Business context and reporting period
Cirrus Logic, Inc. develops analog and mixed-signal integrated circuits for audio and energy markets. This unaudited Form 10-Q covers the first quarter of fiscal 2012, ended June 25, 2011; comparisons are with the three months ended June 26, 2010. Amounts below are in U.S. dollars unless noted.
Key financial results
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $92.2 million | $81.9 million | Up 13% |
| Gross margin | $47.7 million; 51.7% | $46.7 million; 57.1% | Margin down 5.4 percentage points |
| Operating expenses | $33.4 million | $29.2 million | Up $4.1 million |
| Operating income | $14.3 million | $17.5 million | Down $3.2 million |
| Net income | $9.2 million | $17.6 million | Down $8.4 million |
| Diluted EPS | $0.13 | $0.25 | Down $0.12 |
| Operating cash flow | $10.6 million | $11.9 million | Down $1.3 million |
Audio product sales rose 32% to $71.1 million, led by portable products. Energy product sales fell 24% to $21.1 million, including declines in certain end-of-life products. Research and development expense increased 24% to $18.8 million, principally due to higher headcount and related costs, design tools, and equipment. SG&A rose 4% to $14.6 million.
The effective tax rate was 36.6%, versus 0.9% a year earlier; the $5.3 million tax expense was primarily non-cash. Management attributed the higher rate mainly to the worldwide mix of earnings, state taxes, and nondeductible expenses. The prior-period rate benefited from use of U.S. deferred tax assets and a related valuation allowance.
Liquidity, balance sheet and capital allocation
- At June 25, 2011, cash and cash equivalents were $41.5 million; restricted investments were $5.8 million; and short- and long-term marketable securities totaled $108.4 million. Combined cash, restricted investments, and securities were approximately $155.6 million.
- Working capital was $225.5 million, down from $267.4 million at March 26, 2011. Current assets were $281.9 million and current liabilities $56.4 million.
- Long-term obligations were $6.7 million. The filing does not clearly identify these obligations as debt or provide a borrowing balance.
- Operating cash flow was partly offset by an $8.2 million increase in working capital. Investing activities provided $50.0 million, primarily from net proceeds from marketable security sales and maturities; the company spent $14.3 million on property, equipment, software, and technology assets.
- Financing activities used $56.1 million, principally for repurchases of 3.5 million shares for $56.5 million at an average $15.94 per share. Approximately $20.7 million remained under the $80 million repurchase authorization. Cash ended the quarter at $41.5 million.
- Inventory increased to $46.9 million from $40.5 million, reflecting planned builds for expected demand. The Austin headquarters project was expected to be completed in summer 2012; estimated construction cost was $30 million, with an additional $9 million anticipated for furniture, fixtures, and equipment. The company expected to fund the project internally.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. Management said existing capital resources and expected future operating cash flow should support operations for at least the next 12 months.
- Management said the gross-margin decline reflected residual effects of a production issue involving a new audio device that entered high-volume production in March 2011, as well as product-mix changes.
- Customer concentration increased: Apple represented approximately 53% of sales, up from 34% in the prior-year quarter; the ten largest end customers represented 68%, versus 54%. Distributor Avnet represented 20%, compared with 29%.
- Export sales, principally to Asia, were 86% of sales, up from 80%. Sales were primarily denominated in U.S. dollars; the company had not entered into foreign-currency contracts.
- The company noted risks from reliance on a limited number of customers and distributors, including customers’ ability to change suppliers or reduce orders with limited notice, and pressure to meet demanding product-development schedules. It also cited ordinary-course claims and litigation whose outcomes could not be predicted.
- The company reported no material change in previously disclosed risk factors other than the heightened customer concentration information. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Apple-related demand and the concentration of sales among a few customers remain high in subsequent quarters.
- Whether the production issue affecting the new audio device is resolved and gross margins recover.
- Whether planned inventory builds convert into sales or create inventory or working-capital risk.
- Whether energy-product declines, including end-of-life products, persist and how the product mix affects profitability.
- Actual spending and timing for the new headquarters, and the pace and terms of any further share repurchases.
- How the unusually high current-quarter tax rate compares with subsequent tax expense and cash taxes.