Cirrus Logic, Inc. — Form 10-Q Summary
Business context and period: Cirrus Logic designs low-power, high-precision mixed-signal processing products for mobile and consumer applications. This report covers the first quarter of fiscal 2021, the three months ended June 27, 2020; the comparable period ended June 29, 2019. Amounts below are in U.S. dollars.
Key financial results
| Metric | Quarter ended June 27, 2020 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $242.6 million | $238.3 million | Up $4.3 million, or 2% |
| Gross profit / gross margin | $127.5 million / 52.6% | $122.5 million / 51.4% | Margin up 1.2 percentage points |
| Operating income | $18.7 million | $4.1 million | Up $14.5 million |
| Net income | $18.2 million | $4.6 million | Up $13.6 million |
| Diluted EPS | $0.30 | $0.08 | Up $0.22 |
| Operating cash flow | $0.5 million | $57.0 million | Down $56.5 million |
- Expenses and margins: Research and development expense fell to $78.7 million from $88.8 million; selling, general and administrative expense was nearly unchanged at $29.7 million. The company recorded $0.4 million of restructuring costs related to its MEMS microphone product-line exit.
- Cash and liquidity: Cash and cash equivalents were $285.9 million at June 27, 2020. Short- and long-term marketable securities totaled $320.1 million, for cash and securities of approximately $606.1 million. Current assets were $690.0 million and current liabilities were $163.0 million.
- Cash flow and investment: Operating cash flow was only $0.5 million, primarily reflecting a $52.6 million increase in inventory and other working-capital movements. Investing activities used $9.2 million, including net purchases of marketable securities; financing activities generated $2.5 million, principally from stock-plan share issuances. Cash declined by $6.2 million during the quarter.
- Debt: No borrowings were outstanding under the $300 million secured revolving credit facility, and the company reported compliance with its covenants. The facility matures July 12, 2021.
Material changes and management commentary
- Portable-product sales rose $7.7 million, which management attributed primarily to higher tablet content and volumes as people worked from home during COVID-19. Non-Portable and Other product sales declined $3.4 million.
- Gross margin improved, primarily from supply-chain efficiencies and cost reductions associated with exiting the MEMS microphone product line. The restructuring was described as substantially complete.
- Operating cash flow fell sharply year over year: inventory increased $52.6 million, compared with an inventory decrease that benefited the prior-year period. Management cited a $43.9 million unfavorable working-capital change in the current quarter.
- COVID-19 had limited reported impact on demand, operating cash flow, capital needs, and liquidity during the quarter. Most employees continued to work remotely; management said productivity had not significantly declined and expected similar productivity for the foreseeable future, while warning that further disruption could affect operations.
- No numerical revenue or earnings guidance is provided in the filing. Management believed cash, investments, expected cash earnings, and available credit would meet capital needs for at least the next 12 months.
Risks, contingencies and unusual items
- Customer concentration: Apple represented approximately 83% of quarterly sales, up from 72% in the prior-year quarter. The ten largest end customers accounted for approximately 91% of sales. Customer order changes, pricing pressure, or loss of a major customer could materially affect revenue and profitability.
- COVID-19: Further outbreaks, restrictions, supplier or shipping disruptions, remote-work constraints, or a broader economic downturn could affect product development, supply, customer demand, revenue, and results. The company noted that semiconductor wafer manufacturing could be difficult to relocate because of qualification requirements.
- Taxes: Unrecognized tax benefits were $36.2 million, with $3.9 million of accrued interest and penalties, net of tax. U.S. federal income tax returns for fiscal 2017–2019 were under IRS examination; management stated it believed reserves were adequate. The potential effect of the Altera tax issue outside the Ninth Circuit remained unclear.
- Legal matters: Management did not believe pending matters were likely to have a material adverse effect, but cautioned that litigation outcomes are uncertain and could affect a particular reporting period.
- Other items: A foreign-currency forward contract had a $24.6 million notional value and an immaterial fair value at quarter-end. The company reported no investment securities it considered impaired. A $120 million balance remained available under its $200 million share repurchase program; no shares were repurchased during the quarter.
Important facts for investors to verify
- Whether elevated inventory converts to sales and cash flow, and how inventory levels evolve in subsequent quarters.
- Whether sales concentration in Apple remains elevated and how customer demand, pricing, and product-content trends develop.
- Whether COVID-19 affects suppliers, manufacturing, shipping, employee productivity, or consumer demand beyond the limited effects reported for this quarter.
- Progress and remaining costs, if any, from the MEMS product-line restructuring.
- Developments in IRS examinations and the company’s unrecognized tax benefits.
- Availability and terms of the revolving credit facility as it approaches its July 2021 maturity.