Cirrus Logic, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, three months ended June 30, 2012; comparable quarter ended June 25, 2011. The filing reports interim results, which are not necessarily indicative of full-year results. Cirrus Logic develops analog and mixed-signal integrated circuits for consumer and industrial markets.
Financial results
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales | $99.0 million | $92.2 million |
| Gross margin | $53.4 million; 54.0% | $47.7 million; 51.7% |
| Operating income | $10.5 million; about 10.6% of sales | $14.3 million; about 15.5% of sales |
| Net income | $6.9 million | $9.2 million |
| Diluted EPS | $0.10 | $0.13 |
| Operating cash flow | $(0.6) million | $10.6 million |
Revenue increased 7% year over year. Audio products grew 14% to $80.7 million, mainly on higher portable-product sales; energy products declined 14% to $18.3 million, primarily due to lower power amplifier and power meter sales. The gross-margin improvement largely reflected a production issue that had depressed the prior-year quarter, partly offset by energy-product mix and margin.
Operating expenses rose: research and development increased 33% to $24.9 million, primarily from higher headcount and product-development costs; selling, general and administrative expense increased 24% to $18.1 million, mainly from employee-related costs. The higher expenses contributed to lower operating and net income despite sales growth.
Liquidity, cash flow, and capital
At June 30, 2012, cash and cash equivalents were $84.3 million and marketable securities were $82.4 million. Current assets totaled $380.4 million and current liabilities $103.1 million. The company had no borrowings under its new $100 million unsecured revolving credit facility and reported compliance with its financial covenants. The facility includes a $15 million letter-of-credit sublimit; its stated maturity is the first anniversary of its April 19, 2012 closing date, subject to earlier termination provisions.
Operating cash flow was negative $0.6 million, chiefly reflecting working-capital use and a $40.9 million increase in inventory; management said the inventory build reflected expected higher product demand. Investing activities provided $17.9 million, including net proceeds from marketable securities, while capital spending included headquarters construction and product-testing equipment. Financing activities provided $1.0 million from stock issuance; the comparable prior-year period included $56.5 million of share repurchases.
The Austin headquarters project was estimated to cost approximately $46.8 million in total. Cirrus had paid $35.0 million through June 30, with approximately $11.8 million remaining, including about $3 million accrued. Management expected the remaining costs to be funded internally. The company paid no cash dividends and said it expected existing resources and future operating cash flow to support operations for at least the next 12 months.
Material changes, outlook, and risks
- Customer concentration increased: Apple, through multiple contract manufacturers, represented approximately 59% of sales, versus 53% in the year-earlier quarter. The ten largest end customers represented 72%, versus 68%. Avnet represented 13% of sales, down from 20%.
- Export sales, principally to Asia, were 86% of sales in both periods. Sales were primarily denominated in U.S. dollars; the company reported no foreign-currency hedging contracts.
- No formal revenue or earnings guidance is provided in the filing. Management cited expected increased product demand and planned inventory builds, and anticipated adequate liquidity for at least 12 months.
- Key risks include dependence on a limited number of customers and products, customers’ ability to cancel or reschedule orders on short notice, and manufacturing and supply-chain concentration in Taiwan and the broader Pacific Rim.
- U.S. Ethernet Innovations, LLC sued Cirrus and two other defendants, alleging infringement of four Ethernet-related patents and seeking unspecified damages, including possible treble damages. Cirrus denied infringement and sought a declaration that the patents were invalid and not infringed. Management could not estimate possible loss; it did not then expect the proceedings to materially harm financial condition, while noting an unfavorable resolution could affect results.
- The company adopted an accounting update on comprehensive-income presentation; it affected presentation only and had no material financial impact. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the sales growth and anticipated demand—particularly in audio products—continued, and whether the large inventory build converted to sales without write-downs.
- Whether Apple and other major customers maintained orders, given the unusually high customer concentration and limited purchase commitments.
- Whether expense growth and lower operating income persisted relative to revenue growth.
- Actual remaining headquarters-project costs and cash needs, and continued compliance with revolving-credit covenants.
- Developments and potential financial exposure in the Ethernet patent litigation; the filing provides no clear estimate of possible loss.