Cirrus Logic, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended March 28, 2015 (52 weeks). The filing also reports fourth-quarter results. Cirrus Logic designs analog and mixed-signal ICs, primarily for audio applications, and reports as one operating segment.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $916.6 million | $714.3 million |
| Gross profit / margin | $425.7 million / 46% | $356.2 million / 50% |
| Operating income / margin | $108.8 million / 12% | $155.0 million / 22% |
| Net income | $55.2 million | $108.1 million |
| Diluted EPS | $0.85 | $1.65 |
| Cash from operations | $163.5 million | $228.0 million |
Revenue rose 28%, while net income fell about 49%. Portable audio sales increased 32% to $740.3 million; non-portable audio and other sales increased 16% to $176.3 million. Wolfson, acquired in August 2014, contributed $98.3 million of reported revenue from acquisition through year-end. Fourth-quarter sales were $255.2 million and net income was $21.3 million, versus $149.7 million and $12.6 million, respectively, in the prior-year quarter.
Gross margin declined primarily because of higher excess and obsolete inventory charges and acquisition-related inventory fair-value adjustments. Operating expenses increased substantially, including R&D of $197.9 million, up 57%, and $18.1 million of acquisition-related costs. FY2015 also included $5.6 million of interest expense and $12.2 million of other expense, primarily related to expired contracts and acquisition-related foreign-exchange hedges. The effective tax rate was 39.7%, versus 30.6% in FY2014.
Cash, liquidity and debt
At year-end, cash and cash equivalents were $76.4 million and marketable securities totaled $184.3 million; working capital was $275.3 million. Long-term revolver debt was $180.4 million. The $250 million secured facility matures August 29, 2017; the company reported compliance with its covenants, including a minimum $100 million cash-and-securities requirement. Investing activities used $324.4 million, including $444.1 million net of cash acquired for Wolfson. Financing activities provided $205.5 million, principally from revolver borrowings. Management said available cash, expected operating cash flows and borrowing capacity should cover requirements for at least 12 months.
Material changes, outlook and risks
- The Wolfson acquisition expanded the portfolio, including MEMS microphone and software capabilities, and increased headcount to 1,104 from 751. Integration, expected synergies, acquired product margins and preliminary purchase-price accounting remain important uncertainties. Goodwill was $263.1 million at year-end; no goodwill impairment was recorded.
- Management anticipated significant FY2016 revenue growth, including continued production ramps of new smart codecs. Its long-term gross-margin goal was the mid-40% range, with operating profit of approximately 20%. These are targets, not guarantees.
- Customer concentration is pronounced: Apple represented approximately 72% of FY2015 sales, down from 80% in FY2014; the ten largest end customers represented 87%. International sales were 95% of net sales.
- Key risks include customer order volatility and pricing pressure, product concentration and competition, dependence on outsourced manufacturing, supply or yield interruptions, inventory forecasting, and execution of new-product ramps. The company also cited potential tax benefits from organizational restructuring as uncertain and subject to challenge.
- Legal matters described in the filing were concluded: a prior patent case settled for $0.7 million, and later district-court and ITC proceedings involving alleged patent infringement were dismissed or terminated as to Cirrus Logic.
Investor verification priorities
- Track Apple and other major-customer exposure, design wins, order patterns and pricing.
- Assess whether FY2016 growth expectations materialize and whether smart-codec ramps support margins.
- Review Wolfson integration, acquired-product profitability, remaining development costs and potential purchase-accounting changes or impairments.
- Monitor inventory levels and charges, operating cash generation, and compliance with the revolver’s financial and liquidity covenants.
- Evaluate the sustainability of the effective tax rate and anticipated restructuring-related tax benefits.
Ernst & Young issued unqualified opinions on the consolidated financial statements and on internal control over financial reporting. The control assessment excluded Wolfson, which represented approximately 15% of assets and 11% of revenue; the auditor likewise did not evaluate Wolfson’s controls.