Cirrus Logic, Inc. — Form 10-Q Summary
Business context and reporting period: Cirrus Logic develops analog and mixed-signal integrated circuits for audio and energy markets. This filing covers the fiscal third quarter ended December 28, 2013, and the first nine months of fiscal 2014; comparisons are to the periods ended December 29, 2012. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Net sales | $218.9 million | $310.1 million | $564.7 million | $602.9 million |
| Gross profit / margin | $103.8 million / 47.4% | $158.1 million / 51.0% | $282.8 million / 50.1% | $311.6 million / 51.7% |
| Operating income / margin | $52.8 million / 24.1% | $106.1 million / 34.2% | $135.0 million / 23.9% | $167.0 million / 27.7% |
| Net income | $41.5 million | $67.9 million | $95.5 million | $110.2 million |
| Diluted EPS | $0.63 | $0.99 | $1.45 | $1.60 |
| Operating cash flow | Not separately provided | Not separately provided | $163.0 million | $30.4 million |
Cash, liquidity and debt: At December 28, 2013, cash and cash equivalents were $74.7 million and marketable securities totaled $252.9 million, for combined cash and securities of $327.6 million. Current assets were $528.8 million and current liabilities $92.3 million. Total liabilities were $97.4 million. The filing does not provide a clear separate debt balance. Management said existing capital resources and expected operating cash flow should support operations for at least the next 12 months.
Cash flows and capital allocation: Nine-month investing cash outflow was $118.2 million, including $82.6 million of net marketable-securities purchases, $12.8 million for property, equipment and software, and the Acoustic Technologies acquisition. Financing cash outflow was $36.5 million, including $42.4 million of share repurchases. Cash increased $8.3 million to $74.7 million. The company expected $18–$20 million of additional Austin facility expansion costs over the next year.
Material changes and management commentary
- Quarterly sales fell 29% year over year; nine-month sales fell 6%. Audio sales declined 31% in the quarter and 5% year to date, primarily because of lower portable-audio average selling prices. Energy sales rose 23% in the quarter, but declined 22% year to date, partly reflecting the prior sale of Apex assets and lower sales in several product categories.
- Gross margin declined 3.6 percentage points in the quarter and 1.6 points year to date, primarily from pricing changes and product mix. Quarterly operating income fell about 50% and net income fell about 39% year over year.
- R&D expense rose 10% in the quarter and 8% year to date, principally reflecting higher headcount and related costs and CAD software investment. SG&A was broadly stable.
- Operating cash flow increased substantially from the prior-year period, when working-capital changes were a significant use of cash. Current-period inventory was $70.0 million, down from $119.3 million at March 30, 2013; receivables rose to $109.5 million from $69.3 million.
- On October 1, 2013, Cirrus acquired Acoustic Technologies for approximately $20.4 million net, adding embedded voice-processing technology. The purchase-price allocation remained under evaluation; pro forma results were not presented because management considered them not materially different.
- The effective tax rate was 21.6% for the quarter and 29.5% year to date, versus 36.1% and 34.1%, respectively, in the comparative periods. The current-period rate benefited from a $6.3 million Extraterritorial Income Exclusion Act tax benefit and the federal research credit. Tax expense was primarily non-cash due to utilization of U.S. net operating losses.
Outlook, risks and contingencies
- The filing gives no specific revenue, earnings or margin guidance. Management expected to fund planned facility spending from existing cash resources and anticipated maintaining operations for at least 12 months.
- Customer concentration is substantial: Apple represented approximately 84% of quarterly sales and 81% of nine-month sales. The ten largest end customers represented about 90% and 89%, respectively. Management highlights customer loss, reduced orders, and pricing pressure as significant risks; portable-audio ASP declines and product-mix changes were already affecting results.
- A shareholder derivative suit alleging state-law claims against officers and directors remained pending; Cirrus was named as a nominal defendant. Management said it could not estimate potential loss, did not believe the case would materially affect financial condition based on information available, but noted an unfavorable resolution could affect results. A related securities class action was dismissed with prejudice and was not appealed. A separate patent case was settled for $0.7 million.
- The Tucson design-center restructuring was substantially completed; a remaining accrual of approximately $0.5 million was expected to be completed through calendar 2015. A new sublease generated a year-to-date restructuring credit of approximately $0.6 million.
- Management reported no significant change in market-risk exposure and concluded disclosure controls were effective as of December 28, 2013.
Important facts for investors to verify
- Whether Apple’s share of sales and ongoing pricing pressure remain elevated, and how they affect revenue, gross margin and earnings.
- Subsequent quarterly sales and margin trends, particularly portable-audio ASPs and product mix.
- Completion of Acoustic Technologies’ purchase-price allocation and the acquisition’s contribution to results.
- Actual spending on Austin facilities versus the expected $18–$20 million, alongside liquidity and operating cash generation.
- Developments in the shareholder derivative litigation and any change in management’s assessment of potential loss.
- Sustainability of the reported tax benefits, including the research credit and the $6.3 million exclusion-related benefit.