Cirrus Logic, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended March 31, 2018 (a 53-week year). The filing is an annual report, not a standalone Q4 filing; it also reports Q4 results. Cirrus Logic designs fabless analog and mixed-signal ICs, principally for audio and voice applications. It reports one operating segment, with revenue presented across portable audio and non-portable audio and other products.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $1.532 billion | $1.539 billion |
| Gross profit / margin | $760.7 million / approximately 50% | $757.8 million / approximately 49% |
| Operating income | $262.5 million | $317.1 million |
| Net income | $162.0 million | $261.2 million |
| Diluted EPS | $2.46 | $3.92 |
| Cash from operations | $318.7 million | $369.8 million |
| Cash, cash equivalents and marketable securities at year-end | $434.5 million | $451.0 million |
| Working capital at year-end | $473.5 million | $631.9 million |
- Revenue was nearly flat year over year (-0.4%). Portable audio sales were $1.364 billion, down from $1.374 billion; non-portable audio and other sales rose 1.9% to $168.3 million.
- Gross margin improved on supply-chain efficiencies. Operating income fell as research and development spending increased 21% to $366.4 million; SG&A was $131.8 million.
- The effective tax rate rose to 38.9% from 17.1%. The FY2018 provision included a provisional $60.1 million expense for Tax Cuts and Jobs Act effects, including a $53.9 million transition-tax estimate and $6.1 million deferred-tax remeasurement.
- FY2018 Q4 sales were $303.2 million, gross profit $152.6 million, net income $12.0 million and diluted EPS $0.19; the prior-year Q4 reported $327.9 million, $164.3 million, $35.1 million and $0.52, respectively.
- Year-end total assets were $1.430 billion and stockholders’ equity $1.162 billion. The company had no revolver borrowings against its $300 million secured facility, which matures in July 2021; it reported covenant compliance.
- Investing activities used $184.7 million, including net marketable-security purchases and $59.3 million of capital expenditures and technology investments. Financing activities used $249.6 million, including $175.8 million of share repurchases and $60.0 million of revolver repayments.
Material changes and management commentary
- Portable audio sales were pressured by lower-ASP components at a key Android OEM and price reductions on other products, partly offset by higher smartphone volumes. Non-portable sales growth came mainly from computer-related and power-meter products.
- Apple represented approximately 81% of FY2018 sales, up from 79% in FY2017; the ten largest end customers accounted for approximately 92%. International sales were 98% of revenue.
- Management cited product and market expansion, including increased smartphone penetration, digital-headset opportunities, a sampled 28-nanometer voice-biometrics component and a 55-nanometer boosted amplifier with integrated DSP.
- Management expects FY2019 revenue to decline approximately 10% year over year and anticipates a return to year-over-year revenue growth in FY2020.
- Cirrus completed a pension-plan buy-in that fully insured the UK defined-benefit obligations. Management intends to complete a buy-out; a settlement loss, including an approximately $11.2 million unamortized actuarial loss in accumulated other comprehensive income, is expected when completed.
- The October 2015 $200 million repurchase authorization was completed. A new $200 million program was authorized in January 2018; no shares had been repurchased under it by year-end.
Risks, contingencies and unusual items
- Customer and product concentration: reliance on Apple and a small number of large customers exposes sales, pricing and earnings to design changes, order reductions, insourcing and customer bargaining pressure.
- Demand and competition: smartphone and consumer-market cycles, short product-design cycles, price erosion and customers’ ability to cancel or reschedule orders on short notice make quarterly results difficult to forecast.
- Manufacturing and supply: the company depends on external foundries and assembly/test vendors, primarily in Asia. Capacity constraints, yield issues, disruptions, trade restrictions or supplier transitions could delay shipments or raise costs.
- Technology execution: timely new-product development and transitions to advanced manufacturing processes are important. MEMS microphones and new markets carry execution, adoption and potentially lower-margin risks.
- Tax uncertainty: Tax Act amounts were provisional; final calculations could differ. Unrecognized tax benefits were $55.2 million, and a UK subsidiary was under a limited-scope tax audit.
- Commitments: contractual obligations totaled $263.9 million, including $80.2 million in wafer commitments and $106.2 million in net facilities leases. Unrecognized tax benefits are excluded from this total.
- Management reported no pending legal matter believed likely to have a material adverse effect, while noting ordinary-course proceedings and inherent uncertainty. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether FY2019’s forecast revenue decline and the anticipated FY2020 return to growth materialized, and what assumptions support the outlook.
- Apple’s share of sales, customer design wins and product content, plus evidence that customer and revenue concentration is diversifying.
- Smartphone and Android demand, average selling prices, gross-margin trends, and the contribution and economics of newer products and markets.
- Final Tax Act accounting, any further tax assessments, and the timing and financial impact of the pension-plan buy-out.
- Cash generation, inventory growth and commitments, repurchase-program execution, and continued access to manufacturing capacity.
The filing reports unqualified audit opinions on the financial statements and internal control over financial reporting; management and the auditor found controls effective as of March 31, 2018.