CSR is a leading provider of multifunction connectivity, audio and location platforms. CSR’s technology portfolio includes:
Together, these technologies enable us to deliver platforms that integrate silicon, software and our proprietary algorithms to significantly enhance consumer experience in a broad range of devices and applications. Some of our platforms incorporate fully integrated radios, along with baseband, digital signal processor (DSP) and microcontroller elements while others are complete multifunction system-on-chip (SOC) platforms that integrate multimedia, 3D visualization and powerful application processors along with location capabilities for auto navigation and infotainment systems.
CSR’s technologies have been adopted by market leaders into a wide range of mobile consumer devices such as mobile phones, automobile navigation and telematics systems, personal navigation devices (PNDs), wireless headsets, wireless audio systems, personal computers (PCs), tablets, GPS recreational devices, tracking & logistics management systems, digital cameras and gaming devices.
Our revenue is generated principally from the sale of our products to original equipment manufacturers (OEMs) and original design manufacturers (ODMs) serving the retail consumer market. Our revenue in 2010 was $800.6 million, an increase of 33.1% compared to 2009 revenue of $601.4 million (2008: $694.9 million). About half of this increase was attributable to the inclusion of revenues from product lines acquired through our acquisition of SiRF Technology Holdings, Inc. (‘SiRF’) on 26 June 2009 for all of 2010 but in 2009 only for the portion of the year following the completion of the acquisition. The balance of the increase was attributable to the strong sales performance across our product lines described in more detail below.
Our operating loss for 2010 was $6.3 million, compared to a loss of $15.9 million in 2009 (2008: loss of $8.5 million).
Our operating loss in 2010 was significantly affected by our comprehensive settlement with Broadcom Corporation. In December 2010 mediation commenced between CSR and Broadcom with the intention to settle all outstanding litigation regarding alleged intellectual property infringment, including the litigation against SiRF that was pending at the time of its acquisition. Settlement was signed on 10 January 2011. Under the terms of this settlement, we made an initial payment to Broadcom of $5 million and will make further payments of $12.5 million per year for five years. Under the settlement, all outstanding litigation has been dismissed, all pending litigation has been terminated and the parties have entered into a mutual covenant not to sue that expires in January 2016. Although these payments will be made over a five-year period, because they relate to alleged past infringement by SiRF and the related discharge of pending claims and termination of litigation, we recorded $59.8 million, the estimated net present value of these payments, as a charge to 2010 earnings, resulting in the full-year operating loss. Prior to commencement of mediation, the amount of any liability was not readily estimable and no cash outflow was considered probable.
Cash, cash equivalents and treasury deposits increased to $440.1 million at 31 December 2010 from $412.4 million at 1 January 2010, which was an increase of $27.7 million. This increase reflected our strong net cash from operating activities in 2010 of $77.9 million (2009: $50.2 million).
On 13 September 2010, the Board announced a share buy-back programme of up to $50 million. The Company is significantly cash generative and has the financial flexibility both to consider potential acquisitions that meet its strict investment criteria and to drive its organic development. In light of this, the Board initiated the share buy-back programme. Prior to entering our close period on 1 January 2011, we had purchased 7,145,000 of our ordinary shares for an aggregate of $37.5 million.
As previously announced, the Board of CSR is proposing the Company’s first dividend of $0.065 (£0.04) per share in respect of the 2010 financial year, representing 2/3 of a notional $0.098 (£0.06) per share full year dividend that would have been paid if the Company had commenced payment of dividends sooner. It is the Board’s intention to follow a progressive dividend policy that reflects the underlying growth prospects of the Company as well as the long term outlook for growth in earnings per share and group cash flow. The Board intends to pay dividends on a semi-annual basis.
Subject to shareholder approval at the Annual General Meeting to be held on 18 May 2011, the dividend will be paid on 3 June 2011 to shareholders of record on 13 May 2011. The dividend will be paid in sterling and holders of ordinary shares will receive £0.04 per ordinary share.
As noted above, our financial results for the comparative financial year to 1 January 2010 include the results of SiRF from the date of acquisition, but SiRF’s financial performance is not reflected in our financial results for the first six month period of 2009 prior to the acquisition or for any of the financial years prior to 2009.
Over the past year, we have further strengthened our position in all of our key product categories: Bluetooth, Wi-Fi and GPS. The proliferation of connectivity and location beyond the handset into home, office and in-vehicle is continuing rapidly, changing end customers’ experience and expectations – in fact, changing the way we all work, live and play.
This is changing the profile of our business and expanding our opportunities. In all our market segments, we have strong positions and we are leveraging these positions to open new markets with focused and differentiated product and software development, establishing feature-rich platforms, disciplined development execution and strong operational efficiency.
In handsets, our growth was flat, reflecting lower growth in the market for feature phones, the production delays at one of our lead customers for our CSR8000 and the sharp market swing to smartphones. We have acknowledged our relative weakness in smartphones and we are making good progress on our product route map to reposition our portfolio and address this.
We are seeing rapidly growing attach rates for connectivity and location in the automotive and PC/tablet sectors, rapidly growing attach rates for location in the camera sector, and rapidly growing attach rates for connectivity in the gaming sector.
Last year, we launched next-generation products that are now gaining traction and are expected to drive growth in 2011. Our CSR8000 latest generation Bluetooth product, which includes our proprietary Classic Bluetooth, Bluetooth High Speed and Bluetooth low energy technologies, is shipping with two Tier One handset manufacturers, and sales are increasing as expected. SiRFstarIV, our latest generation GPS product, has been designed in with a second Tier One customer. Our SiRFprimaII and SiRFatlasV platforms are having good success in winning designs for feature-rich location platforms with in-dash automotive and PND customers. In 2010, WI-Fi was a small, but strategically important part of our business. Many of the leading companies in the handset and automotive markets are using our Wi-Fi products, and we continue to build momentum, winning a number of additional design wins.
We also introduced CSR μEnergy™, which enables Bluetooth ultra low power connectivity and basic data transfer in a variety of applications previously hindered by power consumption requirements, size constraints and complexity of prevailing wireless technologies. We believe CSR μEnergy™, unique to CSR, has wide potential, including high-volume products such as remote controls, keyboards and mice and a variety of health and well-being products.
CSR invested $199.9 million in R&D in 2010 compared with $169.7 million in 2009 and $158.1 million in 2008. The increase was due to the inclusion of a full year of SiRF R&D expenditure as well as new investment in R&D in 2010, offset by some R&D expense synergies realised following the SiRF acquisition. We believe that this level of investment is important to ensure that we are able to continue to compete effectively in a rapidly evolving market which requires the advancement of existing technologies and the development of innovative solutions in order to sell our products to customers, and we expect to continue increasing our investment in R&D during 2011.
CSR’s commitment to new technology continues to demonstrate the strength of working relationships with key supply chain partners. As examples, 2010 brought firstly the completion of 40nm RF CMOS IP development enabling the parallel roll out of multiple product development programmes using proven advanced RF IP on 40nm. In addition to 40nm IP delivery, CSR executed a programme that resulted in the conversion of high volume wire bond packages using gold wire. Conversion from gold to copper wire mitigated the risk of economic / trade conditions driving gold pricing and increased package costs.
A discussion of the changes in financial performance of the Business Segments starts here. We made good progress in 2010 to extend our product portfolio by expanding our Wi-Fi, location and audio businesses. We maintained a strong position in many of the markets we target, such as Bluetooth headsets, PNDs, automotive and gaming. While we lost some share of the Smartphone market, as discussed below, we also gained market share in markets such as PCs and feature phones.
The first six months of 2010 delivered a significant increase in revenues ($393.8 million compared with revenues of $193.5 million for the same period in 2009) as a result of customers increasing orders and restocking inventory channels in response to a consumer-led increase in demand and the inclusion of SiRF GPS revenues, which we estimate impacted the first six months of 2010 by $128 million. In addition, we experienced strong demand for many of our products, particularly from customers in the automotive sector and emerging markets in PNDs as well as for our PC and consumer products. In each of these markets, we were able to achieve increases in our market share. The second half of 2010 experienced a slight reduction in revenue: $406.9 million compared with $407.9 million for the same period in 2009. This reflected the wider impact of a slower growth in the global economy generally. In addition, during the second half, revenues were affected by the delayed introduction of our products at a major customer, the effect of capacity constraints for the manufacture of products supplied to some of our automotive customers, in addition to a dramatic shift in consumer demand from feature phones (where we are strong) to smartphones (where we are less well positioned).
In July 2010, we acquired APT Licensing Ltd (‘aptX’) after a successful three-year collaboration under the eXtension Partner Programme. In the months since the acquisition, we have secured a number of design wins using our audio compression aptX technology. For example, in January 2011, Samsung announced that it would incorporate aptX in a broad range of its mobile devices and accessories. We believe the aptX technologies will provide further opportunities in other markets, including in automotive and headsets where aptX technologies are market leaders.
Looking ahead, we plan to continue to drive revenue growth across all our businesses by creating and introducing differentiated products with unique, high value features in connectivity, location and audio platforms augmented by our recognised capabilities in implementation and support. We are increasing our investment in product innovation to support the more than 30 new products on our roadmap in the coming years. In 2011, we expect to launch our CSR9800 Bluetooth, Wi-Fi and Bluetooth low energy combination chip, as well as SiRFstarV with “Deep Indoors” location technology, among other product launches.
We have a clear plan to reposition our handset business for growth, with new products launched recently and others launching late in 2011.
We intend to build on our strong position to support further growth in our Audio & Consumer Business Unit during 2011. Our focus is to continue to innovate and differentiate our world-class products to improve customer usability and enable new functionality for many of the emerging consumer electronics markets. With a market share of more than 50% in automotive and a strong position in PNDs in the higher growth emerging markets, our Automotive & PND business unit is well positioned to benefit from strong growth in its markets.
As a consequence of the market opportunities in connectivity, audio and location-based services, competition has intensified as existing and new entrants seek to establish and grow market share. This trend of increasing competition is expected to continue. As the number of companies supplying wireless technology solutions increases, our customers have access to a greater variety of alternative solutions with differing features to those offered by CSR. They are also able to seek better prices in return for awarding contracts and, similarly, competitors are often prepared to offer lower prices in order to secure new business.
For 2011 overall, we reiterate our expectation to continue growing revenues.
Our business is organised into three business units which represent our reportable segments: Handsets (HBU), Audio & Consumer (ACBU) which includes headsets, PCs and consumer products and Automotive & Personal Navigation Devices (APBU). As stated above segment information for the period prior to the acquisition of SiRF does not include SiRF’s financial results.
In 2010, approximately 42% of revenue was generated by the HBU segment, approximately 30% was generated by the ACBU segment and approximately 28% was derived from the APBU segment. This compared to 52%, 27% and 21% respectively in 2009. Revenues from products historically made by SiRF are primarily in the APBU and HBU segments, although a small portion are in the ACBU segment; the acquisition of SiRF thus has had the biggest impacts on the results of operations in the HBU and APBU segments.
HBU segment During 2010, overall revenue in our Handset Business Unit increased by 9% to $339.1 million, compared with $310.8 million in 2009. A further discussion of HBU revenue is given in the Financial Performance section below.
Our handset performance was constrained by our low share of the Smartphone market and production delays at one of our lead customers for our CSR8000 product. Our continued strong sales in the feature phone market partially offset this weakness.
The feature phone market remains substantial, with expected shipments of more than 700 million units per year, and we have been gaining share within this market for all our technologies. We expect to continue to perform well in feature phones in 2011. We have a clear strategy to improve our position in Smartphones as discussed here and we are committed to strengthening our position in this market segment.
Our latest Bluetooth and GPS products – the CSR8810 and SiRFstarIV devices – are currently being shipped in increasing volumes with Tier One OEMs. In GPS, we have secured an important additional Tier One design win, and we see opportunity for more design wins in 2011. The CSR9800, our 40nm Bluetooth + Wi-Fi + CSR μEnergy combination chip, is on track to sample with customers this summer, when we also plan to launch SiRFstarV, a highly differentiated GPS device that incorporates “Deep Indoors” location technology. Both devices are receiving positive feedback and we believe they provide the opportunity for us to secure design wins in the Smartphone market in late 2011 that would increase our penetration of the Smartphone market in 2012.
Technologies such as Bluetooth low energy and Wi-Fi Direct are providing new opportunities for discrete solutions in Smartphones and in feature phones. Our platform partnership with Infineon Technologies is progressing well and has resulted in increased interest in our Bluetooth and Wi-Fi technologies for adoption into feature phones in 2011 and beyond. In addition to the Tier One customer currently commencing production with our CSR8810 on the Infineon platform, this partnership is generating interest in emerging economies such as China. The wireless solutions business of Infineon has recently been acquired by Intel, another company with which we have historically had a strong working relationship, and we look forward to continuing these initiatives with Intel.
HBU underlying operating loss was $25.2 million compared to an underlying operating profit of $4.6 million in 2009 (2008: underlying operating loss of $8.5 million). The HBU underlying operating loss in 2010 was as a result of increased investment in HBU product developments compared to investment in 2009. The 2009 HBU underlying operating profit represented an increase in earnings for this segment of $13.1 million, this was as a result of lower HBU product development costs in 2009 when compared to 2008.
ACBU segment Revenue in our Audio & Consumer Business Unit increased by 46% in 2010 to $238.4 million, compared with $163.3 million in 2009. A further discussion of ACBU revenue is given in the Financial Performance section below. This strong growth is a result of maintaining our leadership position in headsets and market share gains in the gaming and PC markets, as well as the incremental growth of new markets such as digital still cameras, athletic watches and wireless speakers. While Bluetooth remains our primary technology in this market, GPS penetration continues to increase as devices such as digital still cameras and athletic watches implement location-based functionality to enhance the user experience.
In the audio space, we remain the market leader, with more than 70% of the overall headset market, and more than 90% of the emerging stereo headset market. In the fourth quarter, CSR won 75% of all new headset designs, about 25% of which were for stereo headset devices. New designs launched recently included headsets from Bose, Creative and Motorola, as well as wireless speakers from Aliph for the JAMBOX and Creative for the ZiiSound. The aptX acquisition we made last year has further enhanced our offering in this market. For example, last month at the Consumer Electronics Show (CES) in Las Vegas, Samsung announced that it would incorporate our aptX hi-fi quality Bluetooth stereo technology into a broad range of its mobile devices and accessories. ID8 also chose this technology for its ultra-slim designer Bluetooth headset, the MoGo Talk HD1. We believe that further deployment of aptX into the handset market will drive additional demand for the technology in the automotive and headset market segments, as well as in other mobile devices.
We continue to gain market share within the PC market with our PC Wi-Fi provider partners and within the tablet market for our Bluetooth and GPS technologies. Recently Intel Corporation, one of our PC partners, introduced two new Wi-Fi + Bluetooth chips as part of the Intel Centrino Wireless product line. These are the first of the Intel branded products to be launched using our Bluetooth IP, which Intel is licensing from CSR. In the fourth quarter, we also won an additional PC design with a Tier One PC manufacture and won a number of tablet designs in Asia. We recently announced our latest PC Bluetooth® Module, BlueSlim2, which is a qualified Bluetooth module reference design for notebooks, netbooks and tablets, providing a fast, simple and cost-effective route for original equipment manufacturers (“OEMs”) to integrate the latest Bluetooth functionality into PC module designs. In the gaming market, our lead customer is expected to maintain its strong position.
In other consumer devices, our GPS solutions are picking up momentum in markets where geo-tagging and location-aware applications gained popularity last year. In the fourth quarter, we won a number of new design wins for digital still cameras and athletic watches.
As we look to 2011 and beyond, demand for the products we offer in the audio and consumer markets continues to grow. We intend to build on our strong position in many of the markets to support further growth in our Audio & Consumer Business during 2011.
ACBU underlying operating profit was $59.4 million compared to an underlying operating profit of $6.2 million in 2009 (2008: underlying operating profit of $63.4 million). The increased underlying operating profit in 2010 compared to 2009, was as a result of segment revenue increasing more than segment costs. The decrease in segment underlying operating profit between 2008 and 2009 was due to the significant reduction in revenue, as the costs attributed to this segment did not decrease to the same extent.
APBU segment In 2010, our Automotive & PND business unit grew year on year by 75% to $223.1 million, compared with $127.3 million in 2009. A further discussion of APBU revenue is given in the Financial Performance section below. This strong growth was in spite of the capacity constraints we experienced in the second half of the year and is a result of higher attach rates for our technologies in the automotive market where we hold the leading position, and PND growth in emerging markets.
Looking forward, we expect strong growth as overall demand for connectivity and location solutions in the car strengthens, and vehicles become a major connectivity centre for infotainment and telematics applications. Our emerging market customers continue to see significant growth opportunities where penetration rates are still relatively low and where we have a strong market position.
Evidence of the strong growth of the Connectivity Centre in the automotive market was apparent at the Consumer Electronics Show (CES) in Las Vegas where several new automotive products that use CSR’s technologies were introduced. General Motors announced an after-market version of their OnStar communications system that utilises CSR’s Bluetooth and GPS technology. Hyundai launched at CES its BlueLink® Telematics platform, which incorporates more than 30 innovative connectivity functions and core safety services, including maintenance alerts, remote door lock/unlock capabilities, remote start, and “geofence" text-message alert for parents of young drivers, and stolen vehicle slowdown and recovery features. BlueLink® incorporates CSR’s Bluetooth technologies. We have also been leveraging our strong market position in Bluetooth to capitalise on growing demand for CSR’s automotive grade Wi-Fi solution. In recent trade shows, Tier One suppliers have given early demonstrations of technologies using CSR Wi-Fi solutions within the automotive sector.
Several CSR Bluetooth and GPS automotive design wins began production in the fourth quarter, including those for Audi, Ford and Toyota. In addition, our SiRFprimaII platform for the automotive market, which is in advanced stages of development, is generating strong customer interest. We now have four lead customers across three different APAC (Asia Pacific) regions for this multifunction location platform. This is a direct result of our efforts to move our system-on-chip platforms into high-end PNDs and in-dash automobiles, where we enjoy higher gross margins for our automotive-grade quality and complete platform solution.
Looking ahead, growth trends for connectivity technologies in the Automotive & PND markets are expected to be strong, driven by increased attach rates as well as emerging applications. With a leading market share in automotive and a strong position in PNDs in the higher growth emerging markets, CSR is well positioned to benefit from these growth trends. We also expect to see incremental growth in the second half of the year, once we have resolved our previously announced capacity constraint issues for this market. In addition, as our best-in-class audio technology, aptX, gains broad adoption in handsets and portable consumer devices, we believe there is an opportunity to expand that technology to the car as well.
APBU underlying operating profit was $44.8 million compared to an underlying operating profit of $16.0 million in 2009 (2008: underlying operating profit of $18.0 million). The increased underlying operating profit in 2010 compared to 2009 was as a result of segment revenue increasing more than segment costs. The small decrease in segment underlying operating profit between 2008 and 2009 was due to an increase in development costs for GPS automotive products following the acquisition of SiRF, which more than offset the increase in revenue, as the costs incurred for Bluetooth developments were small.
Our results of operations during 2008-2010 were materially affected by the following trends, several of which are likely to continue and which we expect are likely to affect performance in 2011. These include:
Our current product portfolio has target markets including connectivity technologies such as Bluetooth and Wi-Fi; location technologies such as GPS and audio technologies including FM and codecs, all focused on handsets, consumer, audio, automotive and PND applications. We believe that these markets increased by around 15% in value terms in 2010. A large part of the growth was in the Wi-Fi and smartphone markets, where we have yet to establish a strong presence; however, we did increase our revenues by around 17% in 2010 compared to a 2009 revenue comparative which includes SiRF’s first half revenue pre-acquisition of $82.5 million which has been derived from SiRF’s accounting records, as well as CSR’s IFRS revenue of $601.4 million. This principally reflects growth in the higher ASP (average selling price) markets of our audio and consumer and automotive and PND businesses.
Handsets In handsets, the total market showed some growth compared to 2009, following the small decline in 2009; we estimate that the smartphone sector grew by over 50% with much lower growth in feature phones and a decline in the ultra low cost sector. The momentum behind smartphones has continued, with Apple, Nokia, RIM and other established brands concentrating on this sector. Attach rates continued to grow for Bluetooth, Wi-Fi and GPS in phones of all kinds. The growth in smartphones is driving the adoption of combo chips.
Audio and Consumer As we look to 2011 and beyond, demand for the connectivity, location and audio technologies we offer in the audio and consumer markets is expected by industry analysts to grow at an annual compound growth rate of more than 15%.
Automotive and PND Industry analysts forecast that growth trends for connectivity technologies in the Automotive and PND markets are expected to be strong at a more than 25% compound annual growth rate. The growth is expected to be fueled by increased attach rates as well as emerging applications.
Much of the technology which we develop and supply to our customers is installed into devices which are sold into consumer markets. Demand for consumer products and therefore for our own products is subject to seasonal variation. This in turn affects our results which typically are stronger in the second and third quarters of a financial year as our customers increase orders in anticipation of demand for their own products.
Revenue derived from the supply of integrated circuits featuring our Bluetooth technologies remained the most significant part of our revenue in 2010.
We rely on our suppliers to provide the volumes of integrated circuits sufficient to meet the demands for our products from our customers. The economic downturn through 2009 resulted in measures being taken by a number of foundries that manufacture, assemble and test integrated circuits to restructure their businesses, resulting in a contraction of overall capacity for the supply of integrated circuits.
During 2010, BC6 ROM, our Bluetooth device aimed at the mobile phone segment was again our largest revenue generating product, with the SiRFstarIII GPS chip being the next most significant. BC4 ROM, our largest shipping product in 2006, 2007 and 2008 started to reach the end of its useful life. In 2011, we expect BC6 ROM to continue as the largest shipping device, whilst SiRFstarIII is still expected to make a very material contribution. New products such as SiRFstarIV, SiRFatlasV and CSR8000 are all expected to contribute significantly to 2011 revenue.
Looking further into the future, we expect SiRFprimaII, SiRFstarV and CSR9800 our combination Bluetooth, Wi-Fi and Bluetooth low-energy device to make a meaningful contribution to revenue from 2012 onwards.
The following table summarises our income statement:
Revenue Other cost of sales Amortisation of acquired intangible assets Gross profit Other research and development expenses Share-based payment charges Amortisation of acquired intangible assets Total Research and development expenses Other sales, general and administrative expenses Asset impairment Amortisation of acquired intangible assets Share-based payment charges Integration and restructuring expenses Litigation settlement Deferred tax adjustment to goodwill Acquisition-related fees Total Sales, general and administrative expenses Operating loss Investment revenue Finance costs and other gains and losses Loss before tax Tax Profit (loss) for the period
Some discussions and analyses in this Annual Report include measures which are not defined by generally accepted accounting principles (GAAP) such as IFRS. We believe this information, along with comparable IFRS measures, is useful to investors. Our management uses these financial measures, along with the most directly comparable IFRS financial measures, in evaluating our operating performance and value creation. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with IFRS. Non-GAAP financial measures as reported by us may not be comparable with similarly titled amounts reported by other companies.
In the following sections and elsewhere in this Annual Report we discuss the following non-GAAP measures:
For a detailed discussion of the reasons behind this presentation and full reconciliations of each measure to the most directly comparable IFRS measure, refer here.
The following table presents revenue, cost of sales, underlying cost of sales, gross profit, underlying gross profit, total research and development expenses, underlying research and development expenses, total sales, general and administrative expenses, underlying sales, general and administrative expenses, operating (loss) profit and underlying operating profit, all in absolute terms and as a percentage of revenue, for 2010 and 2009:
Revenue Cost of sales Underlying cost of sales Gross profit Underlying gross profit Research and development expenses Underlying Research and development expenses Sales, general and administrative expenses Underlying sales, general and administrative expenses Operating loss Underlying operating profit
The following table presents revenue, cost of sales, gross profit, total research and development expenses, underlying research and development expenses, total sales, general and administrative expenses, underlying sales, general and administrative expenses, operating loss and underlying operating profit, all in absolute terms and as a percentage of revenue, for 2009 and 2008 (underlying cost of sales and underlying gross profit are not shown as they are the same as cost of sales and gross profit respectively):
Revenue Cost of sales Underlying cost of sales Gross profit Underlying gross profit Research and development expenses Underlying Research and development expenses Sales, general and administrative expenses Underlying sales, general and administrative expenses Operating loss Underlying operating profit
Revenue Our revenue in 2010 increased to $800.6 million representing a 33% increase on 2009 revenue ($601.4 million). During 2009, we acquired SiRF which, had it been acquired on the first day of 2009, would have contributed a total of $212.5 million of GPS revenue in the year. In 2010, we recorded a full year of GPS revenues totalling $273.9 million. The remaining growth was driven by our legacy Bluetooth business.
The increase in revenue was achieved despite the volume-weighted average selling price across all products declining by 1% from 2009 to 2010. Volume weighted average selling prices declined for both Bluetooth and GPS products, however, these declines were substantially offset by the higher proportion of revenues from GPS products which have a higher average selling price (although they are subject to the trend for decline described above).
We saw particularly strong growth in our automotive and PND and audio and consumer businesses, which are described further below. This positive impact was offset to an extent by weakness in our handset business, where our lack of penetration in smartphones and the related trend favouring combination devices have meant that the handset business was able to achieve only modest growth.
Our revenue in 2009 fell to $601.4 million, representing a 13% decrease on 2008 revenue ($694.9 million). Excluding SiRF GPS revenue, our revenue declined by $223.5 million, or 32%, in 2009. We believe that over the same period, the Bluetooth market increased by around 10% in terms of total units sold, although our units sold fell by 16%. SiRF’s contribution to revenue since its acquisition on 26 June 2009 reduced the revenue decline by approximately $130.0 million.
There were two primary reasons for our declining sales volumes from 2008 to 2009. The first was the loss of market share in handsets, due to the loss of a Bluetooth+FM programme with our BC5 FM chip at one of our largest customers. The second was the overall decline in the headset market, which we believe fell by around 50% in revenue terms, with our business impacted to a similar extent.
There was a further revenue impact due to the volume-weighted average selling price declining by around 8% year on year. Average selling price for the legacy CSR Bluetooth business declined by around 20% but this was partially offset by the higher average selling price for SiRF products.
In the second half of 2009, as expected, we commenced volume shipments of our BC7000 devices to several major customers of the handset business unit, which had a positive impact on revenue and there was further growth in revenue from this product in 2010.
The proportion of revenue derived from our top ten customers has fallen to 50% from 54% in 2009 (2008: 67%). The SiRF acquisition in 2009 has brought increased diversity to our customer base and has significantly reduced our dependency on several key customers. Our largest customer represented 14% of revenue in 2010 compared to 11% in 2009 and 19% in 2008.
Segment analysis The following table presents CSR’s segmental revenue for 2010, 2009 and 2008. SiRF revenue is included in this data only for the portion of 2009 following the acquisition on 26 June 2009.
Handsets Business Unit Audio & Consumer Business Unit Automotive & PND Business Unit Total
Results for each business unit are regularly reviewed in various forums by senior management, including the CEO and CFO to understand how they have impacted the results of the Group and to assist in the allocation of resources.
HBU segment Handset segment revenue, which represented 42% of our total revenue in 2010, increased 9.1% compared to 2009, as 2010 included the impact of a full year of SiRF GPS revenue.
Non-GPS revenues fell due to normal reductions in weighted average selling prices, whilst volume shipments increased. Growth was constrained by our low share of the smartphone market and the delayed production increase at one of our lead customers for our CSR8000 product.
The net decline in the legacy Bluetooth business was more than offset by the increased revenue from GPS shipments which increased as a result of including a full year of the GPS business. Second half GPS revenues in this segment increased by 9% compared to the second half of 2009, although shipment volumes increased by more than this as a major customer switched volume production to a new lower cost device.
Handset segment revenue, which represented around half of our total revenue in 2009 decreased around 10% in 2009 compared to 2008. This was mainly due to the loss of market share arising from a lost Bluetooth+FM programme.
These effects were partially offset by the increased revenue from GPS shipments in the second half of the year, following the acquisition of SiRF. The GPS derived revenue in the HBU segment represented approximately $52 million out of the total GPS revenue of approximately $130 million following the acquisition of SiRF.
ACBU segment Audio & Consumer segment revenue, which represented 30% of our total revenue in 2010, increased 46% compared to 2009, when it represented 27% of total revenue. In 2010, this includes the impact of a full year of SiRF GPS revenue.
ACBU revenues grew in all their markets. The majority of the growth came from the headset market, where shipment volumes increased and revenues increased significantly as the market oversupply problems experienced in the first half of 2009 did not recur. There was also significant strength in the gaming market where revenues grew as a result of the launch of new products and increased market share for our main end customer in this market. GPS revenues in this segment almost doubled as GPS technology was included in more cameras and fitness applications. Bluetooth revenues increased from the PC market as we won a number of new customers.
Audio & Consumer segment revenue decreased 46% in 2009 compared to 2008. Headset revenue was adversely impacted during 2009 by a decline in the total headset market of around 50%, as a result of the headset supply chain being significantly oversupplied during the first half of 2009, due to the build up of inventory during the second half of 2008 and the global economic downturn. These levels of inventory had largely cleared by the start of the second half of the year, with the result that order levels recovered, better reflecting underlying market demand.
ACBU segment Automotive & PND segment revenue, which represented 28% of our total revenue in 2010, increased 75% compared to 2009, when it represented 21% of total revenue. 2010 includes the impact of a full year of SiRF GPS revenue.
First half revenues in this segment grew from $14.1 million in the first half of 2009 to $104.5 million in the first half of 2010, mainly as a result of the inclusion of SiRF GPS revenues.
Bluetooth revenues showed strong growth in both PNDs and automotive applications. Second half revenues in this segment increased by around 5% compared to the second half of 2009, although sales were constrained during the second half of 2010 due to the limited manufacturing capacity of one supplier for some devices.
Automotive & PND segment revenue increased 149% in 2009 compared to 2008, when it represented 7% of total revenue. The increase was due to the SiRF GPS revenue after the acquisition, with Bluetooth revenue performing relatively well and remaining flat against 2008 in a challenging market.
Geographical analysis We operate in four principal geographic areas – the UK, the rest of Europe, the Americas (particularly the USA) and Asia. The table below provides, for the periods indicated, our revenue from external customers by geographical location, on the basis of customers’ manufacturing location:
UK Rest of Europe USA (including the Americas) Asia
Major Customers Sales to our largest customer accounted for approximately 14% of revenue (approximately $115.2 million) in 2010, compared with 11% of revenue (approximately $67.8 million) in 2009 and 19% of revenue ($135.0 million) in 2008. In 2010, only our largest customer exceeded 10% of revenue in the period. In 2009, sales to our second largest customer also contributed nearly 11% of revenue or approximately $63.9 million. In 2008, sales to the second largest customer contributed 11% of revenue (approximately $75.6 million). In 2010, revenue from our top five customers represented 42% of total revenue, as compared to 43% in 2009 and 50% in 2008.
Gross profit Gross profit consists of revenue less cost of sales. In 2010, our gross margin, which is the ratio of gross profit to revenue increased to 47.0% of revenue, from 44.6% in 2009. In absolute terms, gross profit increased from $268.3 million to $376.6 million in 2010, an increase of 40.4%.
Gross profit is stated after charging $5.6 million of amortisation of intangible assets which were recognised on the acquisition of SiRF in 2009 and related to products in development at that time. During 2010, these products started shipping in volume and the amortisation was therefore charged to cost of sales, whilst in 2009 it was charged to research and development as the products developed from the acquired intangible assets had not yet been launched. Excluding this charge, the underlying gross margin was 47.7%.
The underlying gross margin increased from 44.6% in 2009 to 47.7% in 2010 due to a combination of the fair value adjustment in 2009 which reduced the 2009 gross margin by 1%, the increased proportion of GPS revenues as a result of the inclusion of a full year of GPS revenues, and the mix away from the handset business unit to the other segments which generally have a higher gross margin.
In 2009, our gross margin, the ratio of gross profit to revenue, remained at 44.6% of revenue, the same as in 2008. In absolute terms, gross profit fell to $268.3 million from $309.8 million in 2008, a decrease of 13.4%.
The 2009 gross profit is stated after a $5.8 million charge for fair valued inventory acquired in connection with the acquisition of SiRF; the $5.8 million fair value adjustment had a negative effect of 1% on the gross margin.
The acquisition of SiRF had a significant favourable impact on gross margins and increased the second half gross margin percentage. We estimate that SiRF’s historical gross margins on a comparable basis to CSR were around 47% for 2008 and 54% in 2007, which are above the levels historically achieved by CSR. Our gross margin in the first half of 2009 was 41.2% and this increased to 46.4% in the second half of the year due to a significant improvement in the Bluetooth margins achieved and the acquisition of SiRF as there are generally higher gross margins on GPS products.
Research and development R&D expense consists of total research and development which is further broken down into underlying research and development, share-based payment charges and amortisation of acquired intangible assets. Underlying R&D consists primarily of staff costs, engineering costs and depreciation. The following table sets forth the primary components of R&D expenses during the 2010 and 2009 fiscal years:
Research and development Underlying research and development Share-based payment charges Amortisation of acquired intangible assets Total
In 2010, R&D costs were $199.9 million, a 17.8% increase from the $169.7 million of R&D expenditure in 2009.
Underlying R&D expenditures in 2010 were $189.2 million, an increase of 22% compared to expenditures of $155.5 million in 2009. The increase was due to the inclusion of a full year of costs following the acquisition of SiRF in 2009, which was offset by the impact of synergies arising in the second half of 2009 as a result of the combination of the CSR and SiRF R&D departments and the investment in increased headcount in 2010 as we sought to enhance our development capability in specific areas, particularly in Wi-Fi. The combination of the acquisition of SiRF and these targeted personnel additions led to average R&D headcount increasing from 811 in 2009 to 1,041 in 2010. Combined R&D headcount as at the completion of our acquisition of SiRF was 1,014.
We also spent approximately $9 million on intellectual property for inclusion in some of our next generation of System on Chip products where customers are demanding increased processor power.
Share-based payment charges decreased by around $1 million from 2009 to 2010, mainly due to changes in our assessments of the likely achievement against performance targets.
The decline in amortisation of acquired intangible assets was a combination of the inclusion of a full year of amortisation for the assets recognised on the acquisition of SiRF in 2009, which was more than offset by the allocation of amortisation to cost of sales as described above under “Gross Profit”.
We expect our spending on research and development to continue to grow on an absolute basis.
The following table sets forth the primary components of R&D expenses during the 2009 and 2008 fiscal years:
Research and development Underlying research and development Share-based payment charges Amortisation of acquired intangible assets Total
In 2009, R&D costs were $169.7 million, a 7.3% increase from the $158.1 million of R&D expenditure in 2008, mainly due to the increased headcount in the second half of 2009 following the acquisition of SiRF (2009 average headcount: 811, 2008 average headcount: 697). However, these increases were partially offset by the savings made in the Q4 2008 restructuring programme which saved $20 million across all operating expense categories, and the synergy restructuring programme implemented at completion of the acquisition, which aimed to make $35 million of annualised savings across all operating expense categories within 60 days. These targets were successfully met and delivered ahead of schedule.
The remaining increase in R&D expense was mainly due to the acquisition of SiRF: share options that had been issued to SiRF employees before the completion date were rolled over into CSR share options, leading to a $2.0 million increase in the R&D sharebased payment charge in 2009 and amortisation of intangible assets recognised on acquisition contributed a further $2.0 million of the increase.
Sales, General & Administrative Sales, General & Administrative (SG&A) consists of total sales, general and administrative expenses which is further broken down into underlying sales, general and administrative expenses, asset impairment, amortisation of acquired intangible assets, share-based payment charges, acquisition fees, integration and restructuring expenses and litigation dispute settlement costs.
The following table presents the components of SG&A during the 2010 and 2009 fiscal years:
Sales, general and administrative Underlying sales, general and administrative expenses Amortisation of acquired intangible assets Share-based payment charges Integration and restructurings Litigation settlement Acquisition-related fees Total
Sales, general and administrative costs in 2010 were $182.9 million, representing a 59.7% increase from $114.5 million in 2009, the most significant reason for the increase was the litigation dispute settlement charge of $59.8 million, at the end of 2010.
The settlement charge was the result of the comprehensive settlement on 10 January 2011 of all outstanding litigation with Broadcom. The settlement includes all litigation ongoing between SiRF and Broadcom at the time of the acquisition of SiRF by CSR in June 2009. The terms included a covenant by each party, expiring in January 2016, not to sue the other or any third parties, including the other’s customers, for infringement based on the use of the other's products.
In connection with this comprehensive settlement, CSR has agreed to make an initial payment of $5 million and payments of $12.5 million per year for five years. This was recorded in the 2010 results at the net present value of $59.8 million. Prior to the commencement of mediation in December 2010 the amount of any liability was not readily estimateable and no cash outflow was considered probable.
This increase in SG&A expenditures was offset by decreases in acquisition-related fees of $10.2 million as we incurred $10.6 million on the acquisition of SiRF in 2009, whereas we only incurred $0.4 million on the acquisition of APT Licensing Limited in 2010.
Integration and restructuring charges in 2010 of $1.1 million related to the closure of our Stockholm office in the fourth quarter of 2010, and mainly represents employee severance costs. In 2009, we incurred integration and restructuring costs of $12.2 million which related to the reorganisation following the acquisition of SiRF.
There was a charge of $3.5 million (2009: $2.0 million) for the amortisation of acquired intangible assets, this was the amortisation of customer relationships and trade names recognised on the acquisition of SiRF.
Underlying sales, general and administrative expenses were $114.1 million representing a 32.8% increase compared to 2009 underlying sales, general and administrative expenses of $85.9 million. This increase was as a result of higher litigation costs, principally in connection with the work prior to settlement of the litigation with Broadcom and the inclusion of a full year of SiRF costs, although these were partially mitigated by the synergies achieved in the second half of 2009 (2010 average headcount: 422, 2009 average headcount 356). Combined SG&A headcount immediately following the SiRF acquisition was 430. Following the Broadcom settlement, we anticipate a consequential reduction of at least $10 million per annum in our operating expenses for 2011 after allowing for planned growth in other areas.
The following table presents the components of SG&A during the 2009 and 2008 fiscal years:
Sales, general and administrative Underlying sales, general and administrative expenses Impairment of assets Amortisation of acquired intangible assets Share-based payment charges Integration and restructuring Deferred tax adjustment to goodwill Acquisition-related fees Total
Sales, general and administrative costs in 2009 were $114.5 million, representing a 28.5% decrease from $160.2 million in 2008, the largest change being the impairment of $52.9 million recognised in 2008, which did not recur. The costs of the Q4 2008 restructuring at $14.4 million were slightly higher than the 2009 integration and restructuring programme associated with the acquisition of SiRF which totalled $12.2 million. The main components of this charge in 2009 were onerous lease charges of $2.2 million, severance costs of $4.3 million and consultancy costs of $4.5 million.
Acquisition fees were $10.6 million, which included brokers’ fees, reporting accountant fees and legal fees associated with the acquisition of SiRF. These were charged to the income statement in accordance with International Financial Reporting Standard 3 (revised 2008), which CSR adopted for the 2009 financial reporting period. Under the rules of the previous IFRS3 applied to our previous acquisitions, these costs would have been included within the cost of the investment and ultimately within goodwill.
There was a charge of $2.0 million for the amortisation of acquired intangible assets in 2009, which was the amortisation of customer relationships and trade names recognised on the acquisition of SiRF.
Underlying sales, general and administrative expenses were $85.9 million representing a 3.6% decrease compared to 2008 underlying sales, general and administrative expenses of $89.1 million. There was an increase in the cost base as a result of the acquisition of SiRF; however, the impact of this was more than offset by the cost savings as a result of both the Q4 2008 restructuring and the 2009 synergy programme. There was a further decrease as the 2008 expenses include approximately $2.0 million on independent consultants retained in connection with our operational assessment.
Operating Result The operating loss for 2010 was $6.3 million compared to a loss of $15.9 million in 2009. The decreased loss was primarily the result of higher revenue and gross profit, which was significantly offset by increased operating expenses, which were $382.8 million in 2010 compared with $284.2 million in 2009, an increase of 35%, and primarily attributable to the Broadcom settlement charges.
The operating margin in 2010 (including the operating expense items noted above) was a loss of 0.8% compared to a loss of 2.6% in 2009.
Underlying operating profit for 2010 was $79.0 million compared to $26.9 million for 2009. The underlying operating margin for 2010 was 9.9% compared to 4.5% in 2009.
The operating loss for 2009 was $15.9 million compared to a loss of $8.5 million in 2008. Underlying operating profit for 2009 was $26.9 million compared to an underlying operating profit of $72.8 million in 2008.
Investment revenue Our investment income primarily represents interest earned on our cash and cash equivalents. During 2010, we had a monthly average of $429.1 million in cash, cash equivalents and treasury deposits, which represents an increase of 27% from the monthly average of $336.7 million in 2009. A major reason for the increase was the cash, cash equivalents and treasury deposits of $111.5 million acquired through the acquisition of SiRF which were included in the average for a full year in 2010.
Investment income decreased to $0.8 million in 2010 compared to $1.9 million in 2009: although the base rates in the UK and US remained unchanged, there were a significant number of longer term deposits placed in 2008 before the rates began to decline, which matured in the early part of 2009 and increased the investment income in that year above the level indicated by base rates.
Investment income decreased to $1.9 million in 2009 compared to $6.1 million in 2008, as a result of significantly lower UK and US interest rates.
Finance costs and other gains and losses Finance costs consist of interest expense and similar charges, unwinding of discount on contingent consideration and foreign exchange losses. Our finance costs amounted to $0.3 million in 2010, a small increase compared to $0.2 million in 2009.
Our finance costs amounted to $0.2 million in 2009, a 95% decrease compared to $4.1 million in 2008. This decrease was primarily due to a loss of $2.6 million for 2008 in foreign exchange translations due to the reduction in the GBP:USD exchange rate during that year, and in 2009, there was a gain of $1.0 million as the GBP:USD exchange rate increased.
Tax The tax credit for 2010 was $22.3 million, compared to a credit of $2.9 million in 2009.
The credit mainly resulted from the recognition of deferred tax assets, including the $11.9 million US tax losses described below and the $7.3 million R&D tax credit in the UK which will be carried forward against future year’s profits, as well as the lower tax rates for some of our subsidiaries, as described below.
The underlying effective tax rate for the year was 2.8%, which differed from the UK statutory rate of 28% due mainly to the additional deduction to be carried forward for the R&D tax credit ($7.3 million – 10%); the impact of lower tax rates in the various jurisdictions in which our subsidiaries operate primarily the Cayman Islands and Singapore, particularly related to the final year of operation of the legacy SiRF tax structure which was in place at the date of acquisition ($11.4 million – 15%). The underlying effective tax rate excludes the impact of the litigation settlement and the recognition of a deferred tax asset for the pre-acquisition losses of the SiRF US entity to the extent recovery is deemed probable ($11.9 million). These drive the reported rate of 391.4%. Other contributing factors include non-deductible expenses, the major element of which relates to share option charges.
The tax credit for 2009 was $2.9 million representing an effective tax rate of 20.6%, compared to a charge of $0.5 million in 2008.
Net income (loss) We recorded net income of $16.6 million in 2010, compared to a net loss of $11.3 million in 2009. This increase in our net income was mainly due to the higher revenue and gross profit which were offset by the increased operating expenses, which were $382.8 million in 2010 compared with $284.2 million in 2009, an increase of 35%. The litigation settlement charge was a primary reason for the increase in our operating expenses in 2010. A tax credit of $22.3 million was recorded as described above, which meant that we recorded net income of $16.6 million even though we recorded a loss before tax of $5.7 million. Underlying net profit increased to $77.4 million in 2010 from $30.7 million in 2009.
We suffered a net loss of $11.3 million in 2009, compared to a net loss of $6.9 million in 2008. Underlying net profit decreased from $64.2 million in 2008 to $30.7 million in 2009.
Earnings per share Basic and diluted earnings per share was $0.09 for 2010, compared to a basic and diluted loss per share of $0.07 for 2009. Underlying diluted earnings per share for 2010 was $0.43 per share, an increase of 115%, compared to $0.20 per share for 2009.
The 2010 earnings per share was again impacted by the issuance of 47.7 million shares in connection with the acquisition of SiRF in 2009, which increased by around 25 million the average weighted basic shares outstanding, and therefore had a $0.01 negative impact on the basic and diluted loss per share and a $0.07 negative impact on underlying diluted earnings per share.
Non-current assets Goodwill Other intangible assets Property, plant and equipment Investments Deferred tax asset Current assets Inventory Derivative financial instruments Trade and other receivables Treasury deposits and investments Cash and cash equivalents Total assets Current liabilities Non-current liabilities Total liabilities Net assets
Goodwill Goodwill arose on the acquisitions of aptX in 2010, SiRF in 2009, CPS and NordNav in 2007 and Clarity and UbiNetics during 2005. The balance of $224.7 million represents the goodwill from the aptX, SiRF, CPS, NordNav and Clarity acquisitions. The annual impairment review did not lead to any impairment of the goodwill balance.
Goodwill of $3.2 million was recognised on the acquisition of aptX during 2010, which was fully allocated to the audio and consumer segment as this is where we expect the future benefits from this acquisition to be realised.
Deferred tax asset The deferred tax asset increased from $4.3 million to $28.1 million. This was mainly as a result of the recognition of $11.9 million of SiRF’s pre-acquisition losses, based on, where relevant, forecast operating results based on approved business plans and $11.8 million of losses in the UK related to the loss incurred in the year as a result of the litigation settlement. Sufficient forecast profits exist in the appropriate jurisdictions to enable us to conclude that it is probable that these tax benefits will be realised.
Fixed assets (other intangible assets and property, plant and equipment) Fixed assets at 31 December 2010 included the net book value of our software licences of $9.2 million (2009: $4.3 million), which supports R&D and also includes the value of the ERP system, $3.1 million of internally developed technology which consists of development kits to enhance our design capabilities at advanced technology nodes, along with $14.4 million of in-process and developed R&D purchased as part of the acquisitions in 2010, 2009 and 2007 (2009: $22.5 million) and $8.1 million of trade names and customer relationships acquired with SiRF and aptX (2009: $11.6 million).
During 2010 we completed the implementation of our new ERP system and this was transferred from assets in the course of construction to the software category at a value of $6.0 million.
The value of our in-process and developed R&D decreased by $8.1 million. This was due to $1.6 million acquired with aptX, less total amortisation for the Group of $9.7 million. The $8.1 million of trade names and customer relationships represents the $13.8 million acquired with SiRF and the $0.9 acquired with aptX less amortisation of $6.6 million.
The majority of the balance of our tangible fixed assets is made up of test equipment and IT equipment, including 18 production testers which we consign to our subcontractors. During 2010, we implemented a new global telephone system and continued to invest in test equipment and IT infrastructure to support the growth of the business.
Inventory Inventory at 31 December 2010 stood at $85.3 million, an 18% increase from the level ($72.3 million) at 1 January 2010, which represents 82 inventory days (2009: 63 days) of the previous three months cost of sales. The increase is due to declines in customer demand within production lead times in HBU as well as a planned increase in inventories of certain products to enable us to carefully manage capacity constraints in APBU. This inventory is expected to be sold during 2011 as there remains substantial demand. We aim to keep sufficient inventory to meet the often short customer order lead times in this industry.
Trade receivables Trade receivables increased to $85.6 million as at 31 December 2010, up from $84.3 million at 1 January 2010. Days’ sales outstanding remained at 40 days.
Liabilities Our total liabilities increased to $183.6 million at 31 December 2010 from $129.1 million at 1 January 2010.
Accruals increased by $52.1 million, mainly due to the litigation settlement liability of $59.8 million, which increased current liabilities by $14.1 million and non-current liabilities by $45.7 million.
Contingent consideration of $1.6 million on the acquisition of aptX was recorded in the year.
Our primary source of liquidity is our cash flow from operations. At present, we do not rely on third party financing for any operational cash requirements and therefore liquidity risk is not considered a significant risk. In our opinion, working capital is sufficient for our present requirements.
We manage liquidity risk by maintaining adequate cash reserves and by continuously monitoring forecast and actual cash flows and matching the maturity of financial assets and liabilities.
Operating cash flows before movements in working capital Working capital Taxation Grant income Interest paid R&D tax credit received Net cash from operating activities Treasury management Purchase of investments Acquisitions of subsidiaries Capital expenditure (purchase of intangible assets and property, plant and equipment) Other financing activities Purchases of own shares Net increase (decrease) in cash and cash equivalents
Cash, cash equivalents and treasury deposits increased to $440.1 million (including treasury deposits of $267.8 million) at 31 December 2010, from $412.4 million (including treasury deposits of $241.8 million) at 1 January 2010, an increase of $27.7 million. The difference compared to the inflow of $1.9 million shown in the table above is due to amounts placed on treasury deposit of $25.4 million and a foreign exchange loss of $0.2 million from retranslation of non-US dollar cash balances.
Treasury deposits represent deposits with an initial term of greater than 90 days, which are shown separately from cash and cash equivalents on CSR’s consolidated balance sheet.
During 2010, there was a net increase in cash and cash equivalents of $1.9 million, as compared with a decrease of $11.3 million in 2009. Operating cash flow before movements in working capital contributed $44.1 million as compared to $29.7 million in 2009. The difference was mainly due to the reduction in the operating loss.
On 13th September 2010, the Board announced a share buy-back programme of up to $50 million. The Company is significantly cash generative and has the financial flexibility both to consider potential acquisitions that meet its strict investment criteria and to drive its organic development. In light of this and the return on capital opportunity implied by the prevailing share price, the Board initiated the share buy-back programme. Prior to entering our close period on 1 January 2011, we had purchased 7.1 million of our ordinary shares, this resulted in a cash outflow of $37.5 million.
Cash, cash equivalents and treasury deposits increased to $412.4 million at 1 January 2010 from $261.9 million at 2 January 2009, an increase of $150.5 million.
During 2009, there was a net decrease in cash and cash equivalents of $11.3 million, as compared with a decrease of $9.8 million in 2008. Operating cash flow before movements in working capital contributed $29.7 million as compared to $88.1 million in 2008. The reduction in cash was much larger than the decline in the operating loss because the 2008 operating loss was stated after the $52.9 million non-cash impairment, with movements in working capital resulting in a cash inflow of $20.6 million as compared to $8.2 million in 2008. The differences were mainly due to timing of purchases from subcontractors in the fourth quarter of each year and receipt of cash from customers at the 2008 year end where a distributor failed to pay on time.
The net cash inflow on acquisitions of subsidiaries of $66.5 million in 2009 represented the $111.5 million of cash, cash equivalents and treasury deposits acquired through the SiRF acquisition, excluding the $45.0 million of treasury deposits with initial maturities over 90 days and the acquisition fees paid of $10.6 million, which were included in the operating cash flows before movements in working capital.
Cash outflows on acquisitions of subsidiaries of $11.7 million during 2008 related to payments of deferred consideration on the NordNav acquisition and the repayment of the loan notes related to the CPS acquisition.
During 2008, there was a cash outflow of $20.2 million for the purchase of shares in CSR plc by the CSR Employee Benefit Trust. There were no purchases during 2009 or 2010.
The table below summarises additions to fixed assets in our last three fiscal years. The amounts differ from the cash outflow on capital expenditure due to movements in payables and accruals.
Other intangible assets Property, plant and equipment Total
Our capital expenditure increased to $14.8 million in 2010 from $13.6 million in 2009, an increase of 8.8%.
The increase in intangible assets included the completion of the ERP implementation and additions to the internally developed technology consisting of development kits to enhance our design capabilities at advanced technology nodes.
During 2010, we implemented a new global telephone system and continued to invest in test equipment and IT infrastructure to support the growth of the business.
We expect an increase in capital expenditure in 2011 due to facilities expansion programmes, investment in test equipment for combination products and further spend related to the move to advanced technology nodes.
There was a net cash inflow of $7.6 million related to taxation, this resulted from carrying back the tax loss in the UK to offset against the 2008 tax paid and obtaining a refund. Our net tax in 2009 was a cash inflow of $1.2 million, the majority of which was the receipt of an R&D tax credit in France. This compared to the tax paid of $30.0 million in 2008.
There was a cash inflow from other financing of $4.3 million, mainly as a result of employee share option exercises, while in 2009 there was an outflow of $1.2 million, principally due to repayments under finance leases (2008: inflow of $1.2 million).
Substantially all our sales and costs of sale are denominated in US dollars, the functional currency of all the entities within the Group. Approximately 30% of our operating costs are denominated in pounds sterling.
In order to reduce the volatility of our earnings due to exchange rate fluctuations, we enter into forward foreign exchange contracts to fix an exchange rate for our future pounds sterling-denominated expenditures. We commit to forward contracts between 11 and 15 months in advance, according to our treasury policy. These contracts are accounted for as cash flow hedges and will not affect profit or loss until the period in which the related transaction is recorded or we conclude that it is no longer probable that the hedged transaction will occur. These contracts also form hedges against exchange gains or losses on the related pounds sterling liabilities.
Movements in the US dollar to pound sterling rate impact any pound sterling operating costs not covered by the forward contracts and, in the longer term, movements in the rate of exchange will impact all of our sterling costs, as it will affect the rate fixed by the forward contracts being put in place for future expenditures.
We are also exposed to foreign exchange risks from costs recorded in other currencies, which are currently not covered by forward contracts.
A material appreciation of the value of the US dollar against pound sterling could have a material adverse effect on our future results of operations, mainly due to revaluation losses on sterling-denominated assets, as the forward contracts mentioned above provide a hedge to movements in most sterling-denominated liabilities. A material depreciation of the value of the US dollar against pound sterling could have a material adverse effect on our future results of operations, due to the recording of pound sterling operating expense at a higher US dollar exchange rate.
As of 31 December 2010, forward contracts were in place that gave an average GBP:USD exchange rate of 1.54 for the coming 11 to 15 months. Historically, the average forward contract rate was as follows: 2010: 1.56; 2009: 1.93; and 2008: 1.98. We expect that with the contracts in place as of 31 December 2010, our sterling denominated expenditures will cost around the same in U.S. dollar terms in 2011.
The fair value asset of the contracts in place as of 31 December 2010 was $1.0 million. $1.1 million of the related expense was deferred in hedging reserves. The difference of $0.1 million has been recorded as an expense in the income statement as the related transactions have been recorded. More detail is included in note 33 to the consolidated financial statements.
Our policy is to maintain a strong capital base so as to maintain customer, creditor, investor and market confidence as well as to sustain future development of the business.
Our main forms of liquid investments in 2010 were bank and money market deposits. We intend to reinvest cash balances in the business either through higher levels of investment in working capital and fixed assets or through mergers and acquisitions activity, to support our long-term ambitions.
Our issued share capital as of 31 December 2010 was 184,953,312 ordinary shares of 0.1 pence each, an increase of 2,765,434 shares from the 182,187,878 ordinary shares issued in 2009, the change was due to employee exercises.
As a result of the funds raised through our initial public offering in March 2004, our subsequent positive operating cash flows and the acquisition of SiRF, which contributed $111.5 million of treasury deposits, cash and cash equivalents in June 2009, we had a total of $440.1 million of treasury deposits, cash and cash equivalents at 31 December 2010, an increase of 6.7% from the $412.4 million we held at 1 January 2010.
Neither CSR nor any of its subsidiaries is subject to any externally imposed capital requirements.
We hold our cash and liquid investments in accordance with the counterparty and settlement risk limits of the treasury policy approved by our Board of Directors. We maintain a policy in the placement of cash deposits and investments with counterparties such that at any one time cash is placed with at least three approved financial institutions. No counterparty with a credit rating of less than Aa3 will be approved. We review the internal control environment regularly, through a rolling plan of internal audits, the results of which are reported to the Audit Committee.
We have processes and procedures in place for the identification and where possible the mitigation of risks. In addition to the responsibilities placed on each part of the business to assess and manage risk within their own areas, the Group has an established process for identifying and planning mitigation for key risks that have the potential to impact the business as a whole. A more detailed explanation of this process is contained in the Corporate Governance report here.
The Executive report on this process to the Audit Committee and, where appropriate to the full Board to ensure that there is consideration on the potential impact of such risks on achieving the Group’s wider strategic objectives and in maintaining and growing shareholder value. This recognises the fact that the Company operates in a dynamic environment and therefore that over time the risks which have the potential to most materially affect the Group may also change. Accordingly, during the course of any period, those risks which receive the most attention will reflect these dynamics. The following paragraphs explain some of the areas on which management and the Board have focused during 2010. Specific attention that has been given to these risks includes reviews by the board or, within its delegated authority, by either the Audit Committee or the Litigation sub-committee.
In connection with the litigation with Broadcom, the Board and the Litigation sub-committee have met to consider developments and potential courses of action that might be taken by the Company and to review proposals in connection with discussions which led to the settlement of the litigation. This is explained in more detail here and here in this report.
The Board has undertaken regular reviews of the process for ensuring the timely evaluation, development and launch of new products and technologies for evaluation by customers, including discussions on specific projects under development by the Company and also engagement with key customers. During 2010, the Company appointed Mr Klaus Buehring as Senior Vice President for Development in order to further strengthen our capabilities in this important area. As part of the review which was undertaken following his appointment there have been improvements to the way in which the Group approves projects and monitors product development. The Board has received reports on this work together with an evaluation of how the improvements have helped in addressing risks in this aspect of the Group’s business.
Understanding the trends in the markets in which the Company competes and the demands of customers and end users is important to ensuring that we remain competitive. During 2010, the Board received regular reports on engagement with customers and on their requirements for future product developments and with other third parties, including suppliers on how we can advance in the development of innovative features and technologies. This has included for example the Group’s initiatives in 40nm technology. The advance into this new, smaller size of chip provides the potential for competitive advantage for the Group but transitioning to this new technology is highly complex. During 2010, the Board periodically reviewed the work and the progress in addressing the challenges on the project.
The Board receives regular reports on the performance of each operating segment which are considered against the overall plan and key objectives for the Group. Where relevant the Board will be appraised on matters which could place the fulfillment of those plans at risk. During 2010, one such area considered by the Board was the detailed routine assessment performed by management on the availability of sufficient manufacturing and testing capacity to support customer orders. As was explained in the 2009 annual report, the economic downturn experienced in 2009 resulted in measures being taken by a number of foundries that manufacture, assemble and test integrated circuits to restructure their businesses, which resulted in a contraction of capacity for the supply of integrated circuits. Management has worked and continues to work closely with its supply partners to mitigate, where possible, the impact of such constraints on the ability to satisfy customer orders. As explained in more detail here, however, the Company did experience constraints in manufacturing capacity in 2010 which partially impacted revenue growth for our Automotive and PND business segment. The Board has been kept informed on these matters and the steps which have been and are being taken by management to address these constraints and to support the Group’s requirements.
In connection with the acquisition of SiRF, which was completed in June 2009, the Company at that time registered its Ordinary Shares with the US Securities and Exchange Commission. This has resulted in the Company being subject to additional requirements under the Securities Exchange Act of 1934 (including those rules and regulations that apply by reason of the US Sarbanes-Oxley Act of 2002) that relate to financial reporting and other disclosure matters. Within its delegated authority, during 2010, the Audit Committee has received regular reports on the work of the Group to meet these additional requirements. More detail regarding this work is set out here and here in the Corporate Governance report.
Other matters that have been kept under review have also been discussed in other sections of this report, including the impact of capacity constraints affecting the ability to meet customer orders (see here) and the changes in the demand profile between smartphones and feature phones (see here and here).
As previously announced, the Board is proposing the Company’s first dividend of $0.065 (£0.04) per share in respect of the 2010 financial year, representing 2/3 of a notional $0.098 (£0.06) per share full year dividend that would have been paid if the Company had commenced payment of dividends sooner. It is the Board’s intention to follow a progressive dividend policy that reflects the underlying growth prospects of the Company as well as the long term outlook for growth in earnings per share and group cash flow. The Board intends to pay dividends on a semi-annual basis.
Subject to shareholder approval at the Annual General Meeting to be held on 18 May 2011, the dividend will be paid on 3 June 2011 to shareholders of record on 13 May 2011. The dividend will be paid in sterling and holders of ordinary shares will receive £0.04 per ordinary share.
From time to time, the CSR Employee Benefit Trust purchases CSR ordinary shares in the stock market. The timing of these purchases is subject to compliance with the listing rules of the UK Listing Authority, agreement between CSR and the Trustee of the Employee Benefit Trust and prevailing market prices. The shares are intended to be used for satisfying obligations to deliver shares on the exercise by employees of share options under CSR’s share option programmes, thereby reducing the dilution of existing shareholders.
During 2009 and 2010, no purchases were made. During 2008, the Employee Benefit Trust purchased 3,222,813 CSR ordinary shares, for a total cash consideration of $20.2 million.
As of 31 December 2010, we did not have any off-balance sheet arrangements.
As of 31 December 2010 our principal contractual obligations and commitments consisted of amounts payable under finance leases, operating leases, trade and other payables and outstanding purchase obligations.
The following table summarises our contractual obligations and commitments as of 31 December 2010:
Finance leases Operating leases Trade and other payables Purchase obligations
There have been no significant changes in the financial or trading position of the Company since 31 December 2010.
Details of quantitative and qualitative disclosures about Market Risk are given in note 37 to the consolidated financial statements.
We use a range of financial and non-financial performance measures, reported on a periodic basis, which we refer to as key performance indicators (KPIs), to measure performance over time. In 2009, we added gross margin and operating expenses by function as additional financial KPIs and we added the average cost per employee as a non-financial KPI. No changes have been made to the source of data or calculation methods used in the period. The source of all data is consistent with published financial and non financial information.
To measure growth of the business:
Revenue represents sales of integrated circuits to customers, sales of services to customers and royalty income from products sold
under a royalty earning licence net of any estimated provisions for credit notes and returns.
Our revenue in 2010 increased to $800.6 million, representing a 33% increase on 2009 revenue ($601.4 million). During 2009, we acquired SiRF which, had it been acquired on the first day of 2009, would have contributed a total of $212.5 million of GPS revenue in the year. In 2010 we recorded a full year of GPS revenues, totalling $273.9 million. The remaining growth was driven by our legacy Bluetooth business.
The increase in revenue was achieved despite the volume-weighted average selling price across all products declining by 1% from 2009 to 2010. Volume weighted average selling prices declined for both the Bluetooth and GPS products, however these declines were substantially offset by the higher proportion of revenues from GPS products, which have a higher average selling price.
We saw particularly strong growth in our automotive and PND and audio and consumer businesses, which are described further above. This positive impact was offset to an extent by weakness in our handset business, where our lack of penetration in smartphones and the related trend favouring combination devices have meant that the handset business was able to achieve only modest growth. A further discussion of revenue is given in the Financial Performance section above.
To measure performance of the business:
Underlying gross margin is used as a measure of the profitability of our sales. Underlying gross margin is the ratio of underlying
gross profit to revenue. Underlying gross profit differs from gross profit in that it excludes the amortisation of acquired intangible
assets. We aim to maintain our underlying gross margin in the 45-50% range, an increase from our previous target of the mid 40%
range. Maintaining underlying gross margin involves a combination of production cost management, minimisation of production
overheads and maintaining selling prices by introducing new feature-rich devices which can command a premium selling price.
The underlying gross margin increased from 44.6% in 2009 to 47.7% in 2010 due to a combination of the fair value adjustment in 2009 which reduced the 2009 gross margin by 1%, the increased proportion of GPS revenues (which represented over 30% of revenue this year, compared to around 20% in the prior year as a result of the inclusion of a full year of GPS revenues) and the mix away from the handset business unit to the other segments which generally have a higher gross margin.
A further discussion of gross margin is given in the Financial Performance section above.
Underlying operating expenses by function which represents underlying research and development and underlying sales, marketing and administrative expenses are used as a measure of the costs of the underlying business.
We monitor these costs as a percentage of revenue, and aim to maintain underlying R&D cost at or around our target of 20%, and underlying SG&A costs at or around our target of 10%. We have taken action in the past, such as in our 2008 restructuring programme, to reduce costs to a level more in line with this target, whilst recognising it may take a number of years to achieve. During 2010, the percentage of operating expenses reduced from 2009, but remained above these levels. R&D remained above the targeted level as we continued to invest in key projects to support future revenue growth. SG&A remained above target due to the higher level of spending on litigation costs.
Whilst we aim for these operating targets, and consider them to be achievable, we balance that objective with our view of the appropriate level of operating expense to support the current and future success of the business.
A further discussion of operating expenses is given in the Financial Performance section above.
Underlying diluted earnings per share is used as a measure of the interest each current share and each potentially dilutive share has in the performance of the business. Underlying diluted earnings per share is calculated as underlying earnings (underlying earnings is profit (loss) for the period, add back share-based payment charges, amortisation of acquisition related intangibles, goodwill impairment, acquisition costs, litigation dispute settlement costs and integration and restructuring charges less any tax impacts of these items, taking account of the deductability or taxability of these items) and excluding the recognition of tax losses divided by the number of current shares and potentially dilutive shares outstanding.
Underlying diluted earnings per share in 2010 was $0.43, an increase of 115% compared to $0.20 in 2009.
The increase resulted from the increases in revenue and gross profit, which were partially offset by the increases in underlying operating expenses, all of which are described in more detail above under the Financial Performance section. Growth of underlying diluted earnings per share is a key performance condition for a number of share option schemes. Vesting depends upon relative growth of earnings per share, adjusted for the UK retail price index (RPI) against targets set at the time of grant. None of these conditions was met for the current or preceding year, due to the declines in underlying diluted earnings per share over the 3 year performance periods.
To measure working capital management:
Inventory turns is used as a measure of the management of inventory levels in the business and represents the number of times
inventory turns over in an annual period based on the last three months cost of sales of that annual period.
Inventory turns decreased in 2010 to 4.2 for the period from 5.8 in 2009. 2010 turns were lower due to customers notifying us of reductions in orders within the lead-time for production from our suppliers which led to higher than planned inventory balances. This problem was amplified by lengthening lead times due to both the move to more advanced technology nodes and also tightening capacity at certain suppliers.
Days sales outstanding (DSO) is a measure of the number of days that it takes us to collect cash after a sale has been made. We calculate days sales outstanding by taking the balance of trade receivables outstanding at the end of the annual period, dividing by the revenue for the previous two monthly periods and then multiplying by the number of days in those monthly periods.
Note: Data is given at year end dates.
Days sales outstanding remained at 40 days, within the normal range of 40-45 days. The increase in days sales outstanding in 2008 was due to the non-payment of invoices on the due date by one distributor.
Free cash flow is used to represent the cash that we are able to generate from our operations after taking into account cash flows on capital expenditure. We calculate free cash flow as cash generated by operations (as per the cash flow statement here) less expenditure on tangible and intangible assets (not including those acquired through acquisition) in the 52 week period (as shown on the cash flow statement).
Free cash flow increased to $56.1 million (2009: $37.0 million), mainly as a result of our lower net loss, excluding the impacts of the litigation settlement, which were held in liabilities at the year end. Further analysis of the Company’s liquidity and also of capital resources is set out here.
Average cost per employee for each 52 week period is used as a key performance indicator of the cost of our key resource – people. It is calculated as salary costs, pension costs and social security costs, divided by the monthly average number of employees for the period, with pounds sterling costs converted to US dollars at the forward contract rate in place for that period.
We manage the average cost of our employees carefully and aim to expand and utilise our resources in the most efficient way. We have continued to invest in headcount growth in Asia, capitalising on the lower staff costs in the region and the rich pool of talent, and growth in the higher cost areas such as the US has been lower. We expect to continue to develop our business in all areas, with particular focus on India and China, which not only have a plentiful supply of talented engineers, but are also located near many of our customers in key growth markets.
The annual decrease in 2010 for staff costs was 7.7% and reflects a combination of a change in the mix of employee location (see headcount KPI below), pay rises and currency fluctuations.
Headcount as at the end of the 52 week period is used as a non-financial key performance indicator of the resources available in the business and is monitored closely in relation to productivity and research and development output.
Note: Data is given at year end dates.
Headcount has increased from 1,348 at the end of 2009 to 1,544 at 31 December 2010; an increase of 15% (196 people). The majority of the increase has been focused on our R&D teams in both India and the UK.
We recognise the importance of social, environmental and ethical (SEE) matters and during 2010, continued to work towards compliance with the ABI disclosure guidelines on social responsibility. We believe that our work is part of a continuous improvement to develop standards and working practices that represent tangible improvements in the way in which we undertake our business and also meets our responsibilities to the wider community and all our stakeholders. This includes the impact through our operations on the environment, on the safety and well being of our employees, and end users of our products as well as those who contribute to the process of the development and manufacture of our products through our suppliers, distributors and customers.
SEE matters are considered an integral part of the philosophy of the Company, and the Board and its committees receive reports as part of their routine business on aspects of SEE issues in addition to other reports from those directors responsible for such matters as may be appropriate from time to time.
Social responsibility
2010 saw a significantly renewed and reinvigorated commitment to social responsibility (SR) across the company. This has always
been an important area for us, and the further emphasis given to this area during 2010 has seen us develop a cohesive, formal social
responsibility policy.
An effective SR commitment is important to CSR. It underpins our credibility with customers, suppliers and shareholders alike, each of whom value strong commitment and attention to this area. But above all else, it will help us to return something of value to others, play our role in the communities where we operate, and prove ourselves to be good neighbours as well as a good employer.
Our global SR policy is built on four pillars: Community, Workplace, Marketplace and Environment.
These pillars follow the guidelines of Business in The Community (BiTC), a London-based not-for-profit organisation which is helping us establish and grow our SR credentials. BiTC believes that all companies should:
Community
The Community pillar focuses on four key opportunities:
During the year, our Community initiatives took centre-stage in our SR approach, and we successfully launched a number of activities. In addition, we made several ad-hoc donations to help fund the first responses to natural emergencies close to CSR locations. These included a contribution to The Red Cross, to support efforts to help the lives of people affected by the June floods in France, and to help buy shelters, cooking equipment and to provide safe water for people displaced by the monsoon floods in India.
Appointing charities
Each CSR location has appointed a local charity of the year that is linked to engineering and the sciences. Employees were asked to
nominate charities, with the successful charity being chosen by a location-wide voting process.
For example, in Bangalore, our people chose to support ‘Partners in Change’, an organisation which has pioneered the understanding of social responsibility issues in India. Its focus is on the poor, marginalised or vulnerable communities and groups impacted by business. In 2010, our employees donated school kits, renovated a classroom and supported an orphan’s education plus living costs for 12 months. In the UK, we support The Bletchley Park Trust, which aims to preserve the core heritage of Bletchley Park, the historic site of secret British codebreaking activities during WWII and the birthplace of the modern computer.
Volunteering
In association with their chosen charity, our locations have taken their first steps towards establishing regular volunteering activities,
so as to provide help on a practical basis.
In Shanghai, 54 CSR volunteers are giving their time and skills to support ‘Hands on Shanghai’, which connects volunteers with local community-based organisations. Specifically, we sponsor the Wenhe Primary School, which provides education to the children of migrant workers from other parts of China. Our people have actively designed and implemented a range of projects for the school, including summer camps and museum visits. During 2010 and as part of a business trip to China, Joep van Beurden visited the school and spent time with staff and pupils, discussing the project and learning more about how it was supporting the schools activities.
Working with students
We are keen to give back to the community in a variety of ways, including using our own expertise to help others enjoy a career in
engineering or science.
Our Detroit office works closely with the Girl Scouts movement and provides funding for young mothers who want to participate in engineering classes. In Southern California, one of our senior engineers regularly attends Ask-a-Scientist nights at his local school, while his colleagues in the South of France are working with three students from the University of Nice Engineering Department to develop a wideband antenna. Working with students is popular at many locations within CSR, including our Cambridge, UK office where two of our managers participated in Cambridge Science Week, a project which supports schools and colleges in promoting learning in the sciences.
Match Funding
We have committed to matching the funds raised by our employees where possible, and will consider all applications including those
outside the engineering/science remit. The match-funding initiative has been particularly well-received in the UK and we expect other
locations to follow suit in the coming years. During 2010, we made several matching donations, including to BBC Children in Need
and local projects supporting a football club and gymnasium club.
Workplace
As of 31 December 2010, we had 1,554 employees. The following tables provide a breakdown of employees by functional area and
region.
Employees by function
R&D SG&A Total
Employees by region
Europe Asia USA Total
We aim to maintain and enhance CSR’s reputation as the best place for the best people to do their best work, and will achieve this through four initiatives:
Training
We invest in training and career progression to ensure our people have the right skills and knowledge to deliver on our strategy, and
to support them in delivering their personal development and career ambitions. Not only does this help stretch our people and
enable them to enjoy rewarding careers, it also delivers an improved quality of service to our customers and gives them the flexibility
to deliver innovative solutions into the marketplace.
As we grow, we require a more diverse range of skills to support the business and our strategic objectives. During 2010 we invested in an online system which we have named “eCareer". This has been implemented on a global basis to help us manage and track performance management, reward management and learning and development. eCareer is part of our integrated employee and management resources which allows the capture and cascade of our organisational goals, enabling everyone to understand their contribution to delivering business performance.
eCareer also offers an eLearning function, where Learning and Development is accessible to all employees. We are in the process of building up our learning catalogues and offer for each region, and have put a number of our internal learning materials into eLearn already. Throughout 2011 there will be a big push to get all our technical, behavioural and managerial learning offers and material into eCareer. As part of our continuous improvement in this important area, during 2011, we will be looking in more detail at the skills and knowledge required across the organisation, and working with both in-house management and external training providers, to source the best development solutions for our current and future needs.
Diversity
CSR is a multi-cultural global organisation and we are committed to providing equal opportunities for training, career development
and promotion to all employees, regardless of any physical disability, gender, religion, race or nationality.
Provision for pensions are available to all employees, either through participation in the state pension schemes in the country in which the employee is resident or provision of a defined contribution pension scheme. Such schemes are maintained in accordance with legislative requirements, custom, practice and Group policy as appropriate.
Inclusion
We promote an open and honest working environment where employee views are sought, listened to and acted upon.
Following the Employee Engagement Survey carried out towards the end of 2009, we identified three key areas for improvement. These are:
We have made good progress in all areas, most especially in relation to change and communication. In particular, our monthly global e-newsletter, Rhythm, continues to provide a key means of communication with employees. The company intranet was upgraded during the year and employees can now access more information and support online. We launched a Lunch & Learn programme in 2010, which enables employees to learn about CSR technologies during their lunchbreaks, and also carried out two global company update broadcasts to employees, one from San Jose and one from Shanghai. These broadcasts are transmitted in real time to all locations, across all timezones, and are available on demand within a few hours to any offices that were closed at the time of the broadcast. Company results are cascaded via a webcast, including an informal Q&A session with the senior management team.
We look forward to reporting further progress on Inclusion initiatives following our next Employee Engagement Survey, which will be carried out in March 2011.
Marketplace
We are pleased to be working with a number of partners within our supply chain to adopt best practice and to conduct their
businesses in a responsible manner. Our SR activities relating to our Marketplace are centred on five key priorities:
During 2010 we achieved some notable success, including the addition of an energy rating label to the boxes containing headsets manufactured by one of our leading customers. Like us, they recognise that promoting low-energy products is good for their business as well as their end-customers. Similarly, our leadership in the Bluetooth low-energy segment will enable our customers to manufacture more environmentally-friendly products, from keyboards and mice to light switches.
We are proud to continue to work alongside TSMC, which is reputed to be the “greenest” semiconductor fabricator company in the world. By reducing emissions, recycling water and consuming less water, TSMC is already recognised as the best performer in environmental protection. The company has also turned its attention to other social responsibility issues, including the establishment of an extensive Education and Culture Foundation which targets resources towards education, sponsoring of art and culture, community building and employee volunteering.
The Company expects the highest of ethical standards of all its employees and its policies and procedures support its stated aim of acting with integrity in all aspects of its operations.
The Board director responsible for health and safety matters is Will Gardiner, Chief Financial Officer. Mr Gardiner met on a number of occasions with those who manage the Company’s health and safety issues including the Chair of the Health, Safety and Environmental (HSE) Committee. An annual report is presented to the Board covering health and safety matters, which includes statistics on accidents and incidents, progress against targets from the previous period and objectives for the next year.
In the UK, we have a Health, Safety and Environmental Committee which meets regularly and is chaired by the Group Facilities Manager, who is also the senior health and safety manager for the Group. Our Health, Safety, and Environmental policies are available to all employees on our intranet site as are the minutes of the HSE Committee and current HSE initiatives. Current initiatives are explained below.
During 2010 we completed the first phase of harmonising HSE best practices throughout the CSR group. This was an integration objective following the acquisition of SiRF in 2009. We believe that there are further improvements which can be carried out in order to ensure that the underlying practices are improved in some locations.
During 2010, in order to help understand where those improvements should be targeted, we undertook a comprehensive survey of the health and safety policies, procedures, training programmes, responsiveness to serious and imminent danger and staff’s perception of health and safety within their working environment. All of our offices took part and the results have allowed us to formulate a detailed plan about where and on what to concentrate our resources during 2011. For example, we are working on the appointment in each location of health and safety champions, who will be responsible for supporting the implementation and monitoring compliance with health and safety policies reflecting our global requirements, adjusted for local laws and regulations where applicable.
The executive director with responsibility for the Group’s Environmental Management System (EMS) is Mr Chris Ladas, Operations Director. The EMS, which has the support of the Board, has been developed reflecting our existing low eco-footprint, with all employees working in office based environments, whilst recognising that high standards should be established and maintained across all aspects of our operations. The ongoing management of EMS is overseen by a team incorporating managers responsible for Facilities, Business Management Systems and Quality Assurance.
In 2010, the Company underwent two external assessments against both ISO 14001 and OHSAS 18001 which were completed by Lloyds Register Quality Assurance Limited, an internationally recognised independent assessor. No major nonconformities were raised during these visits. Only one minor nonconformity was found during the reviews and this was addressed immediately. Progress in carrying out the action plans is monitored by the Company’s internal Quality Assurance department. The assessments confirmed that the Company’s Management System continues to satisfy the requirements of ISO 14001:2004 and BS OHSAS 18001:2007, and continued certification to these standards was awarded.
Certification requires that we have an EMS which defines the environmental policy of the Group and sets objectives intended to drive continuous improvements in environmental awareness and practices.
Our environmental policy includes commitments to:
We believe that we are taking considerable steps to contribute to sound environmental practices, covering not only the manufacture and supply of our products but also positive measures to establish and build on good working practices within our various office locations.
We continue to prepare for the introduction in the UK of the Carbon Reduction Commitment (CRC). Due to the change in UK Government in 2010, the introduction of CRC was postponed to 2011. We have put in place the required processes to comply with this scheme, and continue to take steps to minimise our CO2 emissions through on-going energy efficiencies. Further work in this area is pending formal guidance from the Environment Agency which is anticipated during 2011.
Organisations that participate will have to monitor their energy use and purchase allowances for each tonne of CO2e, based on energy consumed. There are annual reporting requirements and registration fees involved. The first CO2e allowance sales for 2011-12 emissions will take place in 2012. This is intended to provide a direct incentive for businesses to reduce energy use emissions, since the lower the emissions, the lower the levy paid to the Government. A performance league table will also be published showing the comparative performance of participating organisations. This is judged on introducing certain energy monitoring initiatives in the first 2 years and also in reducing energy used from the second year.
As part of the Carbon Reduction Commitment in the UK, we continued our energy monitoring programme that encompasses taking readings of our electrical distribution boards to identify potential areas where energy efficiencies can be made. During 2010 we upgraded our building management systems which has resulted in greater control over our working environment and consequently leading to improved efficiencies. We also began to upgrade the main chillers at our Cambridge site, which we will complete during 2011. Other energy initiatives include improving the insulation properties on all air handling units for the Cambridge site. This will help us to reduce energy consumption at one of our key locations, which has the greatest concentration of employees.
We remain committed to finding ways in which we can develop further the recycling of spent materials. During 2010 we began to look at ways in which we could limit the amount of this material being provided to us, whilst still maintaining the existing challenging recycling target.
The total amount of waste being recycled during 2010 rose from 1,130,300 litres to 1,286,640 litres. Over the same period, we experienced a 5.5 % decrease in the amount of waste produced from 2,384,120 litres to 2,259,829 litres. This helped us surpass our original target of recycling 50% of materials; we achieved a recycling rate of 59%.
During 2010 the deployment of video and audio conferencing facilities across all our international locations began to achieve the desired operational efficiencies. Utilisation of this facility has increased throughout 2010 and contributed to us being able to manage our overseas travel. All employees are encouraged to use these facilities in their engagement with colleagues and external parties, including where possible, customers and suppliers. We believe this not only reduces costs, but improves our effectiveness and contributes to reduction in carbon emissions associated with using transport.
CSR has long been committed to optimising the use of “greener” materials in our end products. We continue to work with customers and suppliers as well as our own in-house teams in developing and supplying products which meet the highest standards as regards minimising the use of hazardous substances.
CSR’s products are manufactured and packaged in a variety of forms. Most of these products are already manufactured according to CSR’s own “green” standards. The green standards have been developed by CSR as part of continual engagement with leading global companies who are customers of CSR and also with the support of our suppliers. CSR’s green standards therefore reflect not only internationally recognised guidelines but also the feedback of our customers, whose requirements frequently exceed the minimum conditions set by governments and regulators.
As part of our commitment to ensure compliance to international requirements, we have upgraded our “green” standards in 2010 to include recent developments from the Japan Green Procurement Survey Standardisation Initiative (JGPSSI) and the Joint Industry Group (JIG) in the USA.
We have dedicated staff who assist in the development of all new products and the review of existing product lines targeting the use of greener materials. Part of their role is to monitor established and pending legislation and standards published by national and supranational governments and agencies and to ensure that we are proactive in going beyond the minimum requirements in our compliance with the types and quantities of materials used.
In this respect we work closely with both customers and suppliers in developing products to reduce the use of hazardous materials, and through testing and certification, ensuring ongoing compliance.
Our standard integrated circuits are fully compliant with all existing European legislation, including RoHS and REACH, as well as in other territories where equivalent legislation has been introduced.
In addition to procedures that establish and monitor compliance, we have processes in place to make sure that customers are supported with up to date materials information and laboratory analysis to validate the environmental compliance of our products.
We recognise the importance of ensuring that our key suppliers have appropriate policies and practices on SEE matters. Key manufacturing partners are selected and assessed based on certification to appropriate globally recognised standards such as ISO 14001, OHSAS 18001 and SA 8000. Audits of their operations are undertaken regularly to ensure that appropriate standards and certification exists.
During 2009, a review of product environmental compliance was conducted by our Supplier Audit Team at TSMC and ASE in Taiwan. This confirmed that current certifications to the recognised standards mentioned above were being maintained. The review also considered the suppliers wider HSE policies and management systems in connection with our requirements. The results of these assessments were reported to our management, which concluded that the suppliers complied with our requirements.
Based on the extent of our ongoing engagement described above, the Board is satisfied that there are no significant risks relating to health, safety and environmental matters affecting its strategic objectives or the long or short term value of the Group.
In the following sections we set out our definitions of the following non-GAAP measures and provide reconciliations to relevant IFRS measures:
Underlying operating profit, underlying gross profit, underlying cost of sales, underlying net profit, underlying research and development expenses, underlying sales, general and administrative expenses, underlying tax, free cash flow and underlying diluted earnings per share are non-GAAP measures. We comment on these in detail here because they are the way in which we measure our business internally, they form the basis for management’s performance targets and resource allocation decisions and we use them to determine and manage the long term growth of the business. We present and discuss these measures in order to:
Beginning here we provide a reconciliation of each measure to the nearest IFRS measure: underlying operating profit to IFRS operating profit, underlying gross profit to IFRS gross profit, underlying net profit to IFRS net (loss) profit, underlying operating expenses to IFRS operating expenses, underlying tax to IFRS tax underlying diluted earnings per share to diluted earnings per share and free cash flow to cash generated by operations.
In each of the underlying measures we add back the amortisation and impairment of acquired intangible assets, including goodwill. Our revenue is driven by the performance of our technology and our customer relationships, some of which is internally generated and some of which has been acquired. The acquired technologies and customer relationships are assigned a finite life and result in an amortisation charge being recorded in arriving at operating profit. There are no similar charges associated with our internally generated technology and other intangible assets. In addition, from time to time, the Group may be required to recognise impairments of intangibles and goodwill. No similar charges can occur from our organically grown businesses. We believe that excluding amortisation of acquired intangible assets and goodwill impairment from our measures of operating performance allows the operating performance of the businesses that were organically grown and those that have resulted from acquisitions to be analysed on a more comparable basis.
From time to time events occur which due to their size or nature are considered separately when discussing the trading performance of the Group. The gains and losses on these discrete items can have a material impact on the absolute amount of, and trend in, the operating profit and results for the year. Therefore any gains and losses on such items are analysed outside the underlying results to enable the trends in the underlying performance of the business to be understood. Where items are excluded from the underlying results we provide additional information on these items to enable a full understanding of the events and their financial impact. Examples of such items are the litigation settlement in 2010, acquisition related fees incurred in 2009 in connection with the SiRF acquisition and integration and restructuring fees in 2009 following the SiRF acquisition.
In each of the underlying measures we add back share option charges. We believe share option charges reflects a non-cash cost which may obscure the trends in the underlying business and these charges are based on a number of assumptions linked to our share price, the volatility of our share price, the expected performance of our share price compared to a number of other comparator companies and assumptions around employee behaviour. Therefore management of the segments are not held accountable for the impact of this item on their results of operations.
Further, management believes that due to these subjective assumptions involved in determining the fair value of equity awards and the varying methodologies used to determine equity based compensation across various companies, excluding these amounts from underlying operating profit and underlying net (loss) profit enhances comparisons of the underlying operating performance of the business with other similar companies. Therefore any charges from these share-based payments are analysed outside the underlying results to enable the trends in the underlying performance of the business to be understood.
In underlying diluted earnings per share and underlying tax, in order to ensure that the impact of the items discussed above can be understood, we exclude the tax effects of the adjustments made to underlying operating profit and the recognition of deferred tax assets for acquired tax losses.
CSR cautions that, whilst we have defined underlying operating profit, underlying gross profit, underlying cost of sales, underlying net profit, underlying research and development expenses, underlying sales, general and administrative expenses underlying tax, underlying diluted earnings per share and free cash flow, they are not defined terms under IFRS or other GAAP and therefore these definitions should be carefully reviewed and understood by investors. Investors should be aware that their application may vary in practice from other similarly titled measures presented by other companies and therefore these measures may not be fully comparable between companies. In particular:
The table below gives a reconciliation of “underlying operating profit” to the heading “Operating (loss) profit for the period” as presented on the consolidated income statement in the financial statements for the three years presented in the income statement.
Operating loss Add back: Amortisation of acquired intangible assets (cost of sales) Research and development expenses Share-based payment charges Amortisation of acquired intangible assets Sales, general and administrative expenses Share-based payment charges Amortisation of acquired intangible assets Integration and restructuring Acquisition-related fees Deferred tax adjustment to goodwill Asset impairment Litigation settlement Underlying operating profit
The table below gives a reconciliation of “underlying cost of sales” to the heading “Cost of sales” as presented on the consolidated income statement in the financial statements for the three years presented in the income statement.
Cost of sales Add back Amortisation of acquired intangible assets Underlying cost of sales
The table below gives a reconciliation of “underlying gross profit” to the heading “Gross profit for the period” as presented on the consolidated income statement in the financial statements for the three years presented in the income statement. The calculations for 2004, 2005, 2006 and 2007 which are used in the Key Performance Indicator section are performed on a consistent basis.
Gross profit Add back: Amortisation of acquired intangible assets Underlying gross profit
The table below gives a reconciliation of “underlying research and development expenses” and “underlying sales, marketing and administrative expenses” to the headings “Total Research and Development expenses” and “Total Sales, Marketing and Administrative expenses” as presented on the consolidated income statement in the financial statements for the three years presented in the income statement. The calculations for 2004, 2005, 2006 and 2007 which are used in the Key Performance Indicator section are performed on a consistent basis.
Total research and development expenses Add back: Share-based payment charges Amortisation of acquired intangible assets Underlying research and development Total sales, general and administrative expenses Add back: Share-based payment charges Amortisation of acquired intangible assets Integration and restructuring Acquisition-related fees Deferred tax adjustment to goodwill Asset impairment Litigation settlement Underlying Sales, marketing and administrative expenses
The table below gives a reconciliation of “underlying net profit” to the heading “Profit (loss) for the period” as presented on the consolidated income statement in the financial statements for the three years presented in the income statement. The calculations for 2004, 2005, 2006 and 2007 which are utilised in the Key Performance Indicator section for calculation of underlying diluted earnings per share are performed on a consistent basis.
Profit (loss) for the period Add back: Amortisation of acquired intangible assets (cost of sales) Research and development Share-based payment charges Amortisation of acquired intangible assets Sales, general and administrative expenses Share-based payment charges Amortisation of acquired intangible assets Integration and restructuring Acquisition-related fees Deferred tax adjustment to goodwill Asset impairment Litigation settlement Less: Tax effects of adjustments above Recognition of tax losses brought forward Underlying net profit
The table below gives a reconciliation of “underlying tax” to the heading “Tax” as presented on the consolidated income statement in the financial statements for the three years presented in the income statement.
Tax Less: Tax effects of adjustments above Recognition of tax losses brought forward Underlying tax
Underlying diluted earnings per share is calculated as underlying net profit as shown above divided by the weighted average number of diluted shares as shown below.
The table below gives a reconciliation of diluted shares to the diluted shares used in calculating earnings per share as presented on the consolidated income statement in the financial statements for the three years presented in the income statement. The numbers differ for 2009 and 2008 as in the loss per share calculation presented for those periods, share options are not dilutive, however they are dilutive for underlying dilutive earnings per share as underlying earnings represented a profit in both these years. There is no difference in the number of dilutive shares for 2010, 2007, 2006, 2005 and 2004.
Weighted average number of shares used in diluted earnings per share calculations Effect of dilutive potential ordinary shares – share options Weighted average number of shares used in underlying diluted earnings per share calculations
Free cash flow is calculated as cash generated by operations (as per the consolidated cash flow statement in the financial statements) less expenditure on tangible and intangible assets (not including those acquired through acquisition) in the 52 week period (as shown on the cash flow statement).
The table below gives a reconciliation of “free cash flow” to the heading “cash generated by operations” as presented on the consolidated cash flow statement here for the three years presented in the cash flow statement. The calculations for 2004, 2005, 2006 and 2007 which are utilised in the Key Performance Indicator section for calculation of free cash flow are performed on a consistent basis.
Cash generated by operations Less: Purchase of property, plant and equipment Purchase of intangible assets Free cash flow
Will Gardiner,
Chief Financial Officer
