Cirrus Logic, Inc. — Form 10-Q Summary
Reporting period: Second quarter of fiscal 2023, ended September 24, 2022; comparable quarter ended September 25, 2021. Fiscal year 2023 is a 52-week year ending in March. Amounts below are in millions except per-share data.
Business context
Cirrus Logic develops low-power, high-precision mixed-signal solutions for mobile and consumer applications. It reports one operating segment and discloses revenue across Audio and High-Performance Mixed-Signal products. Management’s strategy emphasizes smartphone audio, expansion into other audio applications, and adjacent mixed-signal markets. The company reported significant wafer supply constraints and said it is prioritizing supply for key customers while seeking additional capacity and foundry options.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Net sales | $540.6 | $465.9 | $934.2 | $743.1 |
| Gross profit | $271.3 | $235.4 | $473.9 | $375.4 |
| Gross margin | 50.2% | 50.5% | 50.7% | 50.5% |
| Operating income | $116.2 | $95.2 | $170.5 | $114.3 |
| Net income | $87.2 | $85.1 | $126.9 | $102.3 |
| Diluted EPS | $1.52 | $1.43 | $2.20 | $1.72 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $110.4 | $2.4 |
Q2 sales rose 16% year over year; six-month sales rose 26%. Q2 High-Performance Mixed-Signal revenue increased to $202.8 million from $165.1 million, and Audio revenue increased to $337.8 million from $300.8 million. Management attributed growth to content gains and higher average selling prices, with higher smartphone volumes also supporting Audio; lower fast-charging IC sales partly offset mixed-signal growth.
Q2 operating expenses were $155.1 million, including $115.5 million of R&D and $39.6 million of SG&A. R&D spending increased with continued product-development and employee-related investment. The Q2 effective tax rate rose to 26.0% from 12.4%; the six-month rate was 26.6% versus 12.3%. The company attributed the increase primarily to U.S. tax-law changes requiring capitalization and amortization of R&D costs and the resulting effect on GILTI.
Financial position and capital allocation
At September 24, 2022, cash and cash equivalents were $355.0 million and marketable securities totaled $72.9 million. Total assets were $2.16 billion; current assets were $956.6 million and current liabilities were $282.4 million. The company had no borrowings under its $300 million revolving credit facility, which matures in 2026, and reported compliance with its covenants. It stated that available cash, investments, future cash earnings, and facility availability should be sufficient for capital needs for at least 12 months.
Six-month operating cash flow was $110.4 million, compared with $2.4 million a year earlier. Management cited cash earnings and an $84.9 million unfavorable working-capital change, primarily from higher accounts receivable and inventory. Investing activities used $16.9 million, mainly for capital expenditures and technology investments. Financing activities used $108.3 million, primarily for $106.4 million of share repurchases. The company repurchased 1.3 million shares in the six-month period under its 2021 program and had also authorized a new $500 million repurchase program in July 2022.
Material changes, outlook, and risks
- Gross margin declined 0.3 percentage points in Q2, reflecting higher supply-chain costs and, to a lesser extent, higher reserves. For the first six months, margin increased 0.2 points, partly because the prior-year period included a one-time acquired-inventory fair-value adjustment related to Lion Semiconductor.
- Management provided no specific revenue or earnings guidance in the supplied filing text. It continued to cite wafer supply constraints, and described COVID-19, inflation, and possible weakening consumer demand as potential adverse influences.
- Customer concentration is substantial: Apple represented approximately 82% of Q2 sales and 81% of six-month sales. The ten largest end customers accounted for approximately 91% and 90%, respectively. The company warns that reduced orders, pricing pressure, or loss of key customers could materially harm results.
- International sales were approximately 98% of revenue in both the quarter and six-month period. The filing highlights possible impacts from tariffs and export restrictions, including U.S. semiconductor export controls announced October 7, 2022, and identifies particular exposure to China-related restrictions.
- The IRS issued a Revenue Agent’s Report asserting approximately $170.5 million of additional tax, excluding interest, and approximately $63.7 million of penalties, concerning fiscal 2017–2019 transfer-pricing matters. Cirrus disputes the proposed adjustments, plans to challenge them, and says it believes adequate reserves have been recorded; an adverse outcome could materially affect future financial position, results, or cash flows.
- The company prepaid GlobalFoundries $195 million for future wafers, expected to be credited against purchases beginning in Q3 calendar 2023, and has quarterly purchase commitments subject to shortfall payments through 2026. Capacity availability and commitment economics remain important to monitor.
Important facts for investors to verify
- Whether wafer supply constraints ease and whether capacity commitments and shortfall provisions match actual demand.
- Whether Apple and other major customers sustain orders, pricing, and product content, given the high customer concentration.
- How the IRS transfer-pricing dispute develops, including reserve adequacy, interest, penalties, and any cash exposure.
- Whether margin performance absorbs supply-chain inflation, pricing pressure, and product-mix changes.
- Whether working-capital investment, share repurchases, and the new authorization remain supportable by cash generation and liquidity.