Cirrus Logic, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 26, 2015, the second quarter of fiscal 2016; comparisons are with the quarter ended September 27, 2014. The filing also reports the six months ended September 26, 2015. Amounts below are in U.S. dollars.
Business context and results
Cirrus Logic develops analog and mixed-signal integrated circuits for audio, industrial, and energy-related applications. It reports one operating segment and two product lines: Portable Audio, and Non-Portable Audio and Other.
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $306.8 million; up 46% year over year | $589.4 million; up 63% |
| Gross profit / margin | $142.2 million / 46.4%, versus 47.8% | $274.7 million / 46.6%, versus 48.5% |
| Operating income / margin | $44.1 million / 14.4%, versus $18.1 million | $94.1 million / 16.0%, versus $34.0 million |
| Net income | $34.9 million, versus $0.9 million | $68.2 million, versus $11.1 million |
| Diluted EPS | $0.53, versus $0.01 | $1.03, versus $0.17 |
| Cash from operating activities | Six-month period: use of $0.03 million, versus use of $1.7 million |
Material changes and financial position
- Portable Audio sales were $257.2 million for the quarter, up 57%; Non-Portable Audio and Other sales were $49.6 million, up 6%. Management attributed growth primarily to increased shipments of smart codecs and amplifiers, the Wolfson acquisition, and organic growth.
- Gross margin declined year over year, primarily because of product mix, including higher volume of lower-margin products. R&D and SG&A increased, mainly reflecting the acquired Wolfson business, higher staffing costs, and development spending.
- At September 26, cash and cash equivalents were $56.3 million and marketable securities totaled $108.9 million. Total debt was $160.4 million, down from $180.4 million at fiscal year-end. Current assets were $515.9 million and current liabilities $187.9 million.
- Six-month operating cash flow was nearly breakeven despite a $129.6 million working-capital cash outflow, principally from accounts receivable and inventory. Investing activities provided $13.2 million; financing activities used $33.2 million. Cash declined $20.1 million during the period.
- Inventory rose to $143.9 million from $84.2 million, primarily due to production ramps ahead of customer demand. Receivables increased to $169.4 million from $112.6 million.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance is provided. Management said existing cash, investments, expected cash generation, and credit resources should meet capital requirements for at least 12 months, while noting additional funding could be required or elected sooner.
- The $250 million senior secured revolving facility matures August 29, 2017; $160.4 million was borrowed at quarter-end. The company reported compliance with its covenants, including a maximum leverage ratio of 2.00 to 1.00 and a minimum cash-and-cash-equivalents covenant of $100 million.
- Customer concentration is substantial: Apple represented 63% of quarterly and six-month sales, down from 73% in the comparable periods; Samsung represented 18%. The ten largest end customers accounted for 89% of sales. Management warns that customer losses, order reductions, and pricing pressure could materially affect revenue and profitability.
- A $12.5 million patent sale related to LED lighting was recorded in the first quarter as a recovery of prior costs; the company exited LED lighting. A negotiated legal-settlement adjustment resulted in $0.8 million of second-quarter expense. The six-month operating-expense line for the patent agreement and other was a net $11.7 million credit.
- A one-time $4.6 million tax benefit related to R&D credit carryforwards contributed to lower fiscal 2016 tax rates. Second-quarter effective tax rate was 18.9%, versus 75.0% a year earlier.
- Two small technology companies were acquired during the quarter for approximately $37.2 million net of cash acquired; purchase accounting was still under evaluation. The acquisitions were intended to expand software capabilities. A Level 3 contingent-consideration liability of $8.6 million was recorded for one acquisition.
- In October 2015, the board authorized an additional $200 million share-repurchase program, on top of $32.5 million remaining under the prior authorization. The company repurchased $19.2 million of shares in the six-month period.
- Management said it knew of no pending legal matters expected to have a material adverse effect, while cautioning that outcomes in legal proceedings remain uncertain. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether sales growth and customer demand can be sustained, given reliance on Apple and other major customers and the elevated inventory build.
- How product mix and pricing pressure affect gross margins as shipment volumes change.
- The definitions and headroom under the credit facility’s cash and leverage covenants, alongside reported cash, securities, and borrowings.
- The final purchase accounting and milestone assumptions for the recent acquisitions, including contingent consideration and related amortization.
- The persistence of earnings excluding the patent-sale credit and one-time tax benefit, and the company’s ability to convert earnings into operating cash flow.