Cirrus Logic, Inc. — FY2014 Form 10-K
Business context and reporting period. Cirrus Logic designs fabless analog and mixed-signal integrated circuits, primarily for audio and targeted energy applications. This annual report covers the fiscal year ended March 29, 2014 (FY2014); fiscal 2013 ended March 30, 2013. The filing also reports FY2014 fourth-quarter results. The company has one reportable segment. Audio represented about 94% of FY2014 sales.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $714.3 million | $809.8 million |
| Gross profit / gross margin | $356.2 million / 50% | $395.2 million / 49% |
| Operating income / margin | $155.0 million / 22% | $200.8 million / 25% |
| Net income / diluted EPS | $108.1 million / $1.65 | $136.6 million / $2.00 |
| Operating cash flow | $228.0 million | $160.8 million |
| Cash, cash equivalents and marketable securities | $384.5 million | $236.5 million |
| Working capital | $392.8 million | $351.5 million |
At year-end, total liabilities were $87.4 million, including $82.5 million of current liabilities; the company reported no outstanding borrowings. FY2014 investing cash outflow was $220.3 million, including $182.5 million of net marketable-security purchases, $20.4 million for the Acoustic acquisition and $15.1 million of capital expenditures. Financing cash outflow was $42.2 million, including $52.1 million of share repurchases. The company repurchased 2.6 million shares during the year and had $62.3 million remaining under its authorization.
Fourth-quarter FY2014 sales were $149.7 million, gross profit was $73.4 million and net income was $12.6 million (diluted EPS $0.20), compared with $206.9 million, $83.6 million and $26.4 million ($0.39 diluted EPS), respectively, in fourth-quarter FY2013.
Material changes versus FY2013
- Sales declined 12%, primarily as audio revenue fell 12% to $667.7 million, reflecting lower portable-audio average selling prices. Energy sales declined 15% to $46.6 million, mainly because revenue from products associated with the Tucson asset sale was no longer included.
- Gross margin improved one percentage point to 50%. FY2013 included a $25.5 million excess-and-obsolete inventory charge; FY2014 had no significant such charge. Sales of previously written-down inventory contributed $12.2 million to FY2014 gross margin.
- Operating income fell 23% and net income fell 21%, while R&D spending rose 11% to $126.2 million, reflecting higher engineering headcount and related costs.
- Operating cash flow increased to $228.0 million, helped by a $49.6 million reduction in inventory. Year-end inventory declined to $69.7 million from $119.3 million.
- On October 1, 2013, Cirrus acquired Acoustic Technologies for approximately $20.4 million net of cash obtained, adding voice-processing technology and employees.
Outlook, commentary, risks and unusual items
- Management expected FY2015 revenue to be relatively flat versus FY2014, citing changes in portable-audio pricing. Long-term gross-margin expectations were in the mid-40% range, with operating profit of approximately 20% of sales.
- Customer concentration is substantial: Apple represented approximately 80% of FY2014 sales, and the ten largest end customers represented 88%. Orders are generally short-term and can be changed or cancelled with limited penalty.
- Other key risks include portable-audio pricing pressure and product concentration; competition and technology shifts; reliance on third-party foundries and Asian manufacturing; inventory forecasting and product defects; and international, supply-chain and cybersecurity risks.
- After year-end, Cirrus agreed to a recommended cash offer for Wolfson Microelectronics of £2.35 per share, valuing its share capital at approximately £291 million (about $488 million). Completion was subject to approvals and other conditions and was expected in the second half of calendar 2014. The proposed funding combined existing cash and a $225 million secured revolving facility. The facility matures no later than January 23, 2015, has financial covenants, and is secured by substantially all company assets, subject to exclusions. Cirrus also entered a nine-month currency hedge for the offer.
- FY2014 included a $0.7 million patent settlement expense and a $0.6 million restructuring credit. The Ethernet patent matter was settled; a securities class action was dismissed with prejudice and a derivative case was dismissed without prejudice.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management reported effective disclosure controls and internal controls as of year-end.
Important facts for investors to verify
- Whether the FY2015 flat-revenue outlook and long-term margin targets were achieved, particularly given portable-audio pricing and customer demand.
- Whether customer and product concentration changed, especially Apple’s share of sales and the durability of design wins.
- Whether inventory levels, write-downs and gross margins remained consistent with management’s expectations.
- The final status, total funding cost, covenant compliance and integration results of the proposed Wolfson acquisition; the filing describes it as pending at the report date.
- Cash availability after acquisition funding, the facility’s near-term maturity and refinancing needs, and planned Austin expansion spending of $18–$20 million over the following year.