Cirrus Logic, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended March 26, 2016. The filing also reports fourth-quarter results; FY2016 Q4 is the quarter ended March 26, 2016. Amounts below are in U.S. dollars.
Business context
Cirrus Logic designs high-performance, low-power analog and mixed-signal integrated circuits for audio and voice processing. Its product lines are Portable Audio and Non-Portable Audio and Other. It operates as a fabless semiconductor company, relying on third parties for wafer fabrication, assembly and testing.
Financial results and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $1,169.3 million | $916.6 million |
| Gross profit / margin | $554.8 million / 47% | $425.7 million / 46% |
| Operating income / margin | $180.2 million / 15% | $108.8 million / 12% |
| Net income | $123.6 million | $55.2 million |
| Diluted EPS | $1.87 | $0.85 |
| Operating cash flow | $155.3 million | $163.5 million |
- FY2016 revenue increased 28%. Portable Audio revenue rose 34% to $989.1 million, driven mainly by smart codecs and boosted amplifiers; Non-Portable Audio and Other rose 2% to $180.2 million.
- FY2016 R&D expense rose 36% to $269.2 million, reflecting increased headcount and product development investment. SG&A rose 18% to $117.1 million.
- Q4 revenue was $232.0 million, gross profit $115.3 million, net income $14.0 million and diluted EPS $0.21. Compared with FY2015 Q4, revenue declined from $255.2 million and net income from $21.3 million. Q4 revenue also declined from $347.9 million in FY2016 Q3.
- Operating cash flow was $155.3 million, down from $163.5 million. Management cited a $102.5 million increase in working capital, primarily from higher inventory and lower accounts payable.
- At year-end, cash and cash equivalents were $168.8 million; short- and long-term marketable securities totaled $81.2 million. Working capital was $378.0 million. Debt was $160.4 million under a $250 million secured revolver maturing August 29, 2017; the company reported compliance with its covenants.
- Total assets were $1,181.9 million and stockholders’ equity was $859.5 million. Capital expenditures and technology investments were approximately $46.1 million.
Changes, outlook and material items
- Compared with FY2015, gross margin improved by about one percentage point, principally because FY2016 did not include the prior-year acquisition-related inventory fair-value adjustment. FY2015 results also included $18.1 million of acquisition-related costs.
- Management forecast FY2017 year-over-year revenue growth above its long-term 15% target, citing new products and share gains with existing and new customers. Long-term gross-margin target remained 46%–48%, with operating profit of approximately 20%.
- FY2016 operating expenses included an $11.7 million net credit in “Patent agreement and other,” principally from $12.5 million received for selling certain LED-lighting patents, partly offset by legal-settlement adjustment expenses. The company said it would no longer engage in LED lighting.
- FY2016 included $36.8 million of acquisitions aimed at broadening software capabilities. Management anticipated up to $20 million in costs over the following year for the Edinburgh office build-out.
- Revenue concentration remains pronounced: Apple accounted for approximately 66% of FY2016 sales, down from 72% in FY2015; Samsung represented approximately 15%. The ten largest end customers represented 89% of sales.
- Key risks include customer concentration and order volatility, pricing pressure and competition, reliance on third-party manufacturing capacity, inventory forecasting and obsolescence, product-development execution, international exposure, and debt and covenant obligations. Management noted that backlog is a weak indicator beyond the short term.
- The company changed distributor revenue recognition in Q4 FY2016 to recognize revenue upon delivery when price is fixed, less estimated returns; it reported $5.4 million of additional FY2016 sales primarily related to this change. It also early adopted a deferred-tax classification standard prospectively. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether FY2017 revenue growth, gross-margin and operating-profit expectations were achieved, and the extent to which results depended on product ramps or customer share gains.
- Whether Apple and Samsung concentration, customer purchasing patterns, and portable-audio pricing pressure changed materially.
- Whether inventory growth and working-capital use reversed, and whether inventory write-downs or supply constraints affected margins.
- Debt repayment/refinancing and covenant headroom ahead of the revolver’s August 2017 maturity; assess liquidity including cash held by foreign subsidiaries.
- The sustainability of earnings excluding the patent-sale recovery and other unusual or acquisition-related items, and the effect of the distributor revenue-recognition change.
- Returns and margin impact from the software and MEMS microphone investments, acquisitions, and Edinburgh facility commitments.