Business context and reporting period
Cirrus Logic, Inc. designs high-performance, low-power integrated circuits for audio and voice processing. This Form 10-Q covers the quarter ended June 30, 2018 (first quarter of fiscal 2019), compared with the quarter ended June 24, 2017. Amounts below are in U.S. dollars; financial statement figures are rounded to millions.
Key financial results
| Metric | Q1 FY2019 | Prior-year quarter |
|---|---|---|
| Net sales | $254.5 million | $320.7 million |
| Gross profit / margin | $124.6 million / 48.9% | $161.7 million / 50.4% |
| Operating expenses | $130.7 million | $114.4 million |
| Operating income (loss) | $(6.2) million | $47.3 million |
| Net income (loss) | $(4.3) million; $(0.07) per diluted share | $42.9 million; $0.64 per diluted share |
| Operating cash flow | $4.7 million | $(3.8) million |
| Investing cash flow | $(12.8) million | $(77.9) million |
| Financing cash flow | $(41.0) million | $(105.5) million |
At June 30, cash and cash equivalents were $186.5 million and marketable securities totaled $199.2 million, versus $235.6 million and $198.9 million, respectively, at March 31. Total assets were $1.367 billion; stockholders’ equity was $1.127 billion. The company had no borrowings under its $300 million revolving credit facility and reported compliance with its covenants. Cash declined $49.1 million during the quarter, including $40.0 million of share repurchases. The board-authorized repurchase program had $160.0 million remaining.
Material changes versus the prior comparable period
- Sales fell $66.2 million, or 21%, primarily because portable-audio sales declined $68.4 million amid continued weakness in smartphone-related demand and, to a lesser extent, the prior sale of certain lower-ASP components. Non-portable audio and other sales rose $2.2 million.
- Portable Audio revenue was $212.3 million versus $280.7 million; Non-Portable Audio and Other revenue was $42.2 million versus $40.0 million. Approximately 97% of sales were to non-U.S. customers, principally in Asia.
- Gross margin declined 1.5 percentage points, attributed primarily to higher reserve expense and lower production volumes.
- Research and development expense rose 17% to $97.9 million, with higher employee and facilities costs following an 11% increase in headcount, product-development costs, and acquisition-related amortization; the prior-year quarter also included a release of contingent consideration. SG&A increased 6% to $32.8 million.
- The company adopted ASC 606 using the modified-retrospective method on April 1, 2018, with no income-statement or retained-earnings impact.
Outlook, risks, contingencies, and unusual items
The filing provides no specific revenue or earnings guidance. Management said expected future cash earnings, existing cash and investments, and available revolver capacity should be sufficient for capital needs through at least the next 12 months, while noting that future needs depend on sales, product acceptance, R&D, acquisitions, and other factors.
- Customer concentration is a major risk: Apple represented approximately 76% of sales in both periods, and the ten largest end customers represented 89% of current-quarter sales. Management cited customer pricing pressure and expected average selling-price declines for certain products.
- The defined-benefit pension plan was fully insured through a March 2018 buy-in. The company intends to complete a buy-out and expects a settlement loss that would include approximately $11.2 million of unamortized accumulated other comprehensive loss at June 30; timing and final amount are not specified.
- Unrecognized tax benefits were $55.8 million, all of which would affect the effective tax rate if recognized. The company was still refining its accounting for the Tax Act and evaluating GILTI tax accounting. UK subsidiaries were subject to a limited-scope tax audit; management believed reserves were adequate.
- After quarter-end, on July 24, 2018, the Ninth Circuit reversed the Tax Court decision in Altera Corp. v. Commissioner. Cirrus was evaluating the impact and said it could be material, if any.
- Management reported no pending legal matter it believed could potentially have a material adverse effect, but cautioned that an adverse outcome in a proceeding could materially affect a particular period. The filing also notes expected balance-sheet increases upon adoption of the new lease standard.
Important facts for investors to verify
- Whether smartphone-related portable-audio demand, sales, and margins stabilize, and how customer pricing and product mix evolve.
- Whether Cirrus reduces its dependence on Apple and other major customers; the filing reports Apple at approximately 76% of sales.
- Cash generation and working-capital trends, including the effect of repurchases and remaining authorization.
- The eventual pension buy-out date and settlement charge, and the outcomes of the tax review, UK audit, and Altera-related evaluation.
- Whether management’s stated liquidity sufficiency and customer demand assumptions remain appropriate; the filing gives no quantified forward guidance.