Cirrus Logic, Inc. — Form 10-Q summary
Business context and period. Cirrus Logic develops analog and mixed-signal integrated circuits for consumer audio and industrial markets. This unaudited report covers the second quarter and first six months of fiscal 2013, ended September 29, 2012; comparisons are to the corresponding fiscal 2012 periods.
Financial performance
| Metric | Three months ended Sep. 29, 2012 | Prior-year quarter | Six months ended Sep. 29, 2012 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $193.8m | $101.6m | $292.8m | $193.8m |
| Gross margin | $100.1m; 51.7% | $54.4m; 53.5% | $153.5m; 52.4% | $102.1m; 52.7% |
| Operating income | $50.4m | $17.9m | $60.9m | $32.2m |
| Net income | $35.4m | $11.2m | $42.4m | $20.4m |
| Diluted EPS | $0.51 | $0.17 | $0.61 | $0.30 |
- Quarterly sales rose 91% year over year; six-month sales rose 51%. Growth was driven by audio products, especially portable audio. Energy product sales declined.
- Quarterly operating margin was about 26%, versus 18% a year earlier; six-month operating margin was about 21%, versus 17%.
- Six-month operating cash flow was negative $48.8m, compared with positive $37.1m a year earlier, principally reflecting working-capital investment, including higher receivables and inventory.
- At September 29, cash and cash equivalents were $67.8m and marketable securities were $66.7m. Current assets were $483.3m and current liabilities $139.8m. No borrowings were outstanding under the $100m revolving facility; the company reported compliance with its covenants. The filing does not report other outstanding debt.
Changes, outlook, and risks
- Margins and operations: Gross margin declined year over year, as new high-volume product ramps created supply-chain challenges and higher production costs. Management expected to work through those production issues during the December quarter, but forecast overall gross margins in the low-50% range due to product mix and pricing pressure.
- Customer concentration: Apple represented approximately 79% of quarterly sales and 72% of six-month sales, versus 59% and 57% in the comparable periods. The ten largest end customers accounted for 87% of quarterly and 80% of six-month sales. Management notes customers may change or cancel orders on short notice.
- Inventory and investment: Inventory increased to $144.9m from $55.9m at fiscal year-end; management attributed the build to expected demand. Six-month purchases of property, equipment and software were $28.9m, including construction of the new Austin headquarters and product-testing equipment.
- Asset sale and taxes: The company completed the sale of certain Apex Precision Power assets for $26.1m, receiving $22.2m cash and recording a $3.9m note due by August 2014. The sale enabled use of a capital-loss carryforward and release of a deferred-tax valuation allowance; the six-month effective tax rate was 30.6%, versus 37.1%.
- Liquidity outlook: Management expected existing resources and future operating cash flow to support operations for at least 12 months. It planned to fund the remaining headquarters project costs internally.
- Contingency: U.S. Ethernet Innovations sued Cirrus Logic and two other defendants, alleging infringement of four Ethernet-related patents; an amended complaint added a fifth patent. The plaintiff seeks unspecified damages, including possible treble damages. Cirrus denied infringement and sought declarations that the patents were invalid and not infringed. Management could not estimate potential loss, but did not believe the proceedings would materially affect financial condition based on information then available.
- Other risks: The filing highlights reliance on a limited number of customers and products, third-party manufacturing and supply, product acceptance, pricing pressure, and order volatility. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether demand, particularly from Apple and for portable audio products, remains strong and customer concentration changes.
- Whether supply-chain ramp costs ease as management expected and gross margins remain in the low-50% range amid mix and pricing pressures.
- Whether elevated inventory converts into sales and operating cash flow improves after the substantial working-capital outflow.
- Progress and remaining cost of the Austin headquarters project, and collection of the $3.9m Apex-sale note.
- Developments in the Ethernet patent litigation, for which the filing provides no clear estimate of possible loss.