Cirrus Logic, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 24, 2023, the first quarter of fiscal 2024. The filing compares results with the three months ended June 25, 2022. Unless noted otherwise, amounts below are in U.S. dollars.
Business context and financial performance
Cirrus Logic develops low-power mixed-signal products and reports one operating segment, with revenue from Audio and High-Performance Mixed-Signal (HPMS) products. Management describes its strategy as maintaining smartphone-audio leadership, growing smartphone HPMS content, and expanding into additional markets.
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales | $317.0 million | $393.6 million | Down 19% |
| Gross profit / margin | $159.4 million / 50.3% | $202.6 million / 51.5% | Margin down 1.2 percentage points |
| Operating income / margin | $17.8 million / 5.6% | $54.3 million / 13.8% | Down 67% |
| Net income / margin | $15.6 million / 4.9% | $39.7 million / 10.1% | Down 61% |
| Diluted EPS | $0.28 | $0.69 | Down $0.41 |
| Operating cash flow | $(39.8) million | $74.4 million | Declined $114.2 million |
| Capital expenditures | $12.3 million | $6.8 million | Increased |
Audio sales fell to $195.8 million from $254.5 million; HPMS sales fell to $121.2 million from $139.1 million. Management attributed the declines chiefly to weakness in general-market audio sales and lower smartphone component shipments. Gross margin decreased mainly because of higher excess-and-obsolete inventory charges and a less favorable product mix. R&D expense was $106.2 million, down from $109.7 million, and SG&A was $35.4 million, down from $38.6 million.
Liquidity, cash flow, and capital
At June 24, 2023, cash and cash equivalents were $352.3 million; short- and long-term marketable securities totaled $73.8 million. The company had no borrowings under its $300 million revolving credit facility, which matures in July 2026, and reported compliance with its covenants. Current assets were $1.05 billion and current liabilities were $202.9 million. Stockholders’ equity was $1.66 billion.
Cash declined $93.4 million during the quarter, ending at $352.3 million. Operating cash use reflected an $82.0 million unfavorable working-capital change, primarily from increased inventory and receivables, partly offset by higher income taxes payable. Inventory rose to $301.0 million from $233.5 million, including a substantial increase in finished goods. Financing cash use was $39.0 million, primarily $38.5 million of share repurchases. The company had approximately $462.6 million remaining under its 2022 repurchase authorization.
Outlook, risks, and unusual items
- Management said inventory is expected to remain elevated during fiscal 2024 as it balances product demand with wafer purchase commitments. It believes expected cash earnings, existing cash and investments, and available credit will be sufficient for short- and long-term capital requirements.
- A new HPMS product planned for launch in fall 2023 is no longer expected to come to market as planned. Management said it had made progress with the customer and foundry partner on disposition of related materials and did not expect that disposition to materially affect the financial statements.
- On July 12, 2023, the company announced a workforce reduction of approximately 5%; it expected completion in fiscal Q2 2024 and said related charges were not expected to be material.
- Customer concentration is significant: Apple represented approximately 83% of quarterly sales, versus 79% a year earlier; the ten largest end customers accounted for approximately 93%, versus 89%. Management warns that reductions in orders or pricing from key customers could materially affect sales and profitability.
- The IRS has proposed approximately $168.3 million in additional tax, plus approximately $63.7 million in penalties, excluding interest, in an examination of fiscal 2017–2019 transfer-pricing matters. Cirrus disputes the proposed adjustments, intends to contest them, and says it has reserved adequately; an adverse outcome could materially affect future financial position, results, or cash flows. The company reported $32.9 million of unrecognized tax benefits and $7.4 million of accrued interest and penalties.
- The effective tax rate rose to 31.5% from 27.9%, with management citing R&D capitalization rules, GILTI, and tax treatment of refundable credits.
- Cirrus has a GlobalFoundries wafer capacity and supply commitment for 2022–2026, including quarterly purchase requirements subject to shortfall payments. It previously prepaid $195 million for future wafers; credits against wafer purchases were to begin in calendar Q3 2023.
Key investor verification points
- Track smartphone demand, product mix, inventory levels, and excess-and-obsolete inventory charges against management’s expectation that inventory remains elevated during fiscal 2024.
- Monitor customer concentration and any changes to Apple orders, pricing, or product programs, including developments affecting the delayed HPMS product.
- Assess whether operating cash flow recovers as working capital normalizes and wafer prepayments begin to be applied to purchases.
- Follow the IRS transfer-pricing dispute, potential assessments and interest, and the adequacy of tax reserves.
- Confirm the effects and costs of the announced workforce reduction and whether the company’s liquidity and repurchase activity remain consistent with its stated capital needs.