Cirrus Logic, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2022, three months ended June 26, 2021; comparisons are with the three months ended June 27, 2020. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Net sales | $277.3 million | $242.6 million |
| Gross profit / gross margin | $139.9 million / 50.5% | $127.5 million / 52.6% |
| Operating income / margin | $19.1 million / 6.9% | $18.7 million / 7.7% |
| Net income | $17.2 million | $18.2 million |
| Diluted earnings per share | $0.29 | $0.30 |
| Cash flow from operations | $(26.8) million | $0.5 million |
| Cash and cash equivalents | $385.1 million | $442.2 million at March 27, 2021 |
Net sales rose 14% year over year. Audio revenue increased to $217.4 million from $206.4 million; High-Performance Mixed-Signal revenue increased to $59.9 million from $36.1 million. Research and development expense increased to $85.7 million from $78.7 million, while selling, general and administrative expense increased to $35.1 million from $29.7 million. The effective tax rate was 12.3%, versus 10.6%.
Operating cash outflow reflected a $61.7 million unfavorable working-capital change, chiefly higher receivables and inventory and lower accounts payable. Investing cash outflow was $16.7 million, including $11.9 million of capital expenditures and technology investments; financing cash outflow was $13.5 million, primarily share repurchases.
Balance sheet and liquidity
At June 26, 2021, cash, cash equivalents and marketable securities totaled approximately $757.3 million, including $372.1 million of marketable securities. The company had no borrowings under its $300 million revolving credit facility and reported compliance with its covenants. Current assets were $839.3 million and current liabilities were $186.5 million. Inventory was $192.7 million, up from $173.3 million at March 27, 2021. The filing reports no material impairment of its investments.
Material changes and management commentary
- Gross margin fell to 50.5% from 52.6%, which management attributed primarily to normal pricing reductions exceeding cost savings, product mix, and, to a lesser extent, higher supply-chain costs.
- Management said demand was significantly greater than available capacity. It expects continued supply constraints and higher costs beginning in Q4 FY2022 to push gross margin slightly below its 50% long-term model in FY2023.
- Apple accounted for approximately 72% of sales, down from 83% a year earlier; the ten largest end customers represented approximately 90% of sales. Management identifies customer concentration and pricing pressure as significant risks.
- Management said COVID-19 had so far had limited effect on demand, operating cash flow, capital needs and liquidity, but warned that further disruptions could affect productivity and business operations.
Outlook, subsequent events and risks
- Lion Semiconductor acquisition: Cirrus Logic agreed to acquire Lion for $335 million in cash on July 8, 2021; the acquisition closed July 20, after quarter-end. The company expects approximately $60 million of Lion revenue before the end of FY2022 and growth potential thereafter. Integration, employee retention, product development, supply constraints and customer orders could prevent anticipated benefits.
- GlobalFoundries supply agreement: Entered July 28, after quarter-end, the agreement covers 2022–2026 and requires Cirrus Logic to purchase a defined quarterly wafer volume, subject to shortfall payments. It includes a $50 million nonrefundable reservation fee, a $175 million prepayment for future wafer purchases, and an estimated minimum wafer purchase commitment of approximately $1.6 billion. The company described $225 million in near-term payments. Risks include excess inventory, unfavorable pricing relative to the market, supplier performance, and potential liquidity or operating impacts.
- Credit facility: A second amended $300 million revolving facility was signed July 8, 2021, with a July 2026 maturity. No facility borrowings were outstanding at quarter-end.
- The company said existing cash, investments, expected cash generation and available credit should cover capital needs for at least the next 12 months. Its future needs include the acquisition and wafer commitments. Management did not believe pending legal matters would have a material adverse effect, while noting the uncertainty inherent in legal proceedings.
- Unrecognized tax benefits were $32.9 million, with $4.4 million of accrued interest and penalties; federal tax returns for FY2017–FY2019 were under IRS examination. Management said it had adequate reserves.
Important facts for investors to verify
- Whether capacity constraints ease, and how pricing, supply costs and product mix affect gross margin and FY2023 results.
- Whether the Lion acquisition delivers the expected revenue and growth, and its effect on cash and integration costs.
- Actual wafer requirements relative to the GlobalFoundries minimum purchase commitment, including prepayment recovery and any shortfall payments.
- Sales exposure to Apple and other major customers, including changes in customer demand, product pricing and design wins.
- Working-capital trends, particularly inventory and receivables, and the company’s liquidity following acquisition and supplier-related payments.