CIRRUS LOGIC, INC. The following discussion should be read along with the unaudited consolidated condensed financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year endedMarch 30, 2019 , contained in our fiscal year 2019 Annual Report on Form 10-K filed with theSecurities and Exchange Commission (the "Commission") onMay 24, 2019 . We maintain a website at investor.cirrus.com, which makes available free of charge our most recent annual report and all other filings we have made with the Commission. This Management's Discussion and Analysis of Financial Condition and Results of Operations and certain information incorporated herein by reference contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations, estimates, forecasts and projections and the beliefs and assumptions of our management. In some cases, forward-looking statements are identified by words such as "expect," "anticipate," "target," "project," "believe," "goals," "estimates," "intend," and variations of these types of words and similar expressions which are intended to identify these forward-looking statements. In addition, any statements that refer to our plans, expectations, strategies or other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation, and expressly disclaim any duty, to revise or update publicly any forward-looking statement for any reason. For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see "Item 1A - Risk Factors" in our 2019 Annual Report on Form 10-K filed with the Commission on 19 --------------------------------------------------------------------------------
Overview
Critical Accounting Policies
Our discussion and analysis of the Company's financial condition and results of operations are based upon the unaudited consolidated condensed financial statements included in this report, which have been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts. We evaluate the estimates on an on-going basis. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. The Company adopted ASC Topic 842, Leases as ofMarch 31, 2019 . The impact of this new guidance on our accounting policies and operating results is described below, in Note 2 - Recently Issued Accounting Pronouncements as well as in Note 9 - Leases. During the nine months endedDecember 28, 2019 , there have been no other significant changes in our "Critical Accounting Policies" included in our fiscal year 2019 Annual Report on Form 10-K for the fiscal year endedMarch 30, 2019 . Recently Issued Accounting Pronouncements InFebruary 2016 , the FASB issued ASU No. 2016-02, Leases, which the Company adopted in the first quarter of fiscal year 2020. The new standard provides a number of optional practical expedients in transition. We elected the use-of-hindsight practical expedient and the 'package of practical expedients' which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The new standard also provides practical expedients for an entity's ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. This means, for qualifying leases, which are those with terms of less than twelve months, we will not recognize ROU assets or lease liabilities. We also do not separate lease and non-lease components for all classes of assets. Most of our operating lease commitments were subject to the new standard and recognized as ROU assets and operating lease liabilities upon adoption, which materially increased the total assets and total liabilities that we report relative to such amounts prior to adoption.
In applying the use-of-hindsight practical expedient, we re-assessed whether we
were reasonably certain to exercise extension options within our lease
agreements. This resulted in the lease term being extended on a number of
leases. The previously capitalized initial direct costs and accrued lease
payments were recalculated assuming these extended lease terms had always
applied, resulting in an adjustment of
On adoption, we recognized additional operating liabilities, with corresponding
ROU assets based on the present value of the remaining minimum rental payments
under current leasing contracts for existing operating leases. In addition,
existing capitalized initial direct costs and accrued lease payments were
reclassified from prepayments and accruals to the ROU asset. There was no income
statement or cash flow statement impact on adoption, nor were prior periods
adjusted.
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The effects of the changes made to our balance sheet at adoption were as follows
(in thousands):
Balance at March Impact from ASU Balance at March
30, 2019 2016-02 Adoption 31, 2019
Financial statement line item:
Prepaid assets $ 30,794 $ (2,833) $ 27,961
Right-of-use lease assets - 149,746 149,746
Lease liabilities - (14,899) (14,899)
Other accrued liabilities (16,339) 11,071 (5,268)
Non-current lease liabilities - (143,085) (143,085)
Other long-term liabilities (9,889) (965) (10,854)
Accumulated deficit (222,430) 965 (221,465)
In June 2016 , the FASB issued ASU No. 2016-13, Financial Instruments - Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This
ASU requires credit losses on available-for-sale debt securities to be presented
as an allowance rather than a write-down. Unlike current U.S. GAAP, the credit
losses could be reversed with changes in estimates, and recognized in current
year earnings. This ASU is effective for annual periods beginning after
December 15, 2019 , and interim periods within those annual periods. Early
adoption is permitted for annual periods beginning after December 15, 2018 ,
including interim periods. The Company is currently evaluating the impact of
this ASU, but does not expect a material impact to the financial statements upon
adoption in the first quarter of fiscal year 2021.
In January 2017 , the FASB issued ASU No. 2017-04, Intangibles - Goodwill and
Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU
eliminates step two of the goodwill impairment test. An impairment charge is to
be recognized for the amount by which the current value exceeds the fair value.
This ASU is effective for annual periods beginning after December 15, 2019 ,
including interim periods. Early adoption is permitted, for interim or annual
goodwill impairment tests performed after January 1, 2017 , and should be applied
prospectively. An entity is required to disclose the nature of and reason for
the change in accounting principle upon transition. That disclosure should be
provided in the first annual period and in the interim period within the first
annual period when the entity initially adopts the amendments in this update.
The Company is currently evaluating the impact of this ASU, but does not expect
a material impact to the financial statements upon adoption.
In February 2018 , the FASB issued ASU No. 2018-02, Income Statement - Reporting
Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income. This ASU allows for the classification
of stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act")
from accumulated other comprehensive income to retained earnings. This ASU is
effective for annual periods beginning after December 15, 2018 , with early
adoption permitted. The standard should be applied in the period of adoption or
retrospectively to each period (or periods) in which the effect of the change in
tax rate is recognized. The Company adopted this ASU in the first quarter of
fiscal year 2020 and elected to reclassify the stranded tax effects of $0.3
million from accumulated other comprehensive income to retained earnings in the
period of adoption.
In June 2018 , the FASB issued ASU No. 2018-07, Compensation - Stock Compensation
(Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This
ASU expands the scope of Topic 718 to include all share-based payment
transactions for acquiring goods and services from nonemployees and will apply
to all share-based payment transactions in which the grantor acquires goods and
services to be used or consumed in its own operations by issuing share-based
payment awards. This ASU is effective for fiscal years beginning after December
15, 2018 , including interim periods within that fiscal year, with early adoption
permitted. The Company adopted this ASU in the first quarter of fiscal year
2020, with no material impact to the financial statements.
In August 2018 , the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic
820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value
Measurement. This ASU adjusts current required disclosures related to fair value
measurements. This ASU is effective for fiscal years beginning after December
15, 2019 , including interim periods within that fiscal year, with early adoption
permitted. The Company is currently evaluating the impact of this ASU, but does
not expect a material impact to the financial statements upon adoption.
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In August 2018 , the Commission adopted the final rule under SEC Release No.
33-10532, Disclosure Update and Simplification, amending certain disclosure
requirements that were redundant, duplicative, overlapping, outdated or
superseded. In addition, the amendments expanded the disclosure requirements on
the analysis of stockholders' equity for interim financial statements. Under the
amendments, an analysis of changes in each caption of stockholders' equity
presented in the balance sheet must be provided in a note or separate statement.
The analysis should present a reconciliation of the beginning balance to the
ending balance of each period for which a statement of comprehensive income is
required to be filed. The final rule was published in the Federal Register on
October 4, 2018 , effective November 5, 2018 . The Company adopted the amendments
in the first quarter of fiscal year 2020. See consolidated condensed statements
of stockholders' equity.
In December 2019 , the FASB issued ASU No. 2019-12, Income Taxes (Topic 740):
Simplifying the Accounting for Income Taxes. The ASU removes certain exceptions
to the general principles in Topic 740 and also clarifies and amends existing
guidance to improve consistent application. This ASU is effective for fiscal
years beginning after December 15, 2020 , including interim periods within that
fiscal year, with early adoption permitted. The Company is currently evaluating
the impact of this ASU, but does not expect a material impact to the financial
statements upon adoption.
Results of Operations Our fiscal year is the 52- or 53-week period ending on the last Saturday in March. Fiscal years 2020 and 2019 are both 52-week fiscal years.
The following table summarizes the results of our operations for the first three
and nine months of fiscal years 2020 and 2019, respectively, as a percentage of
net sales. All percentage amounts were calculated using the underlying data in
thousands, unaudited:
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Three Months Ended Nine Months Ended
December 28, December 29, December 28, December 29,
2019 2018 2019 2018
Net sales 100 % 100 % 100 % 100 %
Gross margin 53 % 50 % 53 % 50 %
Research and development 24 % 27 % 27 % 30 %
Selling, general and administrative 10 % 9 % 10 % 10 %
Income from operations 19 % 14 % 16 % 10 %
Interest income 1 % - % 1 % - %
Interest expense - % - % - % - %
U.K. pension settlement - % (4) % - % (1) %
Other income (expense) - % - % - % - %
Income before income taxes 20 % 10 % 17 % 9 %
Provision for income taxes 2 % 1 % 2 % - %
Net income 18 % 9 % 15 % 9 %
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Net Sales
Net sales for the third quarter of fiscal year 2020 increased $50.4 million , or
16 percent, to $374.7 million from $324.3 million in the third quarter of fiscal
year 2019. Net sales from our portable products increased $56.2 million ,
primarily due to increased unit volumes and content for smartphones, including
higher sales of boosted amplifiers at Android customers. Non-portable and other
product sales decreased $5.8 million for the quarter versus the comparable
period in the prior fiscal year.
Net sales for the first nine months of fiscal year 2020 increased $56.7 million ,
or 6%, to $1,001.8 million from $945.1 million in the first nine months of
fiscal year 2019. Net sales from our portable products increased $72.2 million ,
primarily due to increased content in smartphones, including higher sales of
boosted amplifiers at Android customers. Non-portable and other product sales
decreased $15.5 million for the first nine months of fiscal year 2020 versus the
comparable period in the prior fiscal year.
Sales to non-U.S. customers, principally located in Asia , including sales to
U.S. -based end customers that manufacture products through contract
manufacturers or plants located overseas, were approximately 99 percent and 98
percent of net sales
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for the third quarter of fiscal years 2020 and 2019, respectively and 99 percent
and 98 percent for the first nine months of fiscal years 2020 and 2019,
respectively. Our sales are denominated primarily in
Since the components we produce are largely proprietary, we consider our end customer to be the entity specifying the use of our component in their design. These end customers may purchase our products directly from us, through distributors or third-party manufacturers contracted to produce their designs. For the third quarter of fiscal years 2020 and 2019, our ten largest end customers represented approximately 94 percent and 92 percent of our net sales, respectively. For the first nine months of fiscal years 2020 and 2019, our ten largest end customers represented approximately 93 percent and 91 percent of our net sales, respectively. We had one end customer, Apple Inc., that purchased through multiple contract manufacturers and represented approximately 83 percent of the Company's total net sales for each of the third quarters of fiscal years 2020 and 2019, and 80 percent and 81 percent for the first nine months of fiscal years 2020 and 2019, respectively. No other end customer or distributor represented more than 10 percent of net sales for the three and nine months endingDecember 28, 2019 orDecember 29, 2018 . For more information, please see Part II-Item 1A-Risk Factors- "We depend on a limited number of customers and distributors for a substantial portion of our sales, and the loss of, or a significant reduction in orders from, or pricing on products sold to, any key customer or distributor could significantly reduce our sales and our profitability."
Gross Margin
Gross margin was 52.7 percent in the third quarter of fiscal year 2020, up from 50.3 percent in the third quarter of fiscal year 2019. The increase was primarily driven by favorable product mix and cost reductions on certain products, and to a lesser extent, lower reserves and supply chain efficiencies in the current fiscal quarter versus the third quarter of fiscal year 2019. Gross margin was 52.7 percent for the first nine months of fiscal year 2020, up from 50.0 percent for the first nine months of fiscal year 2019. The increase was primarily driven by favorable product mix and cost reductions on certain products, and to a lesser extent, lower reserves and supply chain efficiencies, in the first nine months of fiscal year 2020 versus the first nine months of fiscal year 2019.
Research and Development Expense
Research and development expense for the third quarter of fiscal year 2020 was$88.7 million , an increase of$0.1 million , from$88.6 million in the third quarter of fiscal year 2019. The primary drivers were increased employee-related expenses, primarily variable compensation and stock-based compensation, and product development costs, offset by increased R&D incentives and decreases in costs related to asset impairment, the amortization of acquisition-related intangibles, and facilities. Research and development expense for the first nine months of fiscal year 2020 was$265.8 million , a decrease of$17.1 million , or 6% percent, from$282.9 million for the first nine months of fiscal year 2019. The primary drivers were decreased amortization of acquisition-related intangibles, increased R&D incentives and decreased asset impairment costs during the current fiscal year, partially offset by increased employee-related expenses, primarily variable compensation and stock-based compensation.
Selling, General and Administrative Expense
Selling, general and administrative expense for the third quarter of fiscal year 2020 was$36.1 million , an increase of$5.7 million , or 19% percent, from$30.4 million in the third quarter of fiscal year 2019. The increase was primarily driven by increases in employee-related expenses, primarily variable compensation and stock-based compensation, as well as facilities-related costs. Selling, general and administrative expense for the first nine months of fiscal year 2020 was$98.7 million , an increase of$2.4 million , or 2% percent, from$96.3 million for the first nine months of fiscal year 2019, primarily due to an increase in employee-related expenses, primarily variable compensation. 23 -------------------------------------------------------------------------------- Interest Income The Company reported interest income of$2.7 million and$7.7 million , for the three and nine months endedDecember 28, 2019 , respectively and$2.0 million and$5.5 million for the three and nine months endedDecember 29, 2018 , respectively. Interest income increased in the current period due to higher yields on higher average cash, cash equivalent and marketable securities balances, compared to the prior period. Interest Expense The Company reported interest expense of$0.3 million and$0.8 million for the three and nine months endedDecember 28, 2019 , respectively and$0.3 million and$0.8 million for the three and nine months endedDecember 29, 2018 , respectively. Interest expense consists primarily of unused commitment fees.
The Company settled its defined benefit pension scheme in the third quarter of fiscal year 2019. A settlement loss of$13.8 million was recognized, which was the amount of the previously recorded unamortized actuarial pension loss in AOCI. The loss is presented as a separate line item in the consolidated condensed statement of income under the caption "U.K. pension settlement". The Company will have no further contribution obligations going forward. Other Income (Expense) For the three and nine months endedDecember 28, 2019 , the Company reported$0.6 million and$1.5 million , respectively, in other expense and immaterial amounts for the three and nine months endedDecember 29, 2018 , primarily related to remeasurement on foreign currency denominated monetary assets and liabilities. Income Taxes Our provision for income taxes is based on estimated effective tax rates derived from an estimate of annual consolidated earnings before taxes, adjusted for nondeductible expenses, other permanent items and any applicable credits. The following table presents the provision for income taxes (in thousands) and the effective tax rates: Three Months Ended Nine Months Ended December 28, December 29, December 28, December 29, 2019 2018 2019 2018 Income before income taxes$ 74,508 $ 32,314 $ 168,917 $ 84,539 Provision for income taxes$ 5,996 $ 2,381 $ 19,577 $ 705 Effective tax rate 8.0 % 7.4 % 11.6 % 0.8 % Our income tax expense for the third quarter of fiscal year 2020 was$6.0 million compared to$2.4 million of income tax expense for the third quarter of fiscal year 2019, resulting in effective tax rates of 8.0% and 7.4% for the third quarter of fiscal years 2020 and 2019, respectively. Our income tax expense was$19.6 million for the first nine months of fiscal year 2020 compared to income tax expense of$0.7 million for the first nine months of fiscal year 2019, resulting in effective tax rates of 11.6% and 0.8%, respectively. Our effective tax rates for the third quarter and first nine months of fiscal year 2020 were lower than the federal statutory rate primarily due to the effect of income earned in certain foreign jurisdictions that is taxed below the federal statutory rate, the release of prior year unrecognized tax benefits in the third quarter due to the lapse of the statute of limitations applicable to a tax position taken on a prior year tax return, as well as excess tax benefits from stock-based compensation. Our effective tax rate for the first nine months of fiscal year 2020 was further reduced by the release of prior year unrecognized tax benefits due to the closure of the tax audit of the Company'sU.K. subsidiaries in the second quarter of fiscal year 2020. Our effective tax rates for the third quarter and first nine months of fiscal year 2019 were lower than the federal statutory rate primarily due to theU.S. federal research and development tax credit and the effect of income earned in certain foreign jurisdictions that is taxed below the federal statutory rate. Our effective tax rate for the first nine months of fiscal year 2019 was further reduced by adjustments recorded to reduce the provisional amount of the Tax Cuts and Jobs Act's transition tax in the second quarter of fiscal year 2019. 24 --------------------------------------------------------------------------------
Liquidity and Capital Resources
We require cash to fund our operating expenses and working capital requirements, including outlays for inventory, capital expenditures, share repurchases, and strategic acquisitions. Our principal sources of liquidity are cash on hand, cash generated from operations, cash generated from the sale and maturity of marketable securities, and available borrowings under our$300 million senior secured revolving credit facility. Cash generated by operating activities is net income adjusted for certain non-cash items and changes in working capital. Cash flow from operations was$246.5 million for the first nine months of fiscal year 2020 as compared to$197.1 million for the corresponding period of fiscal year 2019. The cash flow from operations during the first nine months of fiscal year 2020 was related to the cash components of our net income and a$4.9 million favorable change in working capital, primarily as a result of increases in accounts payable and decreases in inventories, partially offset by increases in accounts receivable. The cash flow from operations during the corresponding period of fiscal year 2019 was related to the cash components of our net income and a$2.1 million favorable change in working capital, primarily as a result of decreases in inventories and increases in accounts payable, partially offset by increases in accounts receivable. Net cash used in investing activities was$50.3 million during the first nine months of fiscal year 2020 as compared to$51.5 million used in investing activities during the first nine months of fiscal year 2019. The cash used in investing activities in the first nine months of fiscal year 2020 is primarily related to net purchases of marketable securities of$32.2 million and capital expenditures and technology investments of$18.2 million . The cash used in investing activities in the corresponding period in fiscal year 2019 was primarily related to capital expenditures and technology investments of$26.1 million and net purchases of marketable securities of$25.3 million . Net cash used in financing activities was$70.1 million during the first nine months of fiscal year 2020. The cash used during the first nine months of fiscal year 2020 was primarily associated with stock repurchases of$70.0 million . The cash used in financing activities was$162.0 million for the first nine months of fiscal year 2019. The use of cash during the first nine months of fiscal year 2019 was primarily associated with stock repurchases during the period of$150.0 million . Our future capital requirements will depend on many factors, including the rate of sales growth, market acceptance of our products, the timing and extent of research and development projects, potential acquisitions of companies or technologies and the expansion of our sales and marketing activities. We believe our expected future cash earnings, existing cash, cash equivalents, investment balances, and available borrowings under our Credit Facility will be sufficient to meet our capital requirements through at least the next 12 months, although we could be required, or could elect, to seek additional funding prior to that time. Revolving Credit Facilities OnJuly 12, 2016 ,Cirrus Logic entered into an amended and restated credit agreement (the "Credit Agreement") withWells Fargo Bank, National Association , as Administrative Agent, and the Lenders party thereto, for the purpose of refinancing an existing credit facility and providing ongoing working capital. The Credit Agreement provides for a$300 million senior secured revolving credit facility (the "Credit Facility"). The Credit Facility matures onJuly 12, 2021 . The Credit Facility is required to be guaranteed by all ofCirrus Logic's material domestic subsidiaries (the "Subsidiary Guarantors"). The Credit Facility is secured by substantially all of the assets ofCirrus Logic and any Subsidiary Guarantors, except for certain excluded assets. Borrowings under the Credit Facility may, at our election, bear interest at either (a) a base rate plus the applicable margin ("Base Rate Loans") or (b) a LIBOR rate plus the applicable margin ("LIBOR Rate Loans"). The applicable margin ranges from 0% to 0.50% per annum for Base Rate Loans and 1.25% to 2.00% per annum for LIBOR Rate Loans based on the Leverage Ratio (as defined below). A commitment fee accrues at a rate per annum ranging from 0.20% to 0.30% (based on the Leverage Ratio) on the average daily unused portion of the commitment of the lenders. The Credit Agreement contains certain financial covenants providing that (a) the ratio of consolidated funded indebtedness to consolidated EBITDA for the prior four fiscal quarters must not be greater than 3.00 to 1.00 (the "Leverage Ratio") and (b) the ratio of consolidated EBITDA for the prior four consecutive fiscal quarters to consolidated fixed charges (including amounts paid in cash for consolidated interest expenses, capital expenditures, scheduled principal payments of indebtedness, and income taxes) for the prior four consecutive fiscal quarters must not be less than 1.25 to 1.00 as of the end of each fiscal quarter. The Credit Agreement also contains negative covenants limiting the Company's or any Subsidiary's ability to, among other things, incur debt, grant liens, make investments, effect certain fundamental changes, make certain asset dispositions, and make certain restricted payments. 25 --------------------------------------------------------------------------------
As of
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