Cirrus Logic, Inc. — Form 10-Q Summary
Business context and period: The filing covers the quarter ended September 28, 2019, Cirrus Logic’s second quarter of fiscal 2020, and compares results with the quarter ended September 29, 2018. The company designs high-performance, low-power integrated circuits for audio, voice, and signal-processing applications. It reports one operating segment, with revenue also presented for Portable and Non-Portable and Other products.
Financial performance
| Metric | Quarter ended Sep. 28, 2019 | Prior-year quarter | Six months ended Sep. 28, 2019 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $388.9 million | $366.3 million | $627.2 million | $620.8 million |
| Gross margin | 53.5% | 50.5% | 52.7% | 49.9% |
| Operating income | $86.7 million | $55.6 million | $90.8 million | $49.4 million |
| Net income | $76.2 million | $58.2 million | $80.8 million | $53.9 million |
| Diluted EPS | $1.27 | $0.93 | $1.34 | $0.86 |
| Operating cash flow | Not stated separately | Not stated separately | $117.8 million | $79.0 million |
- Quarterly sales grew 6%, led by Portable product sales, which increased $25.4 million; Non-Portable and Other sales declined $2.8 million. For the six-month period, sales rose 1.0%: Portable gained $16.0 million while Non-Portable and Other declined $9.6 million.
- Management attributed higher gross margin mainly to favorable product mix, with supply-chain efficiencies and product cost reductions also contributing. Quarterly R&D expense fell 8.5% to $88.2 million, primarily due to lower amortization of acquisition-related intangibles and increased R&D incentives. Quarterly SG&A was broadly flat at $33.0 million.
- Quarterly income tax expense was $12.1 million, versus a $1.4 million benefit in the prior-year quarter. The current-quarter effective tax rate was 13.7%; the company cited foreign-jurisdiction earnings, the FDII deduction, and release of prior-year tax benefits following closure of a U.K. tax audit.
Financial position and liquidity
- At September 28, 2019, cash and cash equivalents were $221.9 million and marketable securities totaled $261.3 million, for $483.2 million in combined cash and securities. Total assets were $1.584 billion and stockholders’ equity was $1.179 billion.
- The company had no borrowings under its $300 million revolving credit facility and reported compliance with its covenants. The facility matures July 12, 2021. Interest expense was primarily unused commitment fees.
- Operating cash flow of $117.8 million for the first six months was up from $79.0 million. Management said current-period operating cash flow reflected net income, offset by an approximately $25 million unfavorable working-capital change, primarily higher receivables, partly offset by higher payables and lower inventory.
- Investing activities used $44.2 million, including net marketable-security purchases and capital and technology investments. Financing activities used $67.8 million, primarily $70.0 million of share repurchases.
- Operating lease liabilities totaled $146.9 million, including $13.8 million current and $133.1 million non-current. Adoption of the lease accounting standard materially increased reported assets and liabilities; it did not materially affect adoption-period income or cash flows.
- Management believed cash, investments, expected future cash earnings, and available credit would meet capital requirements for at least the next 12 months.
Material changes, outlook, and risks
- Quarterly earnings growth outpaced sales growth as gross margin improved and operating expenses declined. The diluted weighted-average share count also fell to 60.2 million from 62.4 million, reflecting share repurchases.
- Sales were highly concentrated: Apple represented approximately 81% of quarterly sales and 78% of six-month sales; Samsung accounted for 10% of six-month sales. The ten largest end customers represented 94% of quarterly sales. Management warns that customer losses, lower orders, or pricing pressure could materially reduce revenue and profitability.
- The filing provides no numerical revenue or earnings guidance. Management’s stated liquidity outlook covers at least the next 12 months, subject to capital needs and other business factors.
- Cirrus Logic was evaluating options for its remaining MEMS microphone efforts after reallocating a significant percentage of engineering resources to projects expected to offer better returns. Management expected to provide an update around January. Approximately $30 million of related equipment and intangible assets was not impaired at quarter-end, but future impairment or disposition charges remain possible.
- Foreign-exchange forwards were introduced in fiscal 2020 to manage exposure to non-U.S.-dollar balance-sheet items. A British pound contract had a $57.0 million notional value at quarter-end; its fair value was not material. Derivative losses were recorded in other expense.
- The company reported $39.0 million of unrecognized tax benefits, of which $38.8 million would affect the effective tax rate if recognized. It said approximately $3.0 million could be released within 12 months. The potential impact of the Ninth Circuit’s Altera decision on stock-based compensation cost-sharing remains unclear; IRS examinations of fiscal 2017 and 2018 returns were ongoing, with reserves considered adequate by management.
- Management said no pending legal matter was currently believed likely to have a material adverse effect, while noting that litigation outcomes remain uncertain. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether Portable product growth and improved gross margin persist, and how customer pricing and product mix evolve.
- Apple and broader customer concentration, including the effect of order changes, sourcing decisions, or pricing pressure.
- The January update on MEMS microphone strategy and any resulting impairment, disposition, or additional expense.
- Cash conversion and working-capital trends, especially the timing and collection of the sharp increase in accounts receivable.
- Developments in the Altera tax matter, IRS examinations, and the potential release of unrecognized tax benefits.
- Share-repurchase pace and remaining authorization; approximately $170 million remained under the 2019 $200 million program at quarter-end.