Cirrus Logic, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 29, 2018 (fiscal second quarter of fiscal 2019); comparisons are with the quarter ended September 23, 2017. The six-month figures compare the first half of fiscal 2019 with the first half of fiscal 2018. Dollar amounts below are in millions unless otherwise noted.
Business context and results
Cirrus Logic designs high-performance, low-power integrated circuits for audio and voice processing. It reports one operating segment, with revenue principally from Portable Audio products and the remainder from Non-Portable Audio and Other products.
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | $366.3 | $425.5 | $620.8 | $746.3 |
| Gross profit / margin | $185.1 / 50.5% | $211.3 / 49.7% | $309.7 / 49.9% | $373.0 / 50.0% |
| Operating income / margin | $55.6 / 15.2% | $90.9 / 21.4% | $49.4 / 8.0% | $138.2 / 18.5% |
| Net income | $58.2 | $73.3 | $53.9 | $116.2 |
| Diluted EPS | $0.93 | $1.10 | $0.86 | $1.74 |
| Operating cash flow | Not separately stated for the quarter | $79.0 | $80.7 |
Financial position and liquidity
- At September 29, 2018, cash and cash equivalents were $195.9 million and marketable securities were $199.9 million, totaling $395.8 million. Cash and securities totaled $434.5 million at March 31, 2018.
- Current assets were $642.6 million and current liabilities were $155.9 million. Accounts receivable rose to $206.8 million from $100.8 million at fiscal year-end, primarily due to shipment volume and timing; inventory declined to $142.3 million from $205.8 million.
- No borrowings were outstanding under the $300 million revolving credit facility, which matures in July 2021. The company reported compliance with its covenants.
- First-half investing cash outflow was $21.9 million, primarily capital expenditures and technology investments; financing cash outflow was $96.8 million, primarily $95.0 million of share repurchases. Cash declined by $39.7 million to $195.9 million.
- Management stated that expected future cash earnings, cash and investments, and available revolver borrowings should meet capital requirements for at least the next 12 months.
Material changes and management commentary
- Q2 sales fell 14% year over year; first-half sales fell 17%. Management attributed most of the decline to lower unit volumes of a digital headset product. First-half Portable Audio sales fell $126.1 million, while Non-Portable Audio and Other sales increased $0.6 million.
- Q2 gross margin improved to 50.5% from 49.7%, principally due to lower manufacturing costs, partly offset by lower production volumes. First-half gross margin was nearly unchanged.
- Operating expenses increased: Q2 research and development rose 7% and selling, general and administrative expense rose 10%, with higher employee-related costs among the cited drivers. Lower sales and higher operating expenses contributed to substantially lower operating income.
- The Q2 income tax benefit was $1.4 million, versus $17.2 million of tax expense in the prior-year quarter. The current-period benefit included an $11.3 million reduction in the provisional Tax Act transition-tax amount, along with effects from R&D credits and foreign earnings. Tax Act accounting remained incomplete; the company was also evaluating the GILTI provisions.
- Cirrus adopted ASC 606 in the first quarter of fiscal 2019 using the modified retrospective method, with no income-statement or opening retained-earnings impact.
Outlook, risks and contingencies
- The filing provides no specific revenue, earnings, or margin guidance.
- Customer concentration is significant: Apple represented approximately 82% of Q2 sales and 79% of first-half sales. The ten largest end customers represented approximately 92% of Q2 and 91% of first-half sales. The company warned that reduced orders or pricing from key customers could materially affect sales, margins, and earnings.
- The company expects adoption of the lease accounting standard to materially increase reported assets and liabilities as operating leases are recognized on the balance sheet.
- The UK defined-benefit pension scheme had been insured through a buy-in transaction. On completion of the planned buy-out, the company expects to recognize a settlement loss, including approximately $11.2 million of unamortized loss in accumulated other comprehensive income at quarter-end.
- Unrecognized tax benefits were $44.2 million; a UK subsidiary was subject to a limited-scope tax audit. Management said it had accrued adequate reserves for the matters under examination.
- Management did not believe pending legal matters would have a material adverse effect, while cautioning that adverse outcomes could affect results or cash flows in a particular period.
Key facts for investors to verify
- Whether lower digital-headset volumes and customer demand continue to pressure revenue, particularly given Apple’s share of sales.
- Whether gross-margin improvement can persist as volumes change, and how R&D and SG&A growth affects operating profitability.
- Cash conversion and working-capital trends, especially the sharp increase in receivables, alongside continued share repurchases.
- Final Tax Act and GILTI accounting outcomes, and the timing and size of the pension-plan buy-out settlement loss.
- Future effects of lease-standard adoption on reported assets, liabilities, and comparability.