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 second quarter and first six months of fiscal 2014, ended September 28, 2013; comparisons are with the periods ended September 29, 2012. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Three months 2013 | Three months 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $190.7 | $193.8 | $345.8 | $292.8 |
| Gross profit | $99.4 | $100.1 | $178.9 | $153.5 |
| Gross margin | 52.2% | 51.7% | 51.7% | 52.4% |
| Operating income | $50.7 | $50.4 | $82.2 | $60.9 |
| Net income | $33.4 | $35.4 | $54.0 | $42.4 |
| Diluted EPS | $0.50 | $0.51 | $0.82 | $0.61 |
| Operating cash flow | Not presented quarterly | $91.1 | $(48.8) |
- Quarterly comparison: Revenue decreased 2%; net income fell about 6%. Gross margin improved to 52.2% from 51.7%, while operating income was broadly flat.
- Six-month comparison: Revenue increased 18% and net income increased about 27%. Gross margin declined to 51.7% from 52.4%; diluted EPS rose to $0.82 from $0.61.
- Revenue mix: Second-quarter audio revenue rose 1% to $179.9 million; energy revenue fell 32% to $10.8 million. First-half audio revenue grew 25% to $323.6 million, while energy revenue declined 35% to $22.2 million. Energy declines reflected the prior sale of Apex Precision Power assets and lower sales in other energy products.
- Cash flow: First-half operating cash flow was $91.1 million, compared with a $48.8 million use of cash a year earlier. Investing activities used $77.6 million, mainly from net purchases of marketable securities; financing activities used $11.0 million, mainly for share repurchases.
Balance sheet and liquidity
- At September 28, 2013, cash and cash equivalents were $68.9 million and marketable securities totaled $239.7 million, for combined cash and securities of $308.6 million.
- Current assets were $519.6 million and current liabilities were $84.9 million; working capital was $434.6 million and the current ratio was approximately 6.1.
- Total assets were $699.2 million. The balance sheet lists no debt; total liabilities were $96.2 million, including $11.2 million of long-term liabilities.
- Inventory fell to $91.2 million from $119.3 million at March 30, 2013, while accounts receivable rose to $97.6 million from $69.3 million.
Management commentary, outlook, risks and unusual items
- Management attributed quarterly gross-margin improvement to releases of previously reserved inventory and vendor credits, partly offset by pricing changes. First-half margin was lower mainly because of pricing changes.
- Income tax expense was primarily non-cash due to utilization of U.S. net operating losses. The effective tax rate was 34.4% for the quarter and 34.5% for the first half; the prior-year comparison benefited from a deferred-tax valuation-allowance release.
- The company expects $15–$20 million of costs over several years for Austin facility expansion and expects to fund them from existing cash resources. Management said existing capital resources and anticipated operating cash flow should support operations for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- Customer concentration is substantial: Apple represented approximately 80% of quarterly sales and 79% of first-half sales. The ten largest end customers represented 89% and 88%, respectively. Management identifies customer loss, reduced orders and pricing pressure as significant risks; export sales were principally to Asia.
- A $0.7 million Ethernet patent settlement was recorded in the first quarter. Tucson design-center restructuring resulted in a $0.6 million first-half credit from revised facility estimates; $0.6 million remained accrued, with payments expected through 2015.
- A shareholder securities class action and a related derivative action remained pending. Management could not estimate possible losses, stated it did not believe the cases would materially adversely affect financial condition based on available information, and cautioned that an unfavorable resolution could affect results. The Ethernet patent matter was settled.
- On October 1, 2013, after quarter-end, Cirrus Logic acquired Acoustic Technologies, Inc. to strengthen embedded voice-processing technology. Purchase-price allocation was still under evaluation.
- The company repurchased 0.6 million shares for $12.7 million during the quarter at an average $21.07 per share; approximately $101.7 million remained authorized. No cash dividends were paid.
Most important facts for investors to verify
- Whether reliance on Apple and a small number of customers remains high, and how customer demand or pricing changes affect revenue and margins.
- Whether audio growth can offset continued energy-product declines and whether gross margins recover or face further pricing pressure.
- The cash-flow and working-capital trajectory, planned Austin expansion spending, and capital allocation between repurchases and business investment.
- The financial impact and final purchase accounting for the Acoustic Technologies acquisition.
- Developments in the shareholder litigation and any resulting loss exposure; the filing does not provide a clear estimate of possible losses.