Cirrus Logic, Inc. — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended March 30, 2019 (52 weeks). The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing.
Business context
Cirrus Logic designs high-performance, low-power analog and mixed-signal integrated circuits for audio, voice, haptics and related applications. Its products serve smartphones and other portable devices, as well as automotive, industrial, energy and consumer markets. It operates as a fabless semiconductor company and reports one operating segment, with revenue presented across Portable and Non-Portable and Other product lines.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $1,185.5 million | $1,532.2 million |
| Gross profit / margin | $597.5 million / 50.4% | $760.7 million / 49.6% |
| Operating income | $100.8 million | $262.5 million |
| Net income | $90.0 million | $162.0 million |
| Diluted EPS | $1.46 | $2.46 |
| Cash from operations | $206.7 million | $318.7 million |
- Sales fell 22.6% year over year. Portable revenue declined to $1,032.0 million from $1,363.9 million, mainly due to lower smartphone-related unit volumes and lower sales of digital headsets and adaptors; increased Android amplifier sales partially offset the decline. Non-Portable and Other revenue decreased 8.8% to $153.5 million.
- Gross margin improved 0.8 percentage points, primarily due to favorable product mix and supply-chain efficiencies. Operating expenses were $496.7 million, including $375.1 million in R&D and $126.5 million in SG&A.
- Cash, cash equivalents and marketable securities totaled approximately $445.3 million at year-end. Working capital was $509.4 million. The company had no borrowings under its $300 million revolving facility and reported covenant compliance.
- Operating cash flow declined from $318.7 million to $206.7 million. Investing activities used $54.7 million and financing activities used $171.5 million, including $160.0 million for share repurchases. Capital expenditures and technology investments totaled $35.8 million.
- Total assets were $1,352.6 million and stockholders’ equity was $1,140.2 million. Long-term liabilities were $96.9 million. The filing reports no outstanding revolver balance.
Fourth quarter: FY2019 net sales were $240.4 million, gross profit was $124.6 million and net income was $6.2 million (diluted EPS $0.10), compared with FY2018 fourth-quarter sales of $303.2 million, net income of $12.0 million and diluted EPS of $0.19.
Material changes and unusual items
- Net income fell 44.4% year over year, reflecting lower sales and operating income, partly offset by a much lower income-tax provision. The effective tax rate was 4.0%, versus 38.9% in FY2018, when the Tax Act produced a substantial tax charge.
- FY2019 included a $13.8 million U.K. pension settlement loss. The defined-benefit plan buy-out was completed, with no further contribution obligations.
- The company sold its Edinburgh property, recording a $4.9 million gain; it had recorded a $9.8 million impairment on that property in FY2017.
- Apple represented approximately 78% of FY2019 sales, down from 81% in FY2018. The ten largest end customers represented 91% of sales. International sales were 98% of revenue.
- Share repurchases reduced shares outstanding: the company repurchased and retired approximately $160.0 million of shares in FY2019. A further $200 million repurchase authorization was approved in January 2019.
Outlook, risks and contingencies
- Management expected gross margin of approximately 50% in FY2020 and operating expenses to remain relatively flat with FY2019 as R&D investment continued. It said macroeconomic uncertainty and its effect on smartphone volumes made revenue difficult to predict.
- Management cited progress in Android market penetration, driven by boosted amplifiers, and ongoing customer engagement in MEMS microphones and voice biometrics. These initiatives remain investments with uncertain adoption and returns; MEMS microphones may have lower margins than established businesses.
- Key risks include heavy dependence on Apple and a concentrated customer base; smartphone-market maturity and demand fluctuations; customer pricing pressure and short-notice order changes; competition and product integration; timely development and customer adoption of new products; and reliance on third-party manufacturing, particularly in Asia.
- Additional exposures include U.S.–China trade restrictions and export controls, supply or capacity disruptions, inventory obsolescence, cybersecurity and intellectual-property risks, and tax uncertainty. Unrecognized tax benefits were $39.7 million; the company said relevant tax examinations remained ongoing and that it believed reserves were adequate.
- Contractual commitments totaled $222.4 million, including $62.6 million of wafer purchase commitments and $100.4 million of net facility lease commitments. The company adopted the new lease standard in FY2020 and recognized approximately $158 million of additional operating lease liabilities, with no income-statement impact.
- Management said expected cash generation, existing cash and investments, and available borrowing capacity should cover capital requirements for at least 12 months. The auditor issued an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether customer diversification and Android amplifier growth can offset smartphone-related volume declines, particularly given Apple’s 78% revenue share.
- Whether FY2020 revenue, gross margin and operating-expense performance track management’s outlook; revenue guidance was not provided as a clear value.
- How sustainable the unusually low 4.0% effective tax rate is, and the outcome and timing of tax audits and unrecognized tax benefits.
- Whether MEMS microphone and voice biometrics investments achieve commercial scale and acceptable margins.
- How lease liabilities, purchase commitments and any supply-chain constraints affect future liquidity and operating flexibility.