Cirrus Logic, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended December 31, 2011, and first nine months of fiscal 2012. The quarter was 14 weeks, versus 13 weeks in the prior-year comparable quarter. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and results
Cirrus Logic develops analog and mixed-signal integrated circuits for audio and energy markets. It reports one operating segment, with Audio Products and Energy Products as product lines.
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Net sales | $122.4 | $95.6 | $316.2 | $278.1 |
| Gross margin | $66.0; 54.0% | $52.5; 54.9% | $168.1; 53.2% | $156.0; 56.1% |
| Operating income | $26.4 | $23.1 | $58.6 | $69.7 |
| Net income | $16.7 | $24.6 | $37.2 | $73.1 |
| Diluted EPS | $0.25 | $0.34 | $0.55 | $1.02 |
Financial position and cash flow
- Nine-month operating cash flow was $51.9, down from $66.6. Investing activities provided $24.5, compared with $55.4 used in the prior-year period; financing activities used $75.5, primarily for share repurchases. Cash and cash equivalents increased $1.0 to $38.0.
- At December 31, cash and cash equivalents, restricted investments, and current and long-term marketable securities totaled approximately $160.3. Current assets were $299.8 and current liabilities $79.4; reported working capital, including cash, was $220.3.
- Long-term obligations were $6.5. The filing does not identify material conventional debt; verify the nature of these obligations in the full filing.
- Capital spending on property, equipment and software was $25.7 for the nine months. The company also spent $6.0 on technology investments.
Material changes and management commentary
- Quarterly sales increased 28% year over year; nine-month sales increased 14%. Audio sales rose 45% in the quarter and 32% year to date, driven primarily by portable products and, in the quarter, surround codecs and DSP products. Energy sales declined 26% in the quarter and 30% year to date, with reductions across product lines including seismic products.
- Audio accounted for 86% of quarterly sales versus 76% a year earlier. Management attributed lower gross margin to a shift toward lower-margin Audio products and lower sales of higher-margin Energy products.
- Operating expenses rose: quarterly R&D increased 42% to $23.1, and SG&A increased 23% to $16.5. Management cited higher headcount and related costs, as well as increased engineering, product-development and other expenses.
- Net income fell despite higher sales and operating income. The key comparison was income taxes: FY2012 nine-month tax expense was $21.8, primarily non-cash, versus a $2.8 tax benefit in the prior-year period. Effective tax rates were 36.9% and a 4.0% tax benefit rate, respectively.
- Inventory increased to $58.1 from $40.5 at March 26, 2011. Management said the increase primarily reflected planned inventory builds for expected higher demand.
Liquidity, outlook, risks and contingencies
- Management expected existing capital resources and future operating cash flow to fund operations for at least the next 12 months. No specific sales or earnings guidance was provided.
- Construction of the new Austin headquarters was expected to finish in summer 2012. Estimated costs were approximately $31 million for construction and a further $8 million for furniture, fixtures and equipment; $17.6 million had been paid to date. The company expected to fund the project internally.
- A December 2011 agreement with STATS ChipPAC provides for $10 million of payments to secure assembly and test capacity. The company expected to recover the full amount through purchase rebates if it meets specified volume milestones; $5 million was paid in January 2012, with the remainder contingent on capacity-expansion commitments.
- Customer concentration is significant: Apple represented approximately 70% of quarterly sales and 62% of nine-month sales, up from 54% and 44%, respectively, in the comparable prior-year periods. The ten largest end customers represented 80% of quarterly and 74% of nine-month sales.
- A patent-infringement suit filed in Delaware in September 2011 seeks unspecified damages, including potentially treble damages. Cirrus moved to dismiss certain claims; management could not estimate a possible loss range and did not believe, based on available information, that the proceedings would materially adversely affect financial condition.
- The company had $68.4 million of valuation allowance against deferred tax assets, including approximately $30.5 million of tax credits that may expire unused. The filing also notes that fiscal years 2009–2011 remain open to examination by major tax authorities.
- Management reported effective disclosure controls as of December 31, 2011, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Apple’s growing share of sales and customer concentration persist, and how customer demand affects forward revenue.
- Whether planned inventory builds convert to sales without excess inventory or margin pressure.
- How operating expenses, product mix and the tax rate affect earnings and cash generation in coming periods.
- Whether headquarters spending and the STATS ChipPAC capacity agreement remain within expected costs and whether purchase milestones generate the anticipated rebates.
- Any developments in the patent litigation, tax-asset realizability, or other contingencies that could materially affect results.