Cirrus Logic, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended December 30, 2023 (a 14-week quarter); comparisons are with the quarter ended December 24, 2022. Fiscal year 2024 has 53 weeks.
Financial results
| Metric | Q3 FY2024 | Q3 FY2023 | First nine months FY2024 | First nine months FY2023 |
|---|---|---|---|---|
| Net sales | $619.0m | $590.6m | $1,417.1m | $1,524.8m |
| Gross margin | 51.3% | 50.2% | 51.1% | 50.5% |
| Operating income | $167.5m | $141.4m | $291.1m | $311.9m |
| Net income | $138.7m | $103.5m | $229.7m | $230.4m |
| Diluted EPS | $2.50 | $1.83 | $4.09 | $4.02 |
| Operating cash flow | Not separately presented for the quarter | $251.1m | $291.3m |
- Quarterly sales rose 5%, with Audio revenue up $31.3m and HPMS down $2.9m. Management attributed Audio growth primarily to higher smartphone volumes and the extra week in the quarter; general-market weakness persisted.
- Nine-month sales declined 7%. Audio fell $82.3m, mainly from weaker general-market sales and lower tablet component shipments; HPMS fell $25.4m, primarily due to lower smartphone component shipments.
- Q3 operating margin was approximately 27% versus 24%; nine-month operating margin was approximately 20% in both periods. Quarterly net income benefited from higher operating income, lower tax expense, and lower other expense.
- Gross-margin improvement reflected lower supply-chain costs (including no wafer premiums or expedite fees) and favorable inventory reserves, partly offset by product mix.
Liquidity, capital resources, and balance sheet
- At December 30, 2023, cash and cash equivalents were $483.9m and marketable securities totaled $103.1m; cash plus marketable securities were approximately $587.0m. Total current assets were $1,185.4m and current liabilities $178.6m.
- No borrowings were outstanding on the $300m revolving credit facility, which matures July 2026; the company reported compliance with its covenants. The filing reports no funded debt outstanding, though lease liabilities were $158.3m in total.
- Nine-month operating cash flow was $251.1m, down from $291.3m. Management cited an $87.4m unfavorable working-capital change, including higher receivables and inventory and lower payables/accruals, partly offset by use of prepaid wafers.
- Investing cash outflow was $60.8m, including $30.7m of capital expenditures and $30.1m of net marketable-security purchases. Financing cash outflow was $152.2m, primarily $136.0m of share repurchases. Cash increased $38.1m from fiscal year-end.
- Inventory was $256.7m, up from $233.5m at fiscal year-end, reflecting wafer purchases under the GlobalFoundries capacity agreement. Management expects inventory to remain elevated during FY2024 while balancing demand and wafer commitments.
Management outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided in this filing. Management stated that expected future cash earnings, existing cash and investments, and available credit are expected to meet capital requirements in the short and long term, while noting funding needs could arise sooner.
- Strategy remains focused on smartphone audio leadership, increasing HPMS content in smartphones, and expanding into additional applications and markets.
- Customer concentration is significant: Apple represented approximately 89% of Q3 sales and 87% of nine-month sales. The ten largest end customers represented 96% and 95%, respectively. Management identifies customer loss, reduced orders, and pricing pressure as material risks.
- A key-customer product expected for fall 2023 did not come to market as anticipated. The filing says this contributed to a July 2023 workforce reduction of approximately 5%; Q2 FY2024 included $2.3m of related severance and other charges. Q3 recorded a $0.4m restructuring-cost recovery; remaining restructuring liabilities were approximately $2.0m.
- Under the GlobalFoundries agreement, Cirrus Logic must purchase defined wafer volumes through 2026, subject to shortfall payments. At period-end, prepaid wafer balances were $158m; the capacity-reservation-fee balance was $33m.
- The IRS proposed adjustments to FY2017–FY2019 transfer-pricing positions asserting approximately $168.3m of additional tax plus $63.7m of penalties, excluding interest. The company disputes the positions, intends to challenge them, and says it has reserved adequately; an adverse outcome could be material.
- Other risks include reliance on third-party manufacturing, particularly in Asia and Taiwan, potential geopolitical or operational disruption, and tax uncertainty. The company reported $32.9m of unrecognized tax benefits. It said pending ordinary-course legal matters are not currently believed to have a material adverse effect.
Important facts for investors to verify
- Whether smartphone demand and the extra fiscal-quarter week explain the Q3 sales increase, and how general-market weakness affects future periods.
- Apple’s unusually high revenue concentration, customer design decisions, and pricing pressure.
- Inventory levels, wafer purchase commitments and possible shortfall exposure under the GlobalFoundries agreement.
- Developments in the IRS examination and the potential total exposure, including interest and penalties.
- Whether gross-margin gains from lower supply-chain costs and inventory reserves persist, and the effects of product mix and restructuring.