Cirrus Logic, Inc. — Form 10-Q Summary
Business context and reporting period. Cirrus Logic develops high-performance, low-power integrated circuits for audio and voice processing. This report covers the quarter and nine months ended December 29, 2018 (fiscal 2019); comparisons are with the periods ended December 30, 2017. The company reports one operating segment, with revenue disclosed for Portable Audio and Non-Portable Audio and Other.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $324.3 million, down 33% from $482.7 million | $945.1 million, down 23% from $1,229.0 million |
| Gross profit and margin | $163.2 million; 50.3%, versus 48.7% | $472.9 million; 50.0%, versus 49.5% |
| Operating income and margin | $44.2 million; 13.6%, versus $103.5 million | $93.7 million; 9.9%, versus $241.7 million |
| Net income | $29.9 million, versus $33.8 million | $83.8 million, versus $150.0 million |
| Diluted EPS | $0.49, versus $0.52 | $1.35, versus $2.26 |
| Operating cash flow | Not presented as a quarterly figure | $197.1 million, versus $213.0 million |
Portable Audio revenue fell $150.0 million in the quarter and $276.1 million over nine months, primarily due to lower component volumes; nine-month sales also reflected lower average selling prices for some products. Non-Portable Audio and Other revenue declined $8.4 million for the quarter and $7.8 million for the nine-month period. Higher gross margin reflected lower manufacturing costs. Nine-month operating expenses increased to $379.2 million from $366.4 million, including higher research and development costs.
Cash, debt and liquidity
- At December 29, 2018, cash and cash equivalents were $219.3 million and marketable securities totaled $224.9 million, for combined cash and securities of approximately $444.2 million.
- Cash and cash equivalents declined $16.3 million from March 31, 2018. Accounts receivable rose to $142.1 million from $100.8 million, which the company attributed primarily to shipment volume and timing; inventory declined to $167.9 million from $205.8 million.
- Nine-month investing cash use was $51.5 million, mainly net purchases of marketable securities and $26.1 million of capital expenditures and technology investments. Financing cash use was $162.0 million, primarily $150.0 million of share repurchases.
- No borrowings were outstanding on the $300 million revolving credit facility, which matures July 2021; the company reported compliance with its covenants. Management said available resources should meet capital requirements for at least the next 12 months.
Material changes, outlook and risks
- Customer concentration: Apple represented approximately 83% of quarterly sales and 81% of nine-month sales. The ten largest end customers accounted for approximately 92% and 91%, respectively. The filing highlights risks from reduced orders, pricing pressure, and customers switching suppliers.
- Tax and pension items: The quarter included a $13.8 million U.K. pension settlement loss, reflecting recognition of a previously recorded actuarial loss; the scheme is fully settled with no further contribution obligations. The quarter’s effective tax rate was 7.4%, versus 67.7% a year earlier. The nine-month rate was 0.8%, versus 38.3%, primarily reflecting tax credits, lower-tax foreign earnings, and adjustments to provisional Tax Act amounts. The company completed its accounting for the Tax Act during the quarter.
- Capital returns: The company had repurchased $150.0 million under its January 2018 $200 million authorization by quarter-end, leaving $50.0 million. In January 2019, the board authorized an additional $200 million of repurchases.
- Guidance: The filing provides no specific forward revenue, earnings, or margin guidance. Management’s liquidity statement is not an earnings forecast.
- Other risks and developments: The company cites intense competition for qualified engineering and technical personnel. Approximately 98% of sales were to non-U.S. customers, principally in Asia, although sales were primarily denominated in U.S. dollars and no currency hedges were entered into during the periods. Management is exploring a potential sale of its Westfield House building; no sale proceeds were recorded. Adoption of lease accounting in fiscal 2020 is expected to materially increase reported assets and liabilities.
Important facts for investors to verify
- Whether the steep decline in Portable Audio volumes, particularly in a business highly dependent on Apple, persists or changes.
- Whether gross-margin improvement from lower manufacturing costs can offset lower sales and continued pricing pressure.
- The composition and sustainability of earnings and tax expense, including the nonrecurring pension settlement and Tax Act adjustments.
- Working-capital trends, especially receivables, and the effect of continued share repurchases on cash and liquidity.
- Potential outcomes and timing for the Westfield House sale, lease-standard adoption, and the company’s disclosed tax examinations and legal matters.