Cirrus Logic, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2013, ended December 29, 2012. Unless otherwise noted, amounts are in U.S. dollars; financial statement amounts below are in millions. The company designs analog and mixed-signal integrated circuits, with audio and energy products reported in one segment.
Financial performance
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Net sales | $310.1 | $122.4 | $602.9 | $316.2 |
| Gross margin | $158.1; 51.0% | $66.0; 54.0% | $311.6; 51.7% | $168.1; 53.2% |
| Operating income | $106.1 | $26.4 | $167.0 | $58.6 |
| Net income | $67.9 | $16.7 | $110.2 | $37.2 |
| Diluted EPS | $0.99 | $0.25 | $1.60 | $0.55 |
- Q3 sales increased 153% year over year; nine-month sales increased 91%. Audio revenue was $300.0 million in Q3 and $558.7 million year to date, up 185% and 115%, respectively. Energy revenue declined 40% in Q3 and 21% year to date.
- Profit growth substantially exceeded sales growth, while gross margin declined. Management attributed lower margins to production and supply-chain challenges following ramps of multiple new high-volume components, and to product mix.
- Research and development expense rose 28% in Q3 and 36% year to date; selling, general and administrative expense rose 15% and 20%, respectively.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $30.4 million, down from $51.9 million a year earlier. Management cited a $160.8 million net working-capital decrease, including higher receivables and inventory associated with expected demand and planned inventory builds.
- Investing cash flow was $29.4 million, including $22.2 million cash proceeds from the Apex asset sale and net proceeds from marketable securities; purchases of property, equipment and software were $48.6 million. Financing cash flow was negative $38.3 million, primarily reflecting $47.9 million of share repurchases.
- At period end, cash and cash equivalents were $87.5 million and marketable securities were $60.7 million. Current assets were $528.8 million versus current liabilities of $128.8 million. The company had no borrowings outstanding under its $100 million unsecured revolving credit facility and reported compliance with its financial covenants.
- The facility was entered into in April 2012 and matures on the first anniversary of its closing date, subject to earlier termination provisions. The filing says management expects existing capital resources and future operating cash flow to support at least the next 12 months.
Material developments, outlook and risks
- Customer concentration: Apple represented approximately 91% of Q3 sales and 82% of nine-month sales, compared with 70% and 62% in the prior-year periods. The ten largest end customers accounted for 94% of Q3 sales and 88% year to date. The filing identifies reliance on a small number of customers as a material risk.
- Margin outlook: Management expected overall gross margin to remain in the low-50% range in Q4 FY2013 as it continued addressing production challenges. The filing does not provide specific sales or earnings guidance.
- Restructuring: The company committed to close its Tucson design center and move operations, including motor-control development, to Austin. The plan affected approximately 25 employees and relocated about 20 positions. It recorded a $3.5 million charge; $3.3 million remained accrued at December 29, with payments expected through calendar 2015.
- Asset sale and taxes: Cirrus sold certain Apex Precision Power assets for $26.1 million, receiving $22.2 million in cash and recording a $3.9 million note receivable due by August 2014. The sale enabled use of a capital-loss carryforward and contributed to a deferred-tax valuation-allowance release in Q2. The nine-month effective tax rate was 34.1%, versus 36.9% a year earlier.
- Capital allocation: A new $200 million share-repurchase program was announced in November. The company repurchased 1.5 million shares for $47.9 million during Q3, leaving approximately $152.6 million available under the program at quarter end. No cash dividends had been paid.
- Contingency: U.S. Ethernet Innovations sued Cirrus and two other companies, alleging infringement of five Ethernet-related patents and seeking unspecified damages, including potentially treble damages. Cirrus denied infringement and asserted the patents were invalid. Management could not estimate a possible loss or range, and said it did not then expect the proceedings to materially adversely affect financial condition; an unfavorable outcome could nevertheless materially affect results in a particular period.
- Other disclosed risks include dependence on third-party manufacturing and suppliers, customer order cancellations or rescheduling, product concentration, pricing pressure, and the possibility that supply constraints or production issues affect delivery and margins.
Key facts for investors to verify
- Whether production and supply-chain issues ease and gross margin tracks management’s low-50% Q4 expectation.
- Whether demand and orders from Apple and other major customers remain strong, given the high revenue concentration.
- Whether inventory and receivables convert to cash and operating cash flow improves after the significant working-capital investment.
- The timing and cash cost of the Tucson restructuring, and collection of the Apex sale note receivable.
- Developments in the Ethernet patent litigation and any change in the company’s ability to estimate potential exposure.