Cirrus Logic, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months of fiscal 2021, ended September 26, 2020; comparisons are to the periods ended September 28, 2019. All financial amounts below are in U.S. dollars.
Business context and financial results
Cirrus Logic develops low-power, high-precision mixed-signal processing solutions for mobile and consumer applications. It reports one operating segment, with revenue primarily from portable products.
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $347.3 million, down 11% year over year | $589.9 million, down 6% |
| Gross profit / gross margin | $180.2 million / 51.9%, versus 53.5% | $307.7 million / 52.2%, versus 52.7% |
| Operating income / margin | $64.2 million / 18.5%, versus $86.7 million / 22.3% | $82.8 million / 14.0%, versus $90.8 million / 14.5% |
| Net income | $59.5 million, versus $76.2 million | $77.7 million, versus $80.8 million |
| Diluted earnings per share | $0.99, versus $1.27 | $1.29, versus $1.34 |
| Operating cash flow | Not separately provided for the quarter | $42.1 million, versus $117.8 million |
Portable-products sales were $312.9 million for the quarter and $523.6 million for the six-month period; non-portable and other sales were $34.4 million and $66.3 million, respectively. Approximately 99% of sales were to non-U.S. customers.
Liquidity, debt, and capital allocation
- At September 26, 2020, cash and cash equivalents were $247.5 million and marketable securities totaled $364.9 million; total assets were $1.70 billion and stockholders’ equity was $1.32 billion.
- The company reported no borrowings under its $300 million revolving credit facility and compliance with its covenants. The facility was scheduled to mature July 12, 2021.
- Six-month operating cash flow fell to $42.1 million, primarily reflecting an $87.5 million unfavorable working-capital change, including higher inventory and accounts receivable, partly offset by higher accounts payable. Inventory rose to $209.1 million from $146.7 million at fiscal year-end.
- Six-month investing cash outflow was $58.7 million, mainly net purchases of marketable securities; financing cash outflow was $28.0 million, primarily $30.0 million of share repurchases. Approximately $90 million remained under the $200 million repurchase authorization.
Material changes, outlook, and risks
- Quarterly sales decreased $41.6 million year over year. Management attributed the decline mainly to lower smartphone-component and wired-headset volumes, and lower Android smart-codec sales; new smartphone, wearable, and tablet content partly offset the declines. Six-month sales were down $37.3 million.
- Gross margin declined year over year, primarily because of product mix; supply-chain efficiencies, partly associated with exiting the MEMS microphone product line, provided an offset. The restructuring was substantially complete, with $0.4 million of costs recorded in the first quarter and none in the second quarter.
- Management said COVID-19 had so far had limited negative impact on demand, cash flow, capital spending, and liquidity, and that productivity and supply schedules had been maintained. It cautioned that further disruptions could affect productivity, product development, supply, shipping, customer orders, and demand. Management expected available cash, investments, future cash generation, and borrowing capacity to meet capital requirements for at least 12 months. No specific revenue or earnings guidance is provided in the filing text.
- Customer concentration is significant: Apple represented approximately 82% of sales in both the quarter and first six months of fiscal 2021. The ten largest end customers represented about 94% of quarterly sales and 93% of six-month sales. Management cited customer ordering and pricing pressure as risks.
- Unrecognized tax benefits were $32.9 million; management noted uncertainty about the potential impact of the Altera cost-sharing issue outside the Ninth Circuit. Fiscal 2017–2020 federal returns were under IRS examination; the company said it had accrued adequate reserves.
- Management did not believe pending legal matters were likely to have a material adverse effect, while noting that litigation outcomes remain uncertain. The filing also disclosed the planned CEO succession: John Forsyth was appointed to succeed Jason Rhode effective January 1, 2021.
Important facts for investors to verify
- Whether smartphone, headset, and Android codec demand—and the related product mix and gross margin—recover or weaken further.
- How the 82% Apple revenue concentration and customer pricing or order changes affect future sales and profitability.
- Whether inventory growth converts to sales and whether working-capital outflows continue to constrain operating cash flow.
- The status and terms of the revolving credit facility as it approached its July 2021 maturity, and the company’s liquidity outlook.
- Developments in COVID-19-related supply, logistics, customer-demand, and employee-productivity risks; tax examinations and unrecognized tax benefits; and the CEO transition.