Cirrus Logic, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended March 30, 2013. The filing also reports fourth-quarter results; fiscal Q4 2013 is the quarter ended March 30, 2013. Fiscal 2012 had 53 weeks, compared with 52 weeks in FY2013.
Business context
Cirrus Logic designs high-precision analog and mixed-signal integrated circuits, primarily for audio and targeted energy applications. It operates as a fabless semiconductor company and relies on third parties for most manufacturing. Audio and energy are product lines within one reportable segment.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $809.8 million | $426.8 million |
| Gross margin | 48.8% | 54.0% |
| Operating income | $200.8 million | $79.5 million |
| Net income | $136.6 million | $88.0 million |
| Diluted EPS | $2.00 | $1.29 |
| Cash provided by operating activities | $160.8 million | $83.2 million |
- Audio sales increased 115% to $754.8 million, primarily on portable audio products. Energy sales declined 28% to $55.0 million.
- FY2013 gross margin fell 5.2 percentage points, primarily due to inventory write-downs and unfavorable product mix. Excess and obsolete inventory charges rose $25.5 million year over year; the filing attributes much of the increase to reduced customer forecasts for a high-volume product.
- Research and development expense increased 33% to $114.1 million. Selling, general and administrative expense rose 18% to $77.0 million. Operating expenses included $3.3 million of net restructuring and other costs.
- Net income included a $64.6 million income tax provision, versus an $8.0 million tax benefit in FY2012. The prior-year result included a significant deferred-tax valuation-allowance release.
- Operating cash flow increased, but growth absorbed working capital, especially inventory and accounts receivable. Inventory rose to $119.3 million from $55.9 million; receivables increased to $69.3 million from $44.2 million.
- At year-end, cash and cash equivalents were $66.4 million and marketable securities were $170.1 million; working capital was $351.5 million. Total assets were $651.3 million and stockholders’ equity was $548.2 million.
- The company reported no borrowings under its $100 million revolving facility; it expired April 19, 2013 and was not renewed. The balance sheet reported $10.1 million of long-term liabilities. No material off-balance-sheet arrangements were reported.
- Investing cash outflow was $84.8 million, including $52.9 million of capital expenditures; financing cash outflow was $75.6 million, including $86.1 million for share repurchases. The company had $114.4 million remaining under its $200 million repurchase authorization at year-end.
Fourth-quarter results
FY2013 Q4 sales were $206.9 million, gross profit was $83.6 million, and net income was $26.4 million, or $0.39 diluted EPS. Compared with FY2012 Q4, sales increased from $110.6 million, while net income declined from $50.8 million; the prior-year quarter included a $39.5 million tax benefit. Q4 sales and net income also declined from FY2013 Q3, when they were $310.1 million and $67.9 million, respectively.
Outlook, risks and unusual items
- Management’s long-term goals are a 20% operating margin and average year-over-year revenue growth of 15%. It expected smartphone-market pricing pressure to bring gross margins into the mid-40% range in the latter half of the upcoming calendar year, and anticipated upcoming-fiscal-year revenue pressure from lower average selling prices on certain audio products. No specific near-term revenue forecast was provided.
- Customer concentration is pronounced: Apple represented approximately 82% of FY2013 sales, up from 62% in FY2012; the ten largest end customers represented 89%, versus 74%. This creates material exposure to customer order changes, pricing demands and product transitions.
- Other key risks include reliance on third-party foundries and Asian manufacturing, supply constraints, product defects, inventory forecasting, competition and price erosion, and dependence on timely product development. Export sales were 94% of total sales.
- Unusual items included the $3.5 million Tucson restructuring charge, closure of the Tucson design center, and sale of Apex-related assets for $26.1 million, including $22.2 million cash and a $3.9 million note receivable. The company also completed its new Austin headquarters, with approximately $58.3 million in total facility and related costs, and anticipated another $15–$20 million for Austin expansion.
- Litigation included an Ethernet patent-infringement suit and shareholder securities and derivative actions. Management said it could not meaningfully estimate possible losses; it did not believe, based on available information, that the cases would materially adversely affect financial condition.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls at year-end.
Important facts for investors to verify
- Whether sales and margins can be sustained given Apple’s 82% sales concentration and the disclosed pricing pressure.
- Whether inventory levels, especially finished goods, convert to demand without further write-downs or cash-flow strain.
- How FY2014 revenue and gross margins compare with management’s stated pricing expectations and long-term goals.
- Realizability of deferred tax assets and the effect of future tax-allowance changes; net deferred tax assets were $81.6 million at year-end.
- Remaining repurchase authorization, planned Austin expansion spending, and liquidity after the revolving facility expired without renewal.
- Developments and potential financial exposure in the patent and shareholder litigation; the filing does not provide a clear loss estimate.