Cirrus Logic, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 29, 2019, the first quarter of fiscal 2020. Comparative period: three months ended June 30, 2018. Amounts are in U.S. dollars; financial statement amounts below are rounded to millions unless stated otherwise.
Business context and results
Cirrus Logic designs high-performance, low-power integrated circuits for audio, voice and signal-processing applications. It reports one operating segment. Sales are highly concentrated in a small number of end customers and primarily outside the United States.
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $238.3 million | $254.5 million | Down $16.2 million, or 6% |
| Gross profit / gross margin | $122.5 million / 51.4% | $124.6 million / 48.9% | Margin up 2.5 percentage points |
| Operating income (loss) | $4.1 million | $(6.2) million | Turned profitable |
| Net income (loss) | $4.6 million | $(4.3) million | Turned profitable |
| Diluted EPS | $0.08 | $(0.07) | Improved |
| Cash from operations | $57.0 million | $4.7 million | Up $52.3 million |
Financial position, cash flow and capital
- At June 29, 2019, cash and cash equivalents were $198.1 million; short- and long-term marketable securities totaled $257.4 million. Combined cash and marketable securities were approximately $455.5 million, versus $445.3 million at March 30, 2019. Cash alone declined by $18.1 million during the quarter.
- Total assets were $1.47 billion and stockholders’ equity was $1.12 billion. The company had no borrowings outstanding under its $300 million revolving credit facility, which matures July 12, 2021, and reported compliance with its covenants.
- Investing activities used $34.7 million, principally reflecting $26.6 million of net purchases of marketable securities and $8.1 million of capital expenditures and technology investments. Financing activities used $40.4 million, primarily for $40.0 million of share repurchases.
- Operating cash flow benefited from a $20.7 million favorable working-capital change, including lower inventory and accounts receivable. Inventory fell to $146.3 million from $164.7 million at March 30.
- The company adopted lease accounting guidance in the quarter. At June 29, operating lease right-of-use assets were $146.0 million and lease liabilities totaled $151.7 million; adoption materially increased reported assets and liabilities but had no income statement or cash flow impact.
Material changes and management commentary
- Portable product sales declined $9.3 million, primarily due to lower smartphone, digital headset and adapter sales, partly offset by increased amplifier sales at Android customers. Non-Portable and Other product sales declined $6.9 million.
- Gross margin improved, which management attributed primarily to lower reserve expense and favorable product mix. Research and development expense declined 9% to $88.8 million, and selling, general and administrative expense declined 10% to $29.5 million.
- Management said lower R&D expense reflected acquisition-related intangible amortization, increased R&D incentives and lower product development costs, partly offset by higher salary costs tied to transitioning development activities from Melbourne to U.S. and U.K. teams.
- Management stated that expected future cash earnings, existing cash and investments, and available credit were expected to meet capital requirements for at least the next 12 months. The filing provides no specific sales, earnings or margin guidance.
Risks, contingencies and unusual items
- Customer concentration remains substantial: Apple represented approximately 72% of quarterly sales, Samsung 10%, and the ten largest end customers approximately 90%. Management cautioned that customer losses, order reductions and pricing pressure could materially affect sales and profitability. Approximately 98% of sales were to non-U.S. customers.
- The company reported $40.0 million of unrecognized tax benefits that could affect the effective tax rate if recognized. It said these benefits could decrease by approximately $3.0 million within 12 months as a statute of limitations expires. Tax examinations include the U.S. federal fiscal 2017 return and U.K. matters for fiscal 2016 and 2017.
- The Ninth Circuit’s June 2019 decision on cost-sharing rules for stock-based compensation may affect the company; the ultimate resolution and potential impact were described as unclear.
- The quarter included a $2.363 million loss on foreign currency forward contracts, recorded in other income (expense). The company began using these contracts during the quarter; one British pound sterling contract had a $59.7 million notional value at quarter-end. It does not apply hedge accounting.
- Ordinary-course legal proceedings were disclosed; management did not believe any pending matter was likely to have a material adverse effect based on its current knowledge. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether customer demand, particularly from Apple and smartphone-related programs, stabilizes or further weakens; monitor concentration and pricing pressure.
- Whether improved gross margin and lower operating expenses persist despite declining sales, and how product mix and reserve changes affect margins.
- Whether the strong operating cash flow is sustainable or primarily reflects working-capital movements.
- How tax examinations, unrecognized tax benefits and the Altera-related cost-sharing issue develop.
- The effect of lease commitments, share repurchases and foreign-exchange exposure on liquidity and reported results. The filing lists $151.7 million of lease liabilities and $226.6 million of undiscounted future lease payments before imputed interest.