including audio products.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $282.6 million | $152.6 million | Up 85% |
| Gross profit / margin | $132.5 million / 46.9% | $75.4 million / 49.4% | Margin down 2.5 percentage points |
| Operating income / margin | $50.0 million / 17.7% | $15.9 million / 10.4% | Up $34.1 million |
| Net income | $33.4 million | $10.2 million | Up 225% |
| Diluted EPS | $0.50 | $0.16 | Up $0.34 |
| Cash from operations | $43.2 million | $12.8 million | Up $30.4 million |
Portable Audio sales were $235.9 million, up 110%, primarily on higher shipments of smart codecs and amplifiers. Non-Portable Audio and Other sales were $46.8 million, up 17%.
At June 27, 2015, cash and cash equivalents were $102.5 million; current and long-term marketable securities totaled $170.9 million. Total assets were $1.19 billion, current liabilities $203.1 million, and stockholders’ equity $799.8 million. Long-term debt was $160.4 million, down $20.0 million from March 28, 2015.
Operating cash flow was partly offset by a $42.0 million increase in inventory. Investing cash flow was $0.7 million, versus $223.2 million in the prior-year quarter, which included substantial marketable-security sales in anticipation of financing the Wolfson acquisition. Financing activities used $17.8 million, primarily for $20.0 million of revolver principal repayments. Capital expenditures and software purchases were $10.6 million.
Material changes and notable items
- Revenue growth was led by portable audio, while gross margin fell from 49.4% to 46.9%, mainly because of a higher mix of portable audio products; supply-chain improvements partly offset the mix impact.
- Research and development expense rose 66% to $65.8 million, and selling, general and administrative expense rose 48% to $29.1 million. The company attributed the increases mainly to the Wolfson acquisition, including added personnel and acquisition-related intangible amortization, as well as product-development spending.
- Wolfson’s operations have been included since its August 21, 2014 acquisition. The final purchase-price allocation included $247.2 million of goodwill; none was expected to be tax-deductible.
- A patent agreement generated $12.5 million in cash from the sale of certain LED-lighting patents. Cirrus Logic agreed to exit LED lighting and recorded the proceeds as a recovery of previously incurred costs in operating expenses.
- On July 21, 2015, after quarter-end, the company bought a privately held technology group for approximately $22 million, funded from existing cash.
Liquidity, outlook, and risks
- Management said cash, investments, expected cash generation, and available credit were expected to meet capital requirements for at least the next 12 months, while noting that additional funding could be required or elected.
- The $250 million senior secured revolving credit facility matures August 29, 2017; $160.4 million was outstanding at quarter-end. The agreement requires a leverage ratio no greater than 2.00 to 1.00 and at least $100 million of consolidated cash and cash equivalents. The company reported compliance with all covenants.
- No specific revenue, earnings, or margin guidance was provided in the filing.
- Customer concentration is a significant risk: Apple represented approximately 62% of sales, Samsung 18%, and the ten largest end customers 88%. The company warned that customer order reductions, pricing pressure, or loss of a major customer could materially hurt sales, margins, and earnings.
- Unrecognized tax benefits were $3.0 million; the company said the amount could increase within 12 months following the Wolfson acquisition and integration, but could not estimate the range. Management did not believe pending legal matters were likely to have a material adverse effect, while cautioning that an adverse outcome could affect a particular period.
- Management identified no significant change in market-risk exposure from the prior annual report. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether elevated Apple and Samsung concentration and customer demand sustain the sharp year-over-year sales increase.
- Whether product mix and pricing pressure continue to weigh on gross margin despite supply-chain improvements.
- Inventory levels and conversion to customer shipments, given the $42.0 million quarterly inventory increase tied to production ramps ahead of demand.
- Revolver covenant headroom and liquidity after the post-quarter $22 million technology acquisition.
- The ongoing effects of Wolfson-related expenses, amortization, and integration, and any increase in unrecognized tax benefits.
- The filing’s fiscal-period labeling: results are for the quarter ended June 27, 2015 (Q1 FY2016), compared with the quarter ended June 28, 2014.