Cirrus Logic, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 24, 2016 (the second quarter of fiscal 2017), with six-month comparisons to the period ended September 26, 2015. Financial statements are unaudited; amounts below are in millions of U.S. dollars unless stated otherwise.
Business context and results
Cirrus Logic develops low-power integrated circuits for audio and voice signal processing. It reports one operating segment, with revenue presented across Portable Audio and Non-Portable Audio and Other products.
| Metric | Three months ended Sep. 24, 2016 | Year-over-year | Six months ended Sep. 24, 2016 | Year-over-year |
|---|---|---|---|---|
| Net sales | $428.6 | Up 40% | $688.0 | Up 17% |
| Gross profit / margin | $211.7 / 49.4% | Up from 46.4% | $338.4 / 49.2% | Up from 46.6% |
| Operating income / margin | $103.9 / 24.2% | Up from $44.1 / 14.4% | $126.1 / 18.3% | Up from $94.1 / 16.0% |
| Net income | $78.1 | Up from $34.9 | $93.9 | Up from $68.2 |
| Diluted EPS | $1.19 | Up from $0.53 | $1.43 | Up from $1.03 |
Financial position, cash flow and liquidity
- At September 24, cash and cash equivalents were $113.3 and marketable securities were $118.1, for combined cash and securities of $231.4. Total assets were $1,345.5 and stockholders’ equity was $969.1.
- Debt was $140.0, classified as long-term. The amended senior secured revolving facility provides up to $300 million, matures July 12, 2021, and is secured by substantially all company and guarantor assets, subject to exclusions. The company was compliant with its financial covenants at quarter-end.
- For the six months, operating cash flow was $32.2, versus cash used of less than $0.1 in the prior-year period. Working capital absorbed $120.5, primarily from higher receivables and inventory. Investing activities used $60.7; financing activities used $27.0. Cash decreased $55.5 from fiscal year-end.
- Accounts receivable rose to $269.6 from $88.5, primarily due to shipment volume and timing. Inventory increased to $161.3 from $142.0; work in process increased substantially.
- Management stated that cash, investments, expected cash generation and available borrowing were expected to meet capital requirements for at least the next 12 months. Cirrus Logic does not pay dividends and intends to retain earnings for reinvestment.
Material changes and management commentary
- Portable Audio sales drove growth: Q2 revenue rose 49% to $383.4, primarily on shipments of new digital headset solutions and a boosted amplifier. Non-Portable Audio and Other revenue declined 9% to $45.2, primarily due to lower DAC sales.
- For the six-month period, Portable Audio revenue increased 22% to $599.5; management cited product shipments, partly offset by a known market-share shift at a large Android customer reverting to dual sourcing. Non-Portable Audio and Other revenue declined 8% to $88.6.
- Management attributed higher gross margin to favorable product mix. R&D expense rose 12% for both the quarter and six-month period, including increased employee costs and headcount; SG&A rose 7% in Q2 and 6% year to date.
- Apple represented approximately 78% of Q2 sales and 74% of six-month sales, compared with 63% in each prior-year comparable period. The ten largest end customers accounted for 92% of Q2 sales and 91% year to date.
- The effective tax rate was 24.0% for Q2 and 24.5% year to date, versus 18.9% and 26.2%. Current-period tax benefits included foreign income taxed below the U.S. statutory rate and the U.S. R&D credit; increased unrecognized tax benefits partly offset these items.
Outlook, risks and unusual items
- The filing gives no specific revenue, earnings or margin guidance. Forward-looking statements are subject to risks and management undertakes no obligation to update them.
- Customer concentration is a principal risk: customers can reduce orders or switch suppliers, and pricing pressure may reduce revenue, margins and earnings. The filing also identifies international operating risks; Brexit could affect staffing, taxes, trade and regulatory requirements.
- Management reported no pending legal matter it believed would have a material adverse effect, while cautioning that adverse outcomes in legal proceedings could materially affect a particular period.
- Contingent consideration related to an acquisition was valued at $5.8 at quarter-end, with up to $10.0 payable if milestones are achieved. Revised shipment forecasts reduced the liability estimate by $3.6 in the six-month period, partly offset by a $0.2 fair-value charge recognized in R&D expense.
- The company recorded $12.5 of proceeds from a patent sale in the prior-year period; it also recorded $0.8 of expense for a negotiated legal-settlement adjustment in prior-year Q2. No comparable patent-agreement item was recorded in the current periods.
- Unrecognized tax benefits totaled $22.1; approximately $2.3 could decrease within 12 months due to a statute-of-limitations lapse. The company was not under audit in a major taxing jurisdiction.
Most important facts for investors to verify
- Whether the strong Q2 sales and margin performance is sustainable, given product-mix effects and the prior market-share shift at a major Android customer.
- Exposure to Apple and other large customers, including customer demand, product pricing and sourcing decisions.
- Collection of the unusually high quarter-end receivables and management of work-in-process inventory and operating cash flow.
- Debt availability and compliance with the revolving facility’s leverage and fixed-charge covenants.
- Potential effects of contingent-consideration milestone outcomes, tax uncertainties and Brexit-related developments.