UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended December 27, 1997
Commission file Number 0-17795
CIRRUS LOGIC, INC.
(Exact name of registrant as specified in its charter.)
CALIFORNIA 77-0024818
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 West Warren Avenue, Fremont, CA 94538
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(510) 623-8300
Indicate by check mark whether the registrant(1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
The number of shares of the registrant's common stock, no par value, was
68,019,593 as of December 27, 1997.
Part 1. Financial Information
Item 1. Financial Statements
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Quarter Ended Three Quarters Ended
----------------------- --------------------
Dec. 27, Dec. 28, Dec. 27, Dec. 28,
1997 1996 1997 1996
----------- ----------- ---------- ---------
Net sales $240,843 $253,309 $666,426 $704,237
Costs and expenses
Cost of sales 146,586 156,613 404,104 434,890
Research and development 47,737 59,828 136,563 179,537
Selling, general and administrative 29,244 31,517 87,145 92,977
Gain on sale of assets, net (16,081) (12,009) (16,081) (18,922)
Restructuring costs and other, net 14,464 0 14,464 0
----------- ----------- ---------- ---------
Total costs and expenses 221,950 235,949 626,195 688,482
----------- ----------- ---------- ---------
Income from operations 18,893 17,360 40,231 15,755
Interest and other (expense) income, net (426) (2,941) (5,454) (7,778)
----------- ----------- ---------- ---------
Income before provision for income taxes 18,467 14,419 34,777 7,977
Provision for income taxes 5,541 4,109 10,433 2,274
----------- ----------- ---------- ---------
Net Income 12,926 10,310 24,344 5,703
=========== =========== ========== =========
Net income per share:
Basic $0.19 $0.16 $0.36 $0.09
Diluted $0.18 $0.15 $0.35 $0.08
Weighted average common shares outstanding:
Basic 67,593 65,178 67,080 64,704
Diluted 70,561 68,441 69,650 67,850
<FN>
See Notes to the Unaudited Consolidated Condensed Financial Statements.
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
Dec. 27, March 29,
1997 1997
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $172,945 $151,540
Short-term investments $233,441 $188,215
Accounts receivable, net $122,799 $173,743
Inventories $99,793 $127,252
Deferred tax assets $34,410 $34,410
Equipment and leasehold improvement
advances to joint ventures $100,593 $112,597
Other current assets $18,802 $7,245
----------- -----------
Total current assets 782,783 795,002
Property and equipment, net $108,720 $130,855
Manufacturing agreements, net
and investments in joint ventures $164,478 $151,675
Deposits and other assets $58,096 $59,289
----------- -----------
$1,114,077 $1,136,821
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities $220,237 $270,282
Accrued salaries and benefits 38,963 33,792
Current maturities of long-term
and capital lease obligations 25,659 30,999
Income taxes payable 35,125 31,259
----------- -----------
Total current liabilities 319,984 366,332
Capital lease obligations and long term debt 45,913 61,096
Other long-term obligations 3,302 5,196
Convertible subordinated notes 300,000 300,000
Commitments and contingencies
Shareholders' equity:
Capital stock 367,598 351,261
Retained earnings 77,280 52,936
----------- -----------
Total shareholders' equity 444,878 404,197
----------- -----------
$1,114,077 $1,136,821
=========== ===========
<FN>
See Notes to the Unaudited Consolidated Condensed Financial Statements.
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Quarters Ended
-----------------------
Dec. 27, Dec. 28,
1997 1996
----------- -----------
Cash flows from operations:
Net income $24,344 $5,703
Adjustments to reconcile net income to net
cash flows from (used for) operations:
Gain on sale of assets ($11,082) ($18,922)
Depreciation and amortization, net $56,094 $65,649
Net change in operating assets and liabilities $37,754 ($38,770)
----------- -----------
Net cash flows provided by operations $107,110 $13,660
Cash flows provided by (used for) investing activities:
Net proceeds from sale of assets 16,142 38,426
Purchase of short-term investments (355,851) (133,256)
Proceeds from sales and maturities of short-term
investments 310,625 12,432
Additions to property and equipment (21,714) (21,067)
Proceeds from termination of UMC agreement 20,543 0
Joint venture manufacturing agreements and
investment in joint ventures (32,500) (54,000)
Increase in deposits and other assets (16,771) (9,138)
----------- -----------
Net cash flows used for investing activities (79,526) (166,603)
----------- -----------
Cash flows used for financing activities:
Proceeds from issuance of convertible notes 0 290,640
Proceeds from issuance of common stock 14,344 16,867
Borrowings on short-term debt 0 172,000
Borrowings on long-term debt 5,980 4,342
Payments on long-term debt and capital lease obligations (26,503) (21,542)
Payments on short-term debt 0 (252,000)
Increase in other long-term liabilities 0 424
----------- -----------
Net cash flows provided by (used for)
financing activities (6,179) 210,731
----------- -----------
Increase in cash and cash equivalents 21,405 57,788
Cash and cash equivalents - beginning of period 151,540 155,979
----------- -----------
Cash and cash equivalents - end of period 172,945 213,767
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid 25,561 8,925
Income taxes (refunded) paid 2,454 (19,148)
Equipment purchased under capitalized leases 0 10,556
Tax benefit of stock option exercises 1,993 2,352
<FN>
See Notes to the Unaudited Consolidated Condensed Financial Statements.
CIRRUS LOGIC, INC.
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated condensed financial statements have been prepared
by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules
and regulations. In the opinion of the Company, the financial
statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the
financial position, operating results and cash flows for those
periods presented. These consolidated condensed financial
statements should be read in conjunction with the consolidated
financial statements, and notes thereto for the year ended March
29, 1997, included in the Company's 1997 Annual Report on Form 10-
K. The results of operations for the interim periods presented are
not necessarily indicative of the results that may be expected for
the entire year.
2. Inventories
Inventories are comprised of the following:
Dec. 27, March 29,
1997 1997
--------- ---------
(In thousands)
Work-in-process $61,223 $ 79,276
Finished goods 38,570 47,976
--------- ---------
Total $99,793 $ 127,252
========= =========
3. Income Taxes
The Company provides for income taxes during interim reporting
periods based upon an estimate of the annual effective tax rate.
Such estimate reflects an effective tax rate lower than the federal
statutory rate primarily because of foreign operating results which
are taxed at rates other than the U.S. statutory rate, federal and
state research tax credits.
4. Gain on Sale of Assets, Net
In December 1997, the Company sold its Nuera product group for cash
proceeds of approximately $21.5 million and recorded a gain of
approximately $11.1 million in the third quarter of fiscal 1998.
Gain on sale of assets also includes the reversal of $5 million
that had previously been accrued for losses on facilities
commitments that had previously been recorded in connection with
the sale and shut down of the operating divisions of PCSI in the
fourth quarter of fiscal 1997.
5. Restructuring Costs and Other, Net
The Company recorded restructuring costs of $11.8 million in the
third quarter of fiscal 1998 in connection with a discontinuation
of certain strategies and product development efforts in the
graphics product group of its PC products division. The
substantial portion of the components of the restructuring charge
were $8.4 million related to excess assets and facilities and $1.8
million of severance payments that were made during the quarter.
Restructuring costs also includes a $2.0 million reversal of amounts
that had been previously accrued for losses on facilities in connection
with the April 1997 restructuring and other costs of $4.7 million
representing additional compensation costs in connection with the same
restructuring that were earned and recorded in the third quarter of fiscal
1998.
6. Net Income Per Share
In 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share.
Statement 128 replaced the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings
per share amounts for all periods have been presented, and where
necessary, restated to conform to the Statement 128 requirement.
The following table sets forth the computation of basic and diluted earnings
per share (In thousands, except per share amounts):
Quarter Ended Three Quarters Ended
Dec.27, Dec. 28, Dec.27, Dec. 28,
1997 1996 1997 1996
-------- -------- -------- --------
Numerator:
Net income $12,926 $10,310 $24,344 $5,703
Denominator:
Denominator for basic earnings per share
weighted-average shares 67,593 65,178 67,080 64,704
Dilutive common stock equivalents, using
treasury stock method 2,968 3,263 2,570 3,146
-------- -------- -------- --------
Denominator for diluted earnings per share 70,561 68,441 69,650 67,850
======== ======== ======== ========
Basic earnings per share $0.19 $0.16 $0.36 $0.09
======== ======== ======== ========
Diluted earnings per share $0.18 $0.15 $0.35 $0.08
======== ======== ======== ========
Options to purchase 694,000 shares of common stock were outstanding as
of December 27, 1997 but were not included in the computation of
diluted earnings per share because the options' exercise price was
greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.
As of December 27, 1997, the Company had outstanding convertible
notes to purchase 12,387,000 shares of common stock that were not
included in the computation of diluted earnings per share because
the notes' exercise price was greater than the average market price
of the common shares and, therefore, the effect would be
antidilutive.
7. Commitments
As of December 27, 1997, the Company is contingently liable for
MiCRUS and Cirent equipment leases which have remaining payments of
approximately $560 million, payable through fiscal 2004.
8. Joint Ventures and Manufacturing Supply Agreements
In July of 1997, the Company terminated the foundry agreement and
foundry capacity agreement it had entered into with United
Microelectronics Corporation ("UMC"), a Taiwanese Company, in the
fall of 1996. Under the agreements, the Company had become an
equity partner in United Silicon Inc., a subsidiary of UMC, and had
rights to purchase minimum volume amounts of wafers. Pursuant to
the termination, the Company relinquished its equity interest and
its rights to purchase the volume amounts, and it recovered the
cumulative cost of its investment in the venture.
9. Recently Issued Accounting Standards
In 1997, the Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income", was issued and is
effective for fiscal years commencing after December 15, 1997.
In 1997, the Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures About Segments of an Enterprise and
Related Information", was issued and is effective for fiscal years
commencing after December 15, 1997.
The Company is required to adopt the provisions of SFAS 130 and 131
in fiscal year 1999 and expects the adoption will not impact
results of operations or financial position but will require
additional disclosures.
10. Subsequent Event
On January 26, 1998, the Company announced that it had signed a
patent cross-license agreement with S3 Incorporated. Under the S3
agreement, the Company will grant a cross-license of all its 2D and
3D graphics and video patents to S3 and, in exchange, the Company
will obtain a cross-license of all of S3's technology patents.
Further, the Company will sell certain graphics patents to S3,
while retaining access to such patents under the cross-license
agreement. The S3 agreement is subject to government review under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976. In
addition, the Company signed a patent cross-license agreement with
another party. As a result of the S3 agreement and other licensing
activities, the Company expects to collect a total of $60.0 million
in the quarter ended March 28, 1998.
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This information should be read along with the unaudited
consolidated condensed financial statements and the notes thereto
included in Item 1 of this Quarterly Report and the audited
consolidated financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and
Results of Operations for the fiscal year ended March 29, 1997,
contained in the 1997 Annual Report on Form 10-K (the "1997 Form
10-K"). This Discussion and Analysis contains forward-looking
statements. Such statements are subject to certain risks and
uncertainties, including those discussed below or in the 1997 Form
10-K that could cause actual results to differ materially from the
Company's expectations. Readers are cautioned not to place undue
reliance on any forward-looking statements, as they reflect
management's analysis only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any
revision to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
During fiscal 1997, the Company implemented a strategy of focusing
on the markets for multimedia (graphics, video, and audio), mass
storage, and communications. As part of this strategy, the Company
divested non-core business units and eliminated projects that did
not fit within its core markets. At the same time, the Company
implemented a program to manage costs and streamline operations.
These efforts culminated in the fourth quarter of fiscal 1997 with
a reorganization into four market-focused product divisions
(Personal Computer Products, Communications Products, Mass Storage
Products, and Crystal Semiconductor Products), and a decision to
outsource its production testing and to consolidate certain
corporate functions. In connection with these actions, the Company
effected a workforce reduction of approximately 400 people in April
1997, representing approximately 15 percent of its worldwide staff.
While these actions contributed to the Company's ability to
generate net income in the first three quarters of fiscal 1998,
there is no assurance that the Company will regain the levels of
profitability that it achieved in the past or that losses will not
occur in the future.
Results of Operations
The following table discloses the percentages that income statement
items are of net sales and the percentage change in the dollar
amounts for the same items compared to the corresponding period in
the prior fiscal year.
Percentage of Net Sales Percentage of Net Sales
Quarter Ended Three Quarters Ended
--------- --------- --------- ---------
Dec. 27, Dec. 28, Percent Dec. 27, Dec. 28, Percent
1997 1996 change 1997 1996 change
--------- --------- --------- --------- --------- ---------
Net sales 100% 100% -5% 100% 100% -5%
Gross margin 39% 38% -3% 39% 38% -3%
Research and development 20% 24% -20% 20% 25% -24%
Selling, general and administrative 12% 12% -7% 13% 13% -6%
Gain on sale of assets -7% -5% 34% -2% -3% -15%
Restructuring costs and other, net 6% - N/A 2% - N/A
Income from operations 8% 7% 9% 6% 2% 155%
Income before income taxes 8% 6% 28% 5% 1% 336%
Provision for income taxes 2% 2% 35% 2% 0% 359%
Net income 5% 4% 25% 4% 1% 327%
Net Sales
Net sales for the third quarter of fiscal 1998 were $240.8 million,
a decrease of 5% from $253.3 million for the third quarter of
fiscal 1997. Revenues from divested businesses in the third
quarter of fiscal 1998 were $10.9 million compared to $21.4 million
in the third quarter of fiscal 1997.Excluding revenues from
divested businesses, net sales remained relatively consistent
primarily due to increased sales in the mass storage division,
primarily related to read channel devices, which were offset by
decreased sales in the PC products division, primarily related to
graphics products.
Net sales for the first three quarters of fiscal 1998 were $666.4
million, a decrease of 5% from $704.2 million for the first three
quarters of fiscal 1997. Revenues from divested businesses in the
first three quarters of fiscal 1998 were $33.6 million compared to
$93.7 million in the first three quarters of fiscal 1997. Excluding
revenues from divested businesses, net sales increased by $22.3
million primarily due to increased sales in the mass storage
division, primarily related to read channel devices, which were
offset by decreased sales in the PC products division, primarily
related to graphics products.
Export sales (including sales to U.S.-based customers with
manufacturing plants overseas) were 53% and 59% of total sales in
the third quarter of fiscal 1998 and fiscal 1997, respectively, and
were 54% and 62% for the first three quarters of fiscal 1998 and
fiscal 1997, respectively. The decreases in export sales as a
percentage of total sales were primarily due to a reduction in
sales of PC products, primarily graphics products, in the Pacific
Rim and Japan.
The Company's sales are currently denominated primarily in U.S.
dollars. The Company currently enters into foreign currency
forward exchange and option contracts to hedge certain of its
foreign currency exposures.
Sales to two customers comprised approximately 21% and 11% of sales
in the first three quarters of fiscal 1998. Sales to one customer
were approximately 10% of net sales in the first three quarters of
fiscal 1997.
Gross Margin
Gross margin was 39% in the third quarter of fiscal 1998 compared
to 38% for the third quarter of fiscal 1997. Gross margin was 39%
in the first three quarters of fiscal 1998 compared to 38% in the
first three quarters of fiscal 1997. The increases in gross margin
for both the third quarter and the first three quarters of fiscal
1998 compared to the same periods of fiscal 1997 were due to
improved margins in mass storage products from larger volumes and a
change in sales mix towards mass storage products, which were
offset somewhat by lower margins in PC products due to lower
volumes and selling prices per unit primarily related to graphics
products.
Research and Development
Research and development expenses for the third quarter of fiscal
1998 were $47.7 million, a decrease of 20% from $59.8 million in
the third quarter of fiscal 1997. Research and development
expenses for the first three quarters of fiscal 1998 were $136.6
million, a decrease of 24% from $179.5 million in the first three
quarters of fiscal 1997. Research and development expenditures
decreases were primarily a result of the divestiture of certain
non-core businesses and also as a result of the April 1997
headcount reductions which were made in connection with the
Company's realignment into four market-focused divisions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in the third quarter
of fiscal 1998 were $29.2 million, a decrease of 7% from $31.5
million in the third quarter of fiscal 1997, and were relatively
consistent at 12% of sales in each of these quarters. Selling and
administrative expenses in the first three quarters of fiscal 1998
were $87.1 million, a decrease of 6% from $93.0 million in the
first three quarters of fiscal 1997, and were relatively consistent
at 13% of sales in each of these periods. The decreases were
primarily a result of the divestiture of certain non-core
businesses and also as a result of the April 1997 headcount
reductions which were made in connection with the Company's
realignment into four market-focused divisions
Gain on Sale of Assets, Net
In December 1997, the Company sold its Nuera product group for cash
proceeds of approximately $21.5 million and recorded a gain of
approximately $11.1 million in the third quarter of fiscal 1998.
Gain on sale of assets also includes the reversal of $5 million
that had previously been accrued for losses on facilities
commitments that had previously been recorded in connection with
the sale and shut down of the operating divisions of PCSI in the
fourth quarter of fiscal 1997.
Restructuring Costs and Other, Net
The Company recorded restructuring costs of $11.8 million in the
third quarter of fiscal 1998 in connection with a discontinuation
of certain strategies and product development efforts in the
graphics product group of its PC products division. The
substantial portion of the components of the restructuring charge
were $8.4 million related to excess assets and facilities and $1.8
million of severance payments that were made during the quarter.
Restructuring costs also includes a $2.0 million reversal of amounts
that had been previously accrued for losses on facilities in connection
with the April 1997 restructuring and other costs of $4.7 million
representing additional compensation costs in connection with the same
restructuring that were earned and recorded in the third quarter of fiscal
1998.
Income Taxes
The Company's effective tax rate was a 30.0% provision in the third
quarter and first three quarters of fiscal 1998 compared to a 28.5%
provision for the third quarter of fiscal 1997 and for the first
three quarters of fiscal 1997. The 30.0% estimated annual
effective tax rate is less than the U.S. federal statutory rate of
35.0%, primarily because of foreign operating results which are
taxed at rates other than the U.S. statutory rate, federal and
state research tax credits.
The Company has considered available evidence supporting the
realizability of net deferred tax assets. Although realization is
not assured, the company believes it is more likely than not the
deferred tax assets will be realized. The deferred tax assets
realizability is evaluated on a quarterly basis.
Liquidity and Capital Resources
The Company generated approximately $107.1 million of cash and cash
equivalents in its operating activities during the first three
quarters of fiscal 1998 and approximately $13.7 million during the
first three quarters of fiscal 1997. The increase in cash provided
by operations was primarily due to improved accounts receivable and
inventory turnover, as well as from higher levels of net income.
The Company used $79.5 million in cash in investing activities
during the first three quarters of fiscal 1998 compared to $166.6
million during the comparable period of fiscal 1997. The primary
reasons for the change are that in the first three quarters of
fiscal 1997 the Company invested more of its cash and cash equivalents
in short-term investments, than in the first three quarters of 1998.
In the first three quarters of fiscal 1998, the Company received
approximately $21 million from termination of the UMC agreements, and
approximately $16.1 million from the sale of Nuera (proceeds of $21.5
million less Nuera's own cash of $5.4 million) in the first three quarters
of fiscal 1998. In the same period of fiscal 1997, the Company received
$38.4 million from the sale of PicoPower and one of the PCSI business
units in the first three quarters of fiscal 1997.
Financing activities used $6.2 million in cash during the first
three quarters of fiscal 1998 and generated $210.7 million during
the comparable period of fiscal 1997. In the third quarter of
fiscal 1997, the Company raised approximately $290.6 million
through the issuance of convertible subordinated notes and used $80
million to pay down short term borrowings.
On June 30, 1997, the Company amended its existing bank lines of
credit to provide a commitment for letters of credit up to a
maximum aggregate of $35,000,000, expiring on June 30, 1998, which
is collateralized by cash or securities with interest at the higher
of: (a) .50% per annum above the latest federal funds rate (as
defined in the Second Amended Credit Agreement); or (b) the rate of
interest in effect for such day as publicly announced from time to
time by the bank. The Company is currently in compliance with all
covenants under the bank line of credit. The Company does not
believe the amendment of its line of credit will have an impact on
its financial position or on its ability to finance its operations
for the foreseeable future.
The semiconductor industry is extremely capital intensive. To
remain competitive, the Company believes it must continue to invest
in advanced wafer manufacturing and test equipment. Investments
will be made in the various external manufacturing arrangements and
its own facilities. The Company intends to obtain most of the
necessary capital through direct or guaranteed equipment lease
financing and the balance through debt, equity financing, and/or
existing cash balances. As of December 27, 1997, the Company is
contingently liable as guarantor or co-guarantor for MiCRUS and
Cirent equipment leases which have remaining payments of
approximately $560 million due through fiscal 2004. In addition,
the Company has other commitments related to its joint venture
relationships with MiCRUS and Cirent that total approximately $37
million at December 27, 1997.
There can be no assurance that financing will be available or, if
available, will be on satisfactory terms. Failure to obtain
adequate financing would restrict the Company's ability to expand
its manufacturing infrastructure, to make other investments in
capital equipment, and to pursue other initiatives.
Future Operating Results
Quarterly Fluctuations
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from
quarter to quarter in the future. The Company's operating results
are affected by a wide variety of factors, many of which are
outside of the Company's control, including but not limited to,
economic conditions and overall market demand in the United States
and worldwide, the Company's ability to introduce new products and
technologies on a timely basis, changes in product mix,
fluctuations in manufacturing costs which affect the Company's
gross margins, declines in market demand for the Company's and its
customers' products, sales timing, the level of orders which are
received and can be shipped in a quarter, the cyclical nature of
both the semiconductor industry and the markets addressed by the
Company's products, product obsolescence, price erosion, and
competitive factors. The Company's operating results in the rest
of fiscal 1998 are likely to be affected by these factors as well
as others.
The Company must order wafers and build inventory well in advance
of product shipments. Because the Company's markets are volatile
and subject to rapid technology and price changes, there is a risk
that the Company will forecast incorrectly and produce excess or
insufficient inventories of particular products. This inventory
risk is heightened because many of the Company's customers place
orders with short lead times. Such inventory imbalances have
occurred in the past and, for example, contributed significantly to
the Company's operating losses in fiscal 1997 and fiscal 1996.
These factors increase not only the inventory risk but also the
difficulty of forecasting quarterly operating results. Moreover,
as is common in the semiconductor industry, the Company frequently
ships more product in the third month of each quarter than in
either of the first two months of the quarter, and shipments in the
third month are higher at the end of that month. The concentration
of sales at the end of the quarter contributes to difficulty in
predicting the Company's quarterly revenues and results of operations.
The Company's success is highly dependent upon its ability to
develop complex new products, to introduce them to the marketplace
ahead of the competition, and to have them selected for design into
products of leading system manufacturers. Both revenues and
margins may be affected quickly if new product introductions are
delayed or if the Company's products are not designed into
successive generations of products of the Company's customers.
These factors have become increasingly important to the Company's
results of operations because the rate of change in the markets
served by the Company continues to accelerate.
Issues Relating to Manufacturing and Manufacturing Investment
The Company participates in joint ventures with IBM (MiCRUS joint
venture) and Lucent (Cirent joint venture) under a series of
agreements intended to secure a committed supply of wafers from
manufacturing facilities operated by the joint ventures. The joint
ventures are controlled by IBM and Lucent, respectively, and are
dependent on the controlling partners' advanced proprietary
manufacturing process technologies and manufacturing expertise.
These agreements include wafer purchase agreements under which the
Company is committed to purchase a fixed percentage of the output
of the joint venture manufacturing facilities. As a result, the
operating results of the Company may be more sensitive to changing
business conditions, as anticipated decreases in revenues could
cause the Company to decide to not fulfill its wafer purchase
obligations. This would result in charges to the Company from the
joint ventures in amounts intended to cover the joint ventures
fixed costs related to the shortfall in wafer orders from the
Company. The Company determines any estimated shortfalls in such
purchase commitments over the short-term (generally six-months) and
accrues such amounts to the extent they would result in inventory
losses were the Company to fulfill the commitment and take delivery
of the related inventory. The Company's gross margins and earnings
were adversely impacted by such charges in the amounts of $6.2
million, $7.8 million, $12.1 million and $22.0 million in the first
and second quarter of fiscal 1996 and the second and fourth
quarters of fiscal 1997, respectively. In the case of the
Company's contracts with its joint venture semiconductor foundries,
the Company must pay contractual penalties if it fails to purchase
its minimum commitments. With its other foundries, the Company
becomes committed upon placing orders and is subject to penalties
for cancellations.
Moreover, the Company will benefit from the MiCRUS and Cirent
Semiconductor joint ventures only if they are able to produce
wafers at or below prices generally prevalent in the market. If,
however, either of these ventures are not able to produce wafers at
competitive prices, the Company's results of operations will be
materially adversely affected. The process of beginning production
and increasing volume with the joint ventures inevitably involves
risks, and there can be no assurance that the manufacturing costs
of such ventures will be competitive. During fiscal 1997, excess
production capacity in the industry lead to significant price
competition between foundries and the Company believes that in some
cases this resulted in pricing from certain foundries that was
lower than the Company's cost of production from its manufacturing
joint ventures. The Company experienced pressures on its selling
prices during fiscal 1997 and the first three quarters of fiscal
1998, which had a negative impact on its results of operations and
it believes that this was partially due to the fact that certain of
its competitors were able to obtain favorable pricing from these
foundries.
Certain provisions of the MiCRUS and Cirent Semiconductor
agreements may cause the termination of the joint venture in the
event of a change in control of the Company. Such provisions could
have the effect of discouraging, deferring or preventing a change
of control of the Company.
In connection with the financing of its operations, the Company has
borrowed money and entered into substantial equipment lease
obligations and is likely to expand such commitments in the future.
Such indebtedness could cause the Company's principal and interest
obligations to increase substantially. The degree to which the
Company is leveraged could adversely affect the Company's ability
to obtain additional financing for working capital, acquisitions
or other purposes and could make it more vulnerable to industry
downturns and competitive pressures. The Company's ability to meet
its debt service and other obligations will be dependent upon the
Company's future performance, which will be subject to financial,
business and other factors affecting the operations of the Company,
many of which are beyond its control. An inability to obtain
financing to meet these obligations could cause the Company to default
on such obligations.
Although the Company has increased its future wafer supplies from
the MiCRUS and Cirent Semiconductor joint ventures, the Company
expects to continue to purchase portions of its wafers from, and to
be reliant upon, outside merchant wafer suppliers. The Company's
current strategy is to fulfill its wafer requirements using a
balance of secured wafer supply from its joint ventures and from
outside merchant wafer suppliers. The Company also uses other
outside vendors to package the wafer die into integrated circuits
and to perform the majority of the Company's product testing.
During the second quarter of fiscal 1998 the Company reduced its
purchase obligations at Cirent by 50 percent, pursuant to an
agreement under which the Company can reacquire, at no incremental
cost, an additional 10 percent of the total Cirent wafer output and
can sell any portion of its wafer purchase obligation to third
parties on a foundry basis. The agreement also provides the
Company with future access to certain Lucent advanced process
technologies including 0.18 micron process technology.
The Company's results of operations could be adversely affected in
the future, and have been in the past, if particular suppliers are
unable to provide a sufficient and timely supply of product,
whether because of raw material shortages, capacity constraints,
unexpected disruptions at the plants, delays in qualifying new
suppliers or other reasons, or if the Company is forced to purchase
wafers or packaging from higher cost suppliers or to pay expediting
charges to obtain additional supply, or if the Company's access to
test facilities are disrupted for an extended period of time.
Because of the concentration of sales at the end of each quarter, a
disruption in the Company's production or shipping near the end of
a quarter could materially reduce the Company's revenues for that
quarter. Production may be constrained even though capacity is
available at one or more wafer manufacturing facilities because of
the difficulty of moving production from one facility to another.
Any supply shortage could adversely affect sales and operating
profits. The Company's reliance upon outside vendors for assembly
and test could also adversely impact sales and operating profits if
the Company were unable to secure sufficient access to the services
of these outside vendors.
Product development in the Company's markets is becoming more
focused on the integration of functionality on individual devices
and there is a general trend towards increasingly complex products.
The greater integration of functions and complexity of operations
of the Company's products increases the risk that latent defects or
subtle faults could be discovered by customers or end users after
volumes of product have been shipped. If such defects were
significant, the Company could incur material recall and
replacement costs for product warranty. The Company's relationship
with customers could also be adversely impacted by the recurrence
of significant defects.
Dependence on PC Market
Sales of most of the Company's products depend largely on sales of
personal computers (PCs). Reduced growth in the PC market could
affect the financial health of the Company as well as its
customers. Moreover, as a component supplier to PC OEMs and to
peripheral device manufacturers, the Company is
likely to experience a greater magnitude of fluctuations in demand
than the Company's customers themselves experience. In addition,
many of the Company's products are used in PCs for the consumer
market, and the consumer PC market is more volatile than other
segments of the PC market.
Other integrated circuit (IC) makers, including Intel Corporation,
have expressed their interest in integrating through hardware
functions, adding through special software functions, or kitting
components to provide some multimedia or communications features
into or with their microprocessor products. Successful integration
of these functions could substantially reduce the Company's
opportunities for IC sales in these areas.
A number of PC OEMs buy products directly from the Company and also
buy motherboards, add-in boards or modules from suppliers who in
turn buy products from the Company. Accordingly, a significant
portion of the Company's sales may depend directly or indirectly on
the sales to a particular PC OEM. Since the Company cannot track
sales by motherboard, add-in board or module manufacturers, the
Company may not be fully informed as to the extent or even the fact
of its indirect dependence on any particular PC OEM, and,
therefore, may be unable to assess the risk of such indirect
dependence.
The PC market is intensely price competitive. The PC manufacturers
in turn put pressure on the price of all PC components, and this
pricing pressure is expected to continue.
Issues Relating to Mass Storage Market
The disk drive market has historically been characterized by a
relatively small number of disk drive manufacturers and by periods
of rapid growth followed by periods of oversupply and contraction.
Growth in the mass storage market is directly affected by growth in
the PC market. Furthermore, the price competitive nature of the
disk drive industry continues to put pressure on the price of all
disk drive components. In addition, consolidation in the disk
drive industry has reduced the number of customers for the
Company's mass storage products and increased the risk of large
fluctuations in demand.
The Company believes that constraints in supply of certain read
head components to the disk drive industry limited sales of its
mass storage products in the fourth quarter of fiscal 1997. In
addition, the Company believes that excess inventories held by its
customers limited sales of the Company's mass storage products in
the second quarter of fiscal 1997 and limited sales of the
Company's optical disk drive products in the third quarter of
fiscal 1997.
The Company's revenues from mass storage products are dependent on
the successful introduction by its customers of new disk drive
products and can be impacted by the timing of customers' transition
to new disk drive products. Recent efforts by certain of the
Company's customers to develop their own ICs for mass storage
products could in the future reduce demand for the Company's mass
storage products, which could have an adverse effect on the
Company's revenues and gross margins from such products. In
addition, in response to the current market trend towards
integrating hard disk controllers with microcontrollers, the
Company's revenues and gross margins from its mass storage products
will be dependent on the Company's ability to introduce such
integrated products in a commercially competitive manner.
Major companies in the disk drive industry, including certain of
the Company's customers, have recently issued press releases
announcing expected declines in business. In addition, the
Company's mass storage products were not designed into a major
customer's product which is expected to run through the second
quarter of fiscal 1999. Consequently, these factors could have an
adverse impact on the mass storage division's revenue through the
next two fiscal quarters.
Issues Relating to Graphics Products
The PC graphics market today consists primarily of both two-
dimensional (2D) and three-dimensional (3D) graphics accelerators
and 2D and 3D graphics accelerators with video features. Market
demand for 3D graphics acceleration began to grow in the third
quarter of fiscal 1997 and is rapidly gaining market share from 2D
products.
The Company continues to experience intense competition in the sale
of both 2D and 3D graphics products. Several competitors
introduced products and adopted pricing strategies that have
increased competition in the desktop graphics market. In addition,
the 3D opportunity has resulted in the entry of significant numbers
of new competitors into the PC graphics market. These competitive
factors affected the Company's market share, gross margins, and
earnings in fiscal 1997 and in the first three quarters of fiscal
1998 and are likely to affect revenues and gross margins for
graphics accelerator products in the future.
During the second quarter of fiscal 1997, the Company introduced
and began shipping its first Rambus DRAM-based 3D accelerator for
the mainstream PC market. Net sales of the Company's 3D
accelerator products were not material in fiscal 1997 or in the
first two quarters of fiscal 1998. In November 1997, the Company
changed its direction in graphics from reliance on 2D and 3D stand
along products to a strategy of providing future graphics products
integrated with other functions, such as audio and/or telephony.
Concurrently, the Company realigned and reduced its graphics
research and development and marketing activities toward this new
product direction, resulting in a workforce reduction of
approximately sixty-five employees. While the Company continues to
sell its line of existing 2D and 3D graphics products, levels and
duration of future revenues from these products is uncertain.
Further, if the new integrated function products are not brought to
market in a timely manner or do not address the market needs or
costs of performance requirements, then the Company's graphics
market share and sales will be adversely affected.
Issues Relating to Audio Products
Most of the Company's revenues in the multimedia audio market
derive from the sales of 16-bit audio Codecs and integrated 16-bit
Codec plus controller solutions for the consumer PC market.
Pricing pressures have forced a transition from multi-chip
solutions to products that integrate the Codec,
controller and synthesis into a single IC. The Company's revenues
from the sale of audio products in the remainder of fiscal 1998 are
likely to be affected significantly by the success of its recently
introduced fully-integrated, single-chip audio ICs. Moreover,
aggressive competitive pricing pressures have adversely affected
and may continue to adversely affect the Company's revenues and
gross margins from the sale of single-chip audio ICs. In addition,
the introduction of new audio products from the Company's
competitors, the introduction of mediaprocessors and the
introduction of MMX processors with multimedia features by Intel
Corporation could adversely affect revenues and gross margins from
the sale of the Company's audio products.
Three-dimensional spatial effects audio became an important feature
in the first three quarters of fiscal 1998, primarily in products
for the consumer marketplace. If the Company's spatial effects
audio products do not continue to meet the cost or performance
requirements of the market, revenues from the sale of audio
products will be adversely affected.
Issues Relating to Modem Products
The market for voice/data/fax modem chip sets is intensely
competitive, and competitive pricing pressures have affected and
are likely to continue to affect the average selling prices and
gross margins of this product line. The success of the Company's
products will depend not only on the products themselves but also
on the degree and timing of market acceptance of new performance
levels developed by U.S. Robotics, which will be supported by the
Company's new products, and the development of standards with
regard to these new performance levels. Conflicting standards for
56Kbps modems (the U.S. Robotics x2 protocol versus the Rockwell
Semiconductor K56flex) have had an adverse impact on the rate of
the market's transition from 33.6Kbps to 56Kbps technology. As a
result, sales volumes of 56Kbps modem products have been lower than
anticipated, while continuing sales of 33.6Kbps modems have been
subject to severe pricing pressures. A uniform standard direction
was established in 1998, but, there is no assurance that the
standard setting process will not be subject to further delays.
Moreover, as a relatively new entrant to this market, the Company
may be at a competitive disadvantage to suppliers who have long-
term customer relationships, have greater market share or have
greater financial resources. In addition, the introduction of new
modem products from the Company's competitors, the introduction of
media processors and the introduction of MMX processors with
multimedia features by Intel Corporation could adversely affect
revenues and gross margins from the sale of the Company's modem
products.
Issues Related to Reorganization
During the fourth quarter of fiscal 1997, the Company decided to
reorganize into four market-focused divisions (Personal Computer
Products, Communications Products, Mass Storage Products, and
Crystal Semiconductor Products), outsource its production testing,
and consolidate certain corporate functions. In connection with
these actions, the Company effected a workforce reduction of
approximately 400 people, representing approximately 15% of the
worldwide staff. Although the Company generated net income in the
first three quarters of fiscal 1998, there is no assurance that
these actions will be successful or have a positive impact on
results of operations. Furthermore, should such actions have a
negative impact on the Company's ability to design and develop
new products, market new or existing products, or produce
and/or purchase products at competitive prices, these actions
could have an adverse impact on the Company's results of operations.
Intellectual Property Matters
The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. The
Company and certain of its customers from time to time have been
notified that they
may be infringing certain patents and other intellectual property
rights of others. In addition, customers have been named in suits
alleging infringement of patents or other intellectual property
rights by customer products. Certain components of these products
have been purchased from the Company and may be subject to
indemnification provisions made by the Company to its customers.
Although licenses are generally offered in situations where the
Company or its customers are named in suits alleging infringement
of patents or other intellectual property rights, there can be no
assurance that any licenses or other rights can be obtained on
acceptable terms. Because successive generations of the Company's
products tend to offer an increasing number of functions, there is
a likelihood that more of these claims will occur as the products
become more highly integrated. The Company cannot accurately
predict the eventual outcome of any suit or other alleged
infringement of intellectual property. An unfavorable outcome
occurring in any such suit could have an adverse effect on the
Company's future operations and/or liquidity.
Foreign Operations and Markets
Because many of the Company's subcontractors and several of the
Company's key customers, which customers collectively account for a
significant percentage of the Company's revenues, are located in
Japan and other Asian countries, the Company's business is subject
to risks associated with many factors beyond its control.
International operations and sales may be subject to political and
economic risks, including political instability, currency controls,
exchange rate fluctuations, and changes in import/export
regulations, tariff and freight rates. Although the Company buys
hedging instruments to reduce its exposure to currency exchange
rate fluctuations, the Company's competitive position can be
affected by the exchange rate of the U.S. dollar against other
currencies, particularly the Japanese yen. Further, to the extent
that volatility in foreign financial markets was to have an adverse
impact on economic conditions in a country or geographic region in
which the Company does business, demand for and supply of the
Company's products could be adversely impacted, which would have a
negative impact on the Company's revenues and earnings.
A significant number of the Company's customers and suppliers are
in Asia. The recent turmoil in the Asian financial markets does
not appear to have had a material impact on the Company's sales
orders or bookings. However, the financial instability in these
regions may have an adverse impact on the financial position of end
users in the region which could impact future orders and/or the
ability of such users to pay the Company or the Company's
customers, which could also impact the ability of such customers to
pay the Company. The Company performs extensive financial due
diligence on customers and potential customers and generally
required material sales to Asia to either be secured by letters of
credit or transacted on a cash on demand basis. Given the current
situation in Asia, the Company has begun to require the letters of
credit to be established through American banking institutions.
During this volatile period, the Company expects to carefully
evaluate the collection risk related to the financial position of
customers and potential customers. The results of such evaluations
will be considered in structuring the terms of sale, in determining
whether to accept a sales orders, in evaluating the recognition of
revenue on sales in the area and in evaluating the collectability
of outstanding accounts receivable from the region. In situations
where significant collection risk exists, the Company will either
not accept the sales order, defer the recognition of related
revenues, or, in the case of previously transacted sales, establish
appropriate bad debt reserves. Despite these precautions, should
the current volatility in Asia have a material adverse impact on
the financial position on end users of the customers products in
Asia, the Company could experience a material adverse impact on its
results of operation.
Competition
The Company's business is intensely competitive and is
characterized by new product cycles, price erosion and rapid
technological change. Competition typically occurs at the design
stage, where the customer evaluates alternative design approaches
that require integrated circuits. Because of shortened product life
cycles and even shorter design-in cycles, the Company's competitors
have increasingly frequent opportunities to achieve design wins in
next generation systems. In the event that competitors succeed in
supplanting the Company's products, the Company's market share may
not be sustainable and net sales, gross margin, and earnings would
be adversely affected. Competitors include major domestic and
international companies, many of which have substantially greater
financial and other resources than the Company with which to pursue
engineering, manufacturing, marketing and distribution of their
products. Emerging companies are also increasing their
participation in the market, as well as customers who develop their
own integrated circuit products. Competitors include manufacturers
of standard semiconductors, application specific integrated
circuits and fully customized integrated circuits, including both
chip and board-level products. The ability of the Company to
compete successfully in the rapidly evolving area of high-
performance integrated circuit technology depends significantly on
factors both within and outside of its control, including, but not
limited to, success in designing, manufacturing and marketing new
products, wafer supply, protection of Company products by effective
utilization of intellectual property laws, product quality,
reliability, ease of use, price, diversity of product line,
efficiency of production, the pace at which customers incorporate
the Company's integrated circuits into their products, success of
the customers' products and general economic conditions. Also the
Company's future success depends, in part, upon the continued
service of its key engineering, marketing, sales, manufacturing,
support and executive personnel, and on its ability to continue to
attract, retain and motivate qualified personnel. The competition
for such employees is intense, and the loss of the services of one
or more of these key personnel could adversely affect the Company.
Because of this and other factors, past results may not be a useful
predictor of future results.
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
None.
b. Reports on Form 8-K
None.
CIRRUS LOGIC, INC.
(Registrant)
February 9, 1998 /s/ Ronald K. Shelton
Date Ronald K. Shelton
Vice President, Finance, Chief Financial Officer,
Chief Accounting Officer, and Treasurer