Cirrus Logic, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2012, ended September 24, 2011; comparisons are with the periods ended September 25, 2010. Dollar amounts below are in millions unless noted.
Business context and results
Cirrus Logic develops analog and mixed-signal integrated circuits for audio and energy applications. It reports one operating segment, with Audio Products and Energy Products as its two product lines.
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Net sales | $101.6 | $100.6 | $193.8 | $182.5 |
| Gross margin | 53.5% | 56.4% | 52.7% | 56.7% |
| Operating income | $17.9 | $29.1 | $32.2 | $46.6 |
| Net income | $11.2 | $30.9 | $20.4 | $48.5 |
| Diluted EPS | $0.17 | $0.42 | $0.30 | $0.67 |
| Operating cash flow | Not separately stated | Not separately stated | $37.1 | $36.1 |
Financial position, liquidity and cash flow
- At September 24, 2011, cash and cash equivalents were $39.3; current marketable securities were $100.1, long-term marketable securities $8.7, and restricted investments $2.9.
- Working capital, including cash, was $212.8, versus $267.4 at March 26, 2011. Current assets were $278.4 and current liabilities $65.6.
- Total assets were $460.7 and stockholders’ equity $388.5. Long-term obligations were $6.5; the filing does not clearly identify these as debt. No borrowings are separately reported in the supplied balance-sheet text.
- Six-month investing cash flow was positive $41.3, primarily reflecting $63.3 net proceeds from marketable-security sales and maturities. Capital spending on property, equipment and software was $18.4, including headquarters construction and adjacent land/building purchases; technology investments were $6.4.
- Six-month financing cash flow was negative $76.1, principally from $76.8 of share repurchases. Cash increased $2.2 to $39.3.
- The company expects its existing resources and future operating cash flows to support at least 12 months of operations. It expected its new Austin headquarters to be completed in summer 2012, with estimated construction costs of $30 and an additional $9 for furniture, fixtures and equipment, funded internally.
Material changes and management commentary
- Q2 sales were up 1%; six-month sales rose 6%. Audio revenue increased 18% in Q2 and 24% for six months, largely on portable-product sales. Energy revenue fell 39% and 32%, respectively, including lower seismic-product sales.
- Gross margin declined year over year. Management attributed pressure to product mix and continuing effects of a production issue involving a new audio device that ramped to high-volume production in March 2011.
- Research and development expense rose 27% in Q2 and 26% for six months, mainly from higher headcount and related costs and software maintenance. SG&A rose 9% and 7%, respectively, mainly from increased headcount and associated expenses.
- Net income fell substantially. Lower operating income and a shift from prior-year income tax benefits to current-year tax expense contributed; FY2012 tax expense was primarily non-cash, with effective rates of 37.5% for Q2 and 37.1% for six months.
- Apple represented 59% of Q2 sales and 57% of six-month sales, versus 44% and 40% in the prior-year periods. The ten largest end customers represented 74% of Q2 and 71% of six-month sales. Avnet represented 18% in both FY2012 periods.
- Export sales, principally to Asia, were 88% of Q2 and 87% of six-month sales. Sales are primarily denominated in U.S. dollars; the company reported it had not entered foreign-currency forward or option contracts.
Guidance, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management stated that available capital resources and expected future operating cash flow should fund operations for at least the next 12 months.
- A September 2011 patent-infringement suit names Cirrus Logic and 17 other defendants. Plaintiffs seek unspecified monetary damages, potentially including treble damages; the company said it could not predict the outcome or estimate potential liability.
- Customer and distributor concentration is a significant risk: customers may reduce orders or switch suppliers, and the filing notes customer agreements generally do not require minimum purchases. Apple concentration increased materially year over year.
- The company repurchased 4.9 million shares for $76.8 during the first six months at an average $15.63 per share. The $80 million authorization was nearly exhausted; approximately $0.5 remained as of September 24. No cash dividends had been paid, and management intended to retain earnings.
- Prior-year comparisons included a $4.0 patent-sale recovery, a $0.5 investment impairment, a $0.4 restructuring charge, and $0.135 of litigation settlement expense. These items were absent from FY2012 results and affect comparability.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It said market-risk exposure had not changed significantly from its prior annual report.
Important facts for investors to verify
- Whether audio-product growth and energy-product trends persist, and how product mix and the prior production issue affect gross margin.
- Whether Apple and other major customers continue ordering at current levels, given the high revenue concentration.
- The progress and eventual exposure, if any, from the patent litigation, for which damages are unquantified.
- Headquarters project spending against the estimated $30 construction and $9 equipment budgets, alongside ongoing capital and technology investment.
- The composition and terms of the $6.5 in long-term obligations, which are not clearly described in the supplied filing text.
- Cash generation and working-capital needs as planned inventory builds support anticipated demand; inventory rose to $49.6 from $40.5 at fiscal year-end.