Cirrus Logic, Inc. — FY2012 Form 10-K
Business context and period. Cirrus Logic designs fabless analog and mixed-signal integrated circuits, principally for audio and energy applications. This annual report covers the fiscal year ended March 31, 2012, a 53-week year; FY2011 ended March 26, 2011, and was a 52-week year. The filing also reports fourth-quarter FY2012 results. Revenue is reported in one segment, with audio and energy product categories.
Financial performance
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $426.8 million | $369.6 million |
| Gross profit / margin | $230.4 million / 54.0% | $202.0 million / 54.7% |
| Operating income / margin | $79.5 million / 18.6% | $83.3 million / 22.5% |
| Net income | $88.0 million | $203.5 million |
| Diluted EPS | $1.29 | $2.82 |
| Cash from operating activities | $83.2 million | $86.9 million |
- Revenue mix: Audio sales rose 32% to $350.7 million, mainly on portable audio products. Energy sales fell 27% to $76.1 million, primarily reflecting lower seismic sales. Overall sales increased 15%.
- Cash, liquidity, and debt: At year-end, cash and cash equivalents were $66.0 million and marketable securities totaled $118.8 million, for combined cash and investments of $184.8 million. Working capital was $278.6 million; current assets were $351.6 million and current liabilities $73.0 million. The company reported no debt arrangements at March 31, 2012.
- Investment and capital returns: Cash used for property, plant, and equipment was $35.9 million; additional technology investments were $6.6 million. The company repurchased $76.8 million of stock in FY2012, completing its $80 million program except for approximately $0.5 million of remaining authorization.
Changes, unusual items, and outlook
- Sales grew 15%, but gross margin slipped 0.7 percentage points and operating income declined about 5%, as operating expenses rose. R&D expense increased 34% to $85.7 million, with higher engineering headcount and development activity.
- FY2012 net income included an $8.0 million income-tax benefit. FY2011 net income was unusually elevated by a $119.3 million tax benefit, including release of valuation allowance; the year-over-year net income decline therefore does not reflect operating performance alone. FY2012 fourth-quarter net income of $50.8 million included a $39.5 million tax benefit, primarily from a valuation-allowance release.
- FY2012 gross margin was negatively affected by 0.5 percentage points by a production issue. Lower excess-and-obsolete inventory charges compared with FY2011 partly offset other margin pressures.
- Management’s long-term model targets annual revenue growth of 15%, gross margin of 55%, and operating profit of 20%. For FY2013, it anticipated sharply higher revenue in the latter part of the year as multiple new products reached full production, and gross margin in the mid-50% range. These are targets and expectations, not guaranteed results.
- After year-end, Cirrus entered into a $100 million unsecured revolving credit facility, with a $15 million letter-of-credit sublimit, maturing no later than April 18, 2013. It had not drawn on the facility through May 29, 2012. The facility includes financial covenants and other borrowing conditions.
Key risks and contingencies
- Customer concentration increased: Apple represented approximately 62% of FY2012 sales, versus 47% in FY2011; the ten largest end customers represented 74%. Distributor Avnet accounted for 15% of sales. Customers generally have no minimum-purchase obligations and may cancel or reschedule orders.
- Dependence on outsourced wafer fabrication, assembly, and testing creates capacity, yield, cost, and disruption risks. FY2012 year-end wafer purchase commitments were $46.3 million; total contractual obligations shown were $58.7 million.
- Inventory increased to $55.9 million from $40.5 million. Forecast errors, order changes, or production issues could lead to excess inventory, write-downs, or supply shortfalls.
- Other material risks include intense competition and price erosion, product-development and design-win execution, international and supply-chain exposure, intellectual-property claims, and reliance on key technical talent. Export sales were 88% of FY2012 net sales.
- A patent infringement lawsuit was settled for $100,000 and dismissed in March 2012. The company stated it was not party to any material pending litigation as of the balance-sheet date. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification checklist
- Assess the durability and customer concentration of audio growth, particularly sales tied to Apple and its contract manufacturers.
- Track FY2013 product ramps against management’s outlook, including resulting revenue, gross margin, and operating expenses.
- Review the drivers of the large tax benefits, remaining deferred tax assets and valuation allowance, and the comparability of reported net income across years.
- Monitor inventory, wafer and assembly commitments, the STATS ChipPAC capacity agreement and expected rebates, and any subsequent supply or production issues.
- Confirm the status, borrowing conditions, covenants, and expiration or renewal of the post-year-end credit facility.