CIRRUS LOGIC, INC. annual report, FY2018

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

MetricFY2018FY2017
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.