Cirrus Logic, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2020, ended December 28, 2019; comparisons are with the corresponding periods of fiscal 2019. Cirrus Logic develops mixed-signal processing products for mobile and consumer applications. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Net sales | $374.7 | $324.3 | $1,001.8 | $945.1 |
| Gross profit / margin | $197.5 / 52.7% | $163.2 / 50.3% | $527.9 / 52.7% | $472.9 / 50.0% |
| Operating income / margin | $72.7 / 19% | $44.2 / 14% | $163.5 / 16% | $93.7 / 10% |
| Net income | $68.5 | $29.9 | $149.3 | $83.8 |
| Diluted EPS | $1.13 | $0.49 | $2.47 | $1.35 |
| Operating cash flow | Not presented quarterly in this filing | $246.5 | $197.1 |
- Quarterly sales rose 16%; nine-month sales increased 6%. Growth came from Portable Products, with higher smartphone unit volumes and content, including boosted amplifiers at Android customers. Non-Portable and Other Products sales declined in both comparison periods.
- Gross margin improved due mainly to favorable product mix and cost reductions, with lower reserves and supply-chain efficiencies also contributing.
- R&D expense was $88.7 million for the quarter, roughly flat year over year, and $265.8 million for nine months, down 6%. SG&A increased 19% in the quarter to $36.1 million and 2% for nine months to $98.7 million.
Liquidity, cash flow, and balance sheet
- At December 28, cash and cash equivalents were $342.3 million and marketable securities totaled $263.3 million. Total current assets were $714.6 million versus current liabilities of $178.3 million.
- Operating cash flow for the first nine months was $246.5 million. Investing activities used $50.3 million, including net purchases of marketable securities and capital and technology investments. Financing activities used $70.1 million, primarily for share repurchases.
- The company had no borrowings under its $300 million revolving credit facility and reported compliance with its covenants. It stated that existing cash, investments, expected cash earnings, and available credit should meet capital requirements for at least the next 12 months.
- Operating lease accounting adoption added substantial right-of-use assets and lease liabilities. At quarter-end, those balances were $141.3 million and $147.9 million, respectively; adoption had no material income-statement or cash-flow impact.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management’s liquidity statement is not a forecast of operating performance.
- On January 27, 2020, the board approved discontinuing MEMS microphone efforts. The company estimated an approximately $22 million operating-expense charge in Q4 FY2020, primarily non-cash asset-disposal charges, with some severance and purchase-commitment costs; the exit was expected to be substantially complete by Q1 FY2021.
- Customer concentration is significant: Apple represented about 83% of quarterly sales and 80% of nine-month sales. The ten largest end customers accounted for about 94% and 93%, respectively. The filing warns that customer losses, order reductions, or pricing pressure could materially affect sales and profitability.
- Approximately 99% of sales were to non-U.S. customers, primarily in Asia. The filing identifies the emerging coronavirus outbreak as a potential risk to company, supplier, customer, and contract-manufacturer operations and to demand.
- The effective tax rate was 8.0% for the quarter and 11.6% for nine months. The company had $36.3 million of unrecognized tax benefits; the potential impact of the Altera cost-sharing tax matter remained unclear. U.S. federal tax years 2017 and 2018 were under examination.
- The prior-year comparison includes a $13.8 million U.K. pension settlement loss; the scheme was fully settled and no further contributions were expected. The company reported no pending legal matter that management believed could have a material adverse effect, while noting normal-course litigation uncertainty.
Key facts for investors to verify
- Whether smartphone demand, product content, and customer purchasing patterns sustain revenue and gross-margin gains.
- How continued Apple and top-customer concentration, customer pricing pressure, and Asia-related operational risks affect future results.
- The final cost, timing, and financial effects of the MEMS microphone exit, including the estimated Q4 charge.
- Cash conversion and working-capital movements, especially receivables, and the company’s ongoing repurchase activity.
- Developments in tax examinations and unrecognized tax benefits, including the unresolved potential effects of the Altera matter.