QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedJune 25, 2022
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ____ to ____
Commission File Number 0-17795
CIRRUS LOGIC, INC.
(Exact name of registrant as specified in its charter)
Delaware
77-0024818
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
800 W. 6th Street
Austin,
Texas
78701
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code:
(512)
851-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common stock, $0.001 par value
CRUS
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
☑
Accelerated Filer
☐
Non-accelerated Filer
☐
Smaller Reporting Company
☐
Emerging Growth Company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
The number of shares of the registrant's common stock, $0.001 par value, outstanding as of July 29, 2022 was 55,940,364.
CIRRUS LOGIC, INC.
FORM 10-Q QUARTERLY REPORT
QUARTERLY PERIOD ENDEDJUNE 25, 2022
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Condensed Balance Sheets - June 25, 2022 (unaudited) and March 26, 2022
The accompanying notes are an integral part of these consolidated condensed financial statements.
3
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except per share amounts; unaudited)
Three Months Ended
June 25,
June 26,
2022
2021
Net sales
$
393,639
$
277,253
Cost of sales
191,005
137,307
Gross profit
202,634
139,946
Operating expenses
Research and development
109,716
85,696
Selling, general and administrative
38,642
35,147
Total operating expenses
148,358
120,843
Income from operations
54,276
19,103
Interest income
523
1,020
Interest expense
(218)
(259)
Other income (expense)
506
(242)
Income before income taxes
55,087
19,622
Provision for income taxes
15,380
2,413
Net income
$
39,707
$
17,209
Basic earnings per share
$
0.71
$
0.30
Diluted earnings per share
$
0.69
$
0.29
Basic weighted average common shares outstanding
56,277
57,582
Diluted weighted average common shares outstanding
57,804
59,513
The accompanying notes are an integral part of these consolidated condensed financial statements.
4
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands; unaudited)
Three Months Ended
June 25,
June 26,
2022
2021
Net income
$
39,707
$
17,209
Other comprehensive income (loss), before tax
Foreign currency translation loss
(967)
(52)
Unrealized loss on marketable securities
(480)
(1,123)
Benefit for income taxes
101
236
Comprehensive income
$
38,361
$
16,270
The accompanying notes are an integral part of these consolidated condensed financial statements.
5
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
Three Months Ended
June 25,
June 26,
2022
2021
Cash flows from operating activities:
Net income
$
39,707
$
17,209
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization
16,515
11,898
Stock-based compensation expense
18,138
14,985
Deferred income taxes
(5,860)
(9,270)
Loss on retirement or write-off of long-lived assets
292
—
Other non-cash adjustments
99
108
Net change in operating assets and liabilities:
Accounts receivable, net
33,992
(27,822)
Inventories
(35,934)
(19,459)
Other assets
549
(6,457)
Accounts payable and other accrued liabilities
(20,327)
(21,740)
Income taxes payable
24,030
13,752
Acquisition-related liabilities
3,164
—
Net cash provided by (used in) operating activities
74,365
(26,796)
Cash flows from investing activities:
Maturities and sales of available-for-sale marketable securities
4,694
49,158
Purchases of available-for-sale marketable securities
(5,186)
(53,969)
Purchases of property, equipment and software
(6,776)
(10,835)
Investments in technology
(448)
(1,068)
Net cash used in investing activities
(7,716)
(16,714)
Cash flows from financing activities:
Issuance of common stock, net of shares withheld for taxes
120
746
Repurchase of stock to satisfy employee tax withholding obligations
(866)
(1,772)
Repurchase and retirement of common stock
(56,382)
(12,501)
Net cash used in financing activities
(57,128)
(13,527)
Net increase (decrease) in cash and cash equivalents
9,521
(57,037)
Cash and cash equivalents at beginning of period
369,814
442,164
Cash and cash equivalents at end of period
$
379,335
$
385,127
The accompanying notes are an integral part of these consolidated condensed financial statements.
6
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands; unaudited)
Common Stock
Additional Paid-In Capital
Accumulated Earnings (Deficit)
Accumulated Other Comprehensive Income (Loss)
Total
Three Months Ended
Shares
Amount
Balance, March 27, 2021
57,652
$
58
$
1,498,761
$
(112,689)
$
2,875
$
1,389,005
Net income
—
—
—
17,209
—
17,209
Change in unrealized gain (loss) on marketable securities, net of tax
—
—
—
—
(887)
(887)
Change in foreign currency translation adjustments
—
—
—
—
(52)
(52)
Issuance of stock under stock option plans and other, net of shares withheld for employee taxes
61
—
745
(1,773)
—
(1,028)
Repurchase and retirement of common stock
(166)
—
—
(12,501)
—
(12,501)
Stock-based compensation
—
—
14,985
—
—
14,985
Balance, June 26, 2021
57,547
$
58
$
1,514,491
$
(109,754)
$
1,936
$
1,406,731
Balance, March 26, 2022
56,596
$
57
$
1,578,370
$
23,435
$
(2,045)
$
1,599,817
Net income
—
—
—
39,707
—
39,707
Change in unrealized gain (loss) on marketable securities, net of tax
—
—
—
—
(379)
(379)
Change in foreign currency translation adjustments
—
—
—
—
(967)
(967)
Issuance of stock under stock option plans and other, net of shares withheld for employee taxes
28
—
120
(866)
—
(746)
Repurchase and retirement of common stock
(725)
(1)
—
(56,382)
—
(56,383)
Stock-based compensation
—
—
18,138
—
—
18,138
Balance, June 25, 2022
55,899
$
56
$
1,596,628
$
5,894
$
(3,391)
$
1,599,187
The accompanying notes are an integral part of these consolidated condensed financial statements.
7
CIRRUS LOGIC, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The unaudited consolidated condensed financial statements have been prepared by Cirrus Logic, Inc. (“Cirrus Logic,” “we,” “us,” “our,” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). The accompanying unaudited consolidated condensed financial statements do not include complete footnotes and financial presentations. As a result, these financial statements should be read along with the audited consolidated financial statements and notes thereto for the year ended March 26, 2022, included in our Annual Report on Form 10-K filed with the Commission on May 20, 2022. In our opinion, the financial statements reflect all material adjustments, including normal recurring adjustments, necessary for a fair presentation of the financial position, operating results and cash flows for those periods presented. The preparation of financial statements in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect reported assets, liabilities, revenues and expenses. Actual results could differ from those estimates and assumptions. Moreover, the results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the entire year.
2. Recently Issued Accounting Pronouncements
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805) – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured at the acquisition date in accordance with Revenue from Contracts with Customers (Topic 606) as if the acquirer had originated the contracts. Prior to the issuance of this ASU, contract assets and liabilities were recognized at fair value on the acquisition date. This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within that fiscal year, with early adoption permitted, and should be applied on a prospective basis. The Company is currently evaluating the impact of this guidance, but does not expect a material impact to the financial statements upon adoption.
In November 2021, the FASB issued ASU No. 2021-10, Government Assistance (Topic 832) – Disclosures by Business Entities about Government Assistance, which requires annual disclosures about transactions with a government that are accounted for by applying a grant or contribution type accounting model. The disclosures would require information about the nature and related policy used for the transactions, the line items on the balance sheet and income statement that are affected and the amounts applicable to each financial statement line item, and significant terms and conditions of the transactions. This ASU is effective for financial statements issued for annual periods beginning after December 15, 2021, with early adoption permitted, and can be applied on a prospective or retrospective basis. The Company is currently evaluating the impact of this guidance, but does not expect a material impact to the financial statements upon adoption.
3. Marketable Securities
The Company’s investments have been classified as available-for-sale securities in accordance with U.S. GAAP. Marketable securities are categorized on the consolidated condensed balance sheet as "Marketable securities", within the short-term or long-term classification, as appropriate.
The following table is a summary of available-for-sale securities at June 25, 2022 (in thousands):
As of June 25, 2022
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value (Net Carrying Amount)
Corporate debt securities
$
70,540
$
—
$
(2,577)
$
67,963
Non-U.S. government securities
510
—
(11)
499
U.S. Treasury securities
5,730
—
(197)
5,533
Agency discount notes
385
—
(18)
367
Total securities
$
77,165
$
—
$
(2,803)
$
74,362
The Company typically invests in highly-rated securities with original maturities generally ranging from one to three years. The Company's specifically identified gross unrealized losses of $2.8 million related to securities with total amortized costs of approximately $77.2 million atJune 25, 2022. Securities in a continuous unrealized loss position for more than 12
8
months as of June 25, 2022 had an aggregate amortized cost of $9.0 million and an aggregate unrealized loss of $0.4 million. The Company may sell certain of its marketable securities prior to their stated maturities for strategic reasons including, but not limited to, anticipated or actual changes in credit rating and duration management. The Company records an allowance for credit loss when a decline in investment market value is due to credit-related factors. When evaluating an investment for impairment, the Company reviews factors including the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, changes in market interest rates and whether it is more likely than not the Company will be required to sell the investment before recovery of the investment’s cost basis. As of June 25, 2022, the Company does not consider any of its investments to be impaired.
The following table is a summary of available-for-sale securities at March 26, 2022 (in thousands):
As of March 26, 2022
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value (Net Carrying Amount)
Corporate debt securities
$
70,296
$
2
$
(2,133)
$
68,165
Non-U.S. government securities
509
—
(9)
500
U.S. Treasury securities
5,483
—
(169)
5,314
Agency discount notes
385
—
(14)
371
Total securities
$
76,673
$
2
$
(2,325)
$
74,350
The Company's specifically identified gross unrealized losses of $2.3 million related to securities with total amortized costs of approximately $75.5 million atMarch 26, 2022. Securities in a continuous unrealized loss position for more than 12 months as of March 26, 2022 had an aggregate amortized cost of $3.5 million and an aggregate unrealized loss of $0.1 million. As ofMarch 26, 2022, the Company did not consider any of its investments to be impaired.
The cost and estimated fair value of available-for-salesecuritiesby contractual maturities were as follows(in thousands):
June 25, 2022
March 26, 2022
Amortized
Estimated
Amortized
Estimated
Cost
Fair Value
Cost
Fair Value
Within 1 year
$
18,744
$
18,397
$
10,697
$
10,601
After 1 year
58,421
55,965
65,976
63,749
Total
$
77,165
$
74,362
$
76,673
$
74,350
4.Fair Value of Financial Instruments
The Company has determined that the only material assets and liabilities in the Company’s financial statements that are required to be measured at fair value on a recurring basis are the Company’s cash equivalents and marketable securities portfolio. The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
•Level 1 - Quoted prices in active markets for identical assets or liabilities.
•Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company’s cash equivalents and marketable securities portfolio consist of money market funds, commercial paper, debt securities, non-U.S. government securities, U.S Treasury securities and securities of U.S. government-sponsored enterprises and are reflected on our consolidated condensed balance sheets under the headings cash and cash equivalents,
9
marketable securities, and long-term marketable securities. The Company determines the fair value of its marketable securities portfolio by obtaining non-binding market prices from third-party pricing providers on the last day of the quarter, whose sources may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value.
The Company's long-term revolving credit facility, described in Note 9, bears interest at a base rate plus applicable margin or LIBOR plus applicable margin. As of June 25, 2022, there are no amounts drawn under the credit facility and the fair value is zero.
As of June 25, 2022 and March 26, 2022, the Company has no material Level 3 assets or liabilities. There were no transfers between Level 1, Level 2, or Level 3 measurements for the three months ended June 25, 2022.
The following summarizes the fair value of our financial instruments at June 25, 2022 (in thousands):
Quoted Prices in Active Markets for Identical Assets Level 1
Significant Other Observable Inputs Level 2
Significant Unobservable Inputs Level 3
Total
Assets:
Cash equivalents
Money market funds
$
302,044
$
—
$
—
$
302,044
Available-for-sale securities
Corporate debt securities
$
—
$
67,963
$
—
$
67,963
Non-U.S. government securities
—
499
—
499
U.S. Treasury securities
5,533
—
—
5,533
Agency discount notes
—
367
—
367
$
5,533
$
68,829
$
—
$
74,362
The following summarizes the fair value of our financial instruments at March 26, 2022 (in thousands):
Quoted Prices in Active Markets for Identical Assets Level 1
Significant Other Observable Inputs Level 2
Significant Unobservable Inputs Level 3
Total
Assets:
Cash equivalents
Money market funds
$
217,151
$
—
$
—
$
217,151
Commercial paper
—
249
—
249
$
217,151
$
249
$
—
$
217,400
Available-for-sale securities
Corporate debt securities
$
—
$
68,165
$
—
$
68,165
Non-U.S. government securities
—
500
—
500
U.S. Treasury securities
5,314
—
—
5,314
Agency discount notes
—
371
—
371
$
5,314
$
69,036
$
—
$
74,350
10
5.Derivative Financial Instruments
Foreign Currency Forward Contracts
The Company uses foreign currency forward contracts to reduce the earnings impact that exchange rate fluctuations have on non-functional currency balance sheet exposures. The Company recognizes both the gains and losses on foreign currency forward contracts and the gains and losses on the remeasurement of non-functional currency assets and liabilities within "Other income (expense)" in the consolidated condensed statements of income. The Company does not apply hedge accounting to these foreign currency derivative instruments.
As of June 25, 2022, the Company held one foreign currency forward contract denominated in British Pound Sterling with a notional value of $1.8 million. The fair value of this contract was not material as of June 25, 2022.
The before-tax effect of derivative instruments not designated as hedging instruments was as follows (in thousands):
Three Months Ended
June 25,
June 26,
2022
2021
Location
Gain (loss) recognized in income:
Foreign currency forward contracts
$
(219)
$
332
Other income (expense)
6.Accounts Receivable, net
The following are the components of accounts receivable, net (in thousands):
June 25,
March 26,
2022
2022
Gross accounts receivable
$
206,272
$
240,264
Allowance for doubtful accounts
—
—
Accounts receivable, net
$
206,272
$
240,264
7. Inventories
Inventories are comprised of the following (in thousands):
June 25,
March 26,
2022
2022
Work in process
$
109,461
$
95,188
Finished goods
64,909
43,248
$
174,370
$
138,436
8. Acquisition
On July 20, 2021, the Company completed the acquisition of Lion Semiconductor, Inc. ("Lion") (the "Acquisition"). Lion's switched-capacitor architectures deliver higher efficiency and better heat dissipation for the rapidly developing fast-charging market and are used today in numerous flagship and mid-tier smartphones. The Acquisition is expected to bring unique intellectual property and products for power applications in smartphones, laptops and other devices and accelerate growth of the Company’s high-performance mixed-signal product line.
As a result of acquiring 100% of the outstanding share capital of Lion, Lion became a wholly-owned subsidiary of the Company. This transaction is accounted for as a business combination using the acquisition method of accounting. All of the acquired assets and liabilities of Lion have been recorded at their respective fair values as of the acquisition date. Transaction costs have been expensed as incurred.
At the acquisition date, total consideration transferred was approximately $280.5 million, inclusive of $4.9 million in cash acquired. During the third quarter of fiscal year 2022, an additional $1.2 million of consideration was paid related to
11
contractual post-closing adjustment provisions. The remaining merger consideration of $31.0 million is subject to indemnity provisions as outlined in the merger agreement and is recorded as a liability as of June 25, 2022.
In addition, $25.4 million of the merger consideration relates to retention agreements with certain key employees that are subject to continued employment with the Company. The merger consideration subject to retention agreements is treated as compensation expense and is recognized over the retention period in "Research and development" expense in the consolidated condensed statements of income.
The excess of the purchase price over the net assets acquired is recorded as goodwill and is attributable primarily to expected growth in the scope of and market opportunities of the products and customer base of Lion. None of the goodwill is deductible for income tax purposes.
The following table presents the allocation of the purchase price at the date of acquisition (in thousands):
July 20, 2021
Cash
$
4,924
Account receivable
6,725
Inventory
7,675
Manufacturing advances
8,502
Other current assets
321
Intangibles
163,700
Goodwill
148,418
Other non-current assets
453
Current liabilities
(2,927)
Deferred tax liabilities
(25,016)
Total purchase price
$
312,775
9. Revolving Credit Facility
On July 8, 2021, the Company entered into a second amended and restated credit agreement (the “Second Amended Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto. The Second Amended Credit Agreement provides for a $300 million senior secured revolving credit facility (the “Revolving Credit Facility”). The Revolving Credit Facility matures on July 8, 2026 (the “Maturity Date”). The Revolving Credit Facility is required to be guaranteed by all of Cirrus Logic’s material domestic subsidiaries (the "Subsidiary Guarantors"). The Revolving Credit Facility is secured by substantially all the assets of Cirrus Logic and any Subsidiary Guarantors, except for certain excluded assets.
Borrowings under the Revolving Credit Facility may, at Cirrus Logic’s election, bear interest at either (a) a base rate plus the applicable margin ("Base Rate Loans") or (b) a LIBOR rate plus the applicable margin ("LIBOR Rate Loans"). The applicable margin ranges from 0% to 0.75% per annum for Base Rate Loans and 1.00% to 1.75% per annum for LIBOR Rate Loans based on the ratio of consolidated funded indebtedness to consolidated EBITDA for the most recently ended period of four consecutive fiscal quarters (the “Consolidated Leverage Ratio”). The Second Amended Credit Agreement further provides a method for determining an alternative rate of interest if the LIBOR Rate is no longer available or upon the occurrence of certain other events. A Commitment Fee accrues at a rate per annum ranging from 0.175% to 0.275% (based on the Consolidated Leverage Ratio) on the average daily unused portion of the commitment of the lenders.
The Second Amended Credit Agreement contains customary affirmative covenants, including, among others, covenants regarding the payment of taxes and other obligations, maintenance of insurance, reporting requirements, and compliance with applicable laws and regulations. Further, the Second Amended Credit Agreement contains customary negative covenants limiting the ability of Cirrus Logic or any Subsidiary to, among other things, incur debt, grant liens, make investments, effect certain fundamental changes, make certain asset dispositions, and make certain restricted payments. The Revolving Credit Facility also contains certain financial covenants providing that (a) the ratio of consolidated funded indebtedness (minus up to $200 million of unrestricted cash and cash equivalents available on such date) to consolidated EBITDA for the prior four consecutive quarters must not be greater than 3.00 to 1.00 (the “Consolidated Net Leverage Ratio”)
12
and (b) the ratio of consolidated EBITDA for the prior four consecutive quarters to consolidated interest expense paid or payable in cash for the prior four consecutive quarters must not be less than 3.00 to 1.00 (the “Consolidated Interest Coverage Ratio”).
As of June 25, 2022, the Company had no amounts outstanding under the Revolving Credit Facility and was in compliance with all covenants under the Second Amended Credit Agreement.
10.Revenues
Disaggregation of revenue
We disaggregate revenue from contracts with customers by product line and ship to location of the customer. Sales are designated in the respective product line categories of Audio and High-Performance Mixed-Signal.
Total net sales based on the product line disaggregation criteria described above are shown in the table below (in thousands).
Three Months Ended
June 25,
June 26,
2022
2021
Audio Products
$
254,496
$
217,355
High-Performance Mixed-Signal Products
139,143
59,898
$
393,639
$
277,253
The geographic regions that are reviewed are China, the United States, and the rest of the world. Total net sales based on the geographic disaggregation criteria described are as follows (in thousands):
Three Months Ended
June 25,
June 26,
2022
2021
China
$
261,491
$
168,325
United States
7,197
6,019
Rest of World
124,951
102,909
$
393,639
$
277,253
Performance obligations
The Company's single performance obligation is the delivery of promised goods to the customer. The promised goods are explicitly stated in the customer contract and are comprised of either a single type of good or a series of goods that are substantially the same, have the same pattern of transfer to the customer, and are neither capable of being distinct nor separable from the other promised goods in the contract. This performance obligation is satisfied upon transfer of control of the promised goods to the customer, as defined per the shipping terms within the customer's contract. The vast majority of the Company's contracts with customers have an original expected term length of one year or less. As allowed by Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, the Company has not disclosed the value of any unsatisfied performance obligations related to these contracts.
The Company’s products typically include a warranty period of one to three years. These warranties qualify as assurance-type warranties, as goods can be returned for product non-conformance and defect only. As such, these warranties are accounted for under ASC 460, Guarantees, and are not considered a separate performance obligation.
Contract balances
Payments are typically due within 30 to 60 days of invoicing and terms do not include significant financing components or noncash consideration. There have been no material impairment losses on accounts receivable. There are no material contract assets or contract liabilities recorded on the consolidated condensed balance sheets.
Transaction price
13
The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised goods to the customer. Fixed pricing is the consideration that is agreed upon in the customer contract. Variable pricing includes rebates, rights of return, warranties, price protection and stock rotation. Rebates are granted as a customer account credit, based on agreed-upon sales thresholds. Rights of return and warranty costs are estimated using the "most likely amount" method by reviewing historical returns to determine the most likely customer return rate and applying materiality thresholds. Price protection includes price adjustments available to certain distributors based upon established book price and a stated adjustment period. Stock rotation is also available to certain distributors based on a stated maximum of prior billings.
The Company estimates all variable consideration at the most likely amount that it expects to be entitled to receive. The estimate is based on current and historical information, including recent sales activity and pricing, available to the Company. Variable consideration is only included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company defers all variable consideration that does not meet the revenue recognition criteria.
11.Income Taxes
Our provision for income taxes is based on estimated effective tax rates derived from an estimate of annual consolidated earnings before taxes, adjusted for nondeductible expenses, other permanent items, and any applicable income tax credits.
The following table presents the provision for income taxes (in thousands) and the effective tax rates:
Three Months Ended
June 25,
June 26,
2022
2021
Income before income taxes
$
55,087
$
19,622
Provision for income taxes
$
15,380
$
2,413
Effective tax rate
27.9
%
12.3
%
Our income tax expense was $15.4 million and $2.4 million for the first quarters of fiscal years 2023 and 2022, respectively, resulting in effective tax rates of 27.9% and 12.3%, respectively. Our effective tax rate for the first quarter of fiscal year 2023 increased significantly year over year and was higher than the federal statutory rate primarily due to a provision in the Tax Cuts and Jobs Act of 2017 whereby research and development expenditures incurred in tax years beginning after December 31, 2021 must be capitalized and amortized ratably over five or fifteen years for tax purposes, depending on the location in which the research activities are conducted. The resulting capitalization of research and experimental costs impacted the calculation of the Company's global intangible low-taxed income ("GILTI"), which is treated as a period cost, beginning in the first quarter of fiscal year 2023. Our effective tax rate for the first quarter of fiscal year 2022 was lower than the federal statutory rate primarily due to the effect of income earned in certain foreign jurisdictions that is taxed below the federal statutory rate.
The Company records unrecognized tax benefits for the estimated risk associated with tax positions taken on tax returns. At June 25, 2022, the Company had unrecognized tax benefits of $32.9 million, all of which would impact the effective tax rate if recognized. The Company’s total unrecognized tax benefits are classified as “Non-current income taxes" in the consolidated condensed balance sheets. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of June 25, 2022, the balance of accrued interest and penalties, net of tax, was $5.4 million.
On July 27, 2015, the U.S. Tax Court issued an opinion in Altera Corp. et al. v. Commissioner which concluded that the regulations relating to the treatment of stock-based compensation expense in intercompany cost-sharing arrangements were invalid. In 2016 the U.S. Internal Revenue Service appealed the decision to the U.S. Court of Appeals for the Ninth Circuit (the “Ninth Circuit”). On July 24, 2018, the Ninth Circuit issued a decision that was subsequently withdrawn and a reconstituted panel conferred on the appeal. On June 7, 2019, the Ninth Circuit reversed the decision of the U.S. Tax Court and upheld the cost-sharing regulations. On February 10, 2020, Altera Corp. filed a Petition for a Writ of Certiorari with the Supreme Court of the United States, which was denied by the Supreme Court on June 22, 2020. Although the issue is now resolved in the Ninth Circuit, the Ninth Circuit's opinion is not binding in other circuits. The potential impact of this issue on the Company, which is not located within the jurisdiction of the Ninth Circuit, is unclear at this time. We will continue to monitor developments related to this issue and the potential impact of those developments on the Company's current and prior fiscal years.
14
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. Fiscal years 2017 through 2022 remain open to examination by the major taxing jurisdictions to which the Company is subject, although carry forward attributes that were generated in tax years prior to fiscal year 2017 may be adjusted upon examination by the tax authorities if they have been, or will be, used in a future period.
The Company's fiscal year 2017, 2018, and 2019 federal income tax returns are under examination by the U.S. Internal Revenue Service ("IRS"). The IRS has proposed adjustments that would increase U.S. taxable income related to transfer pricing matters with respect to our U.S. and U.K. affiliated companies, and in the first quarter of fiscal year 2023 issued a Revenue Agent’s Report asserting additional tax of approximately $170.5 million, excluding interest, and imposing penalties of approximately $63.7 million. We do not agree with the IRS's positions and we intend to vigorously dispute the proposed adjustments. We intend to pursue resolution through the administrative process with the IRS Independent Office of Appeals and, if necessary, through judicial remedies. We expect it could take a number of years to reach resolution on these matters. Although the final resolution of these matters is uncertain, the Company believes adequate amounts have been reserved for any adjustments to the provision for income taxes that may ultimately result. However, if the IRS prevails in these matters, the amount of assessed tax, interest, and penalties, if any, could be material and may have an adverse impact on our financial position, results of operations, and cash flows in future periods. The Company is not under an income tax audit in any other major taxing jurisdiction.
12.Net Income Per Share
Basic net income per share is based on the weighted effect of common shares issued and outstanding and is calculated by dividing net income by the basic weighted average shares outstanding during the period. Diluted net income per share is calculated by dividing net income by the weighted average number of common shares used in the basic net income per share calculation, plus the equivalent number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares outstanding. These potentially dilutive items consist primarily of outstanding stock options and restricted stock grants.
The following table details the calculation of basic and diluted earnings per share for the three months ended June 25, 2022 and June 26, 2021 (in thousands, except per share amounts):
Three Months Ended
June 25,
June 26,
2022
2021
Numerator:
Net income
$
39,707
$
17,209
Denominator:
Weighted average shares outstanding
56,277
57,582
Effect of dilutive securities
1,527
1,931
Weighted average diluted shares
57,804
59,513
Basic earnings per share
$
0.71
$
0.30
Diluted earnings per share
$
0.69
$
0.29
The weighted outstanding shares excluded from our diluted calculation for the three months ended June 25, 2022 and June 26, 2021 were 386 thousand and 114 thousand, respectively, as the shares were anti-dilutive.
13. Commitments and Contingencies
Capacity Reservation Agreement
On July 28, 2021, the Company entered into a Capacity Reservation and Wafer Supply Commitment Agreement (the “Capacity Reservation Agreement”) with GLOBALFOUNDRIES Singapore Pte. Ltd. (“GlobalFoundries”) to provide the Company a wafer capacity commitment and wafer pricing for Company products for calendar years 2022-2026 (the “Commitment Period”).
15
The Capacity Reservation Agreement requires GlobalFoundries to provide, and the Company to purchase, a defined number of wafers on a quarterly basis for the Commitment Period, subject to shortfall payments. In exchange for GlobalFoundries’ capacity commitment, the Company paid a $60 million non-refundable capacity reservation fee. This reservation fee is recorded in "Other current assets" and "Other assets" on the consolidated condensed balance sheets within the short-term or long-term classification, as appropriate, and amortized over the Commitment Period. In addition, the Company pre-paid GlobalFoundries $195 million for future wafer purchases, which will be credited back to the Company as a portion of the price of wafers purchased beginning in the third quarter of calendar year 2023. This prepayment is currently recorded in "Long-term prepaid wafers" on the consolidated condensed balance sheets.
14.Legal Matters
From time to time, we are involved in legal proceedings concerning matters arising in connection with the conduct of our business activities. We regularly evaluate the status of legal proceedings in which we are involved in order to assess whether a loss is probable or there is a reasonable possibility that a loss or additional loss may have been incurred, and to determine if accruals are appropriate. We further evaluate each legal proceeding to assess whether an estimate of possible loss or range of loss can be made.
Based on current knowledge, management does not believe that there are any pending matters that could potentially have a material adverse effect on our business, financial condition, results of operations or cash flows. However, we are engaged in various legal actions in the normal course of business. There can be no assurances in light of the inherent uncertainties involved in any potential legal proceedings, some of which are beyond our control, and an adverse outcome in any legal proceeding could be material to our results of operations or cash flows for any particular reporting period.
15.Stockholders' Equity
Common Stock
The Company issued an immaterial number of shares of common stock during the three months ended June 25, 2022, pursuant to the Company's equity incentive plans. The Company issued a net 0.1 million shares of common stock during the three months ended June 26, 2021, pursuant to the Company's equity incentive plans.
Share Repurchase Program
In January 2021, the Board of Directors authorized the repurchase of an additional $350 million of the Company’s common stock. Since inception, approximately $213.9 million of the Company’s common stock has been repurchased under the 2021 share repurchase program, leaving approximately $136.1 million available for repurchase under this plan as of June 25, 2022. During the three months ended June 25, 2022, the Company repurchased 0.7 million shares of its common stock under the 2021 plan for $56.4 million, at an average cost of $77.78 per share.
16.Segment Information
We determine our operating segments in accordance with FASB guidelines. Our Chief Executive Officer (“CEO”) has been identified as the chief operating decision maker under these guidelines.
The Company operates and tracks its results in one reportable segment, but reports revenue in two product lines, Audio and High-Performance Mixed-Signal. Our CEO receives and uses enterprise-wide financial information to assess financial performance and allocate resources, rather than detailed information at a product line level. Additionally, our product lines have similar characteristics and customers. They share support functions such as sales, public relations, supply chain management, various research and development and engineering support, in addition to the general and administrative functions of human resources, legal, finance and information technology. Therefore, there is no complete, discrete financial information maintained for these product lines. Revenue by product line is disclosed in Note 10 - Revenues.
16
17. Subsequent Event
In July 2022, the Board of Directors authorized the repurchase of an additional $500 million of the Company's common stock, in addition to the $136.1 million remaining from the Board's previous share repurchase authorization in January 2021, described above in Note 15.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read along with the unaudited consolidated condensed financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended March 26, 2022, contained in our fiscal year 2022 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “Commission”) on May 20, 2022. We maintain a website at investor.cirrus.com, which makes available free of charge ourmostrecent annual report andallother filingswe have madewith theCommission.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q including Management’s Discussion and Analysis of Financial Condition and Results of Operations and certain information incorporated herein by reference contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). These forward-looking statements are based on expectations, estimates, forecasts and projections and the beliefs and assumptions of our management as of the filing of this Form 10-Q. In some cases, forward-looking statements are identified by words such as “expect,” “anticipate,” “target,” “project,” “believe,” “goals,” “estimates,” “intend,” and variations of these types of words and similar expressions which are intended to identify these forward-looking statements. In addition, any statements that refer to our plans, expectations, strategies or other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements and readers should not place undue reliance on such statements. We undertake no obligation, and expressly disclaim any duty, to revise or update publicly any forward-looking statement for any reason.
For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see“Item 1A – Risk Factors”in our 2022 Annual Reporton Form 10-K filed with the Commission onMay 20, 2022,and in Part II, Item 1A “Risk Factors” within this Quarterly Report on Form 10-Q. Readers should carefully review these risk factors, as well as those identified in other documents filed by us with the Commission.
Overview
Cirrus Logic, Inc. (“Cirrus Logic,” “We,” “Us,” “Our,” or the “Company”) is a leader in low-power, high-precision mixed-signal processing solutions that create innovative user experiences for the world’s top mobile and consumer applications.
We remain committed to our three-pronged strategy for growing our business: first, maintaining our leadership position in smartphone audio; second, broadening sales of audio components in key profitable applications beyond smartphones; and third, applying our mixed-signal engineering expertise to develop solutions in new, adjacent high-performance mixed-signal applications and markets.
As capacity constraints persist, Cirrus Logic continues to experience demand in excess of supply. In fiscal year 2022, we entered into a long-term Capacity Reservation and Wafer Supply Commitment Agreement with GlobalFoundries, to expand our ability to address unprecedented market demand and provide customers with much-needed supply assurance. We are working with our partners to expand capacity where possible. See additional information in Note 13 - Commitments and Contingencies of the Notes to the Consolidated Condensed Financial Statements.
17
Impact of COVID-19
We continue to expect that COVID-19 will have an adverse effect on our business, financial condition, and results of operations and, with the pandemic ongoing, we are unable to predict the full extent and nature of these impacts at this time. The COVID-19 pandemic will likely heighten or exacerbate many of the other risks described in the risk factors listed in our Form 10-K for the year ended March 26, 2022, and in our other filings with the Commission.
In the longer term, the COVID-19 pandemic is likely to continue to adversely affect the economies and financial markets of many countries, potentially leading to a global economic downturn, inflation or a recession. This would likely adversely affect the demand environment for our products and those of our customers, particularly consumer products such as smartphones, which may, in turn negatively affect our revenue and operating results. To date, any negative impact of COVID-19 on the overall demand for our products, cash flow from operations, need for capital expenditures, and our liquidity position has been limited.
Critical Accounting Policies and Estimates
Our discussion and analysis of the Company’s financial condition and results of operations are based upon the unaudited consolidated condensed financial statements included in this report, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts. We evaluate the estimates on an on-going basis. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.
There have been no significant changes during the three months ended June 25, 2022, to the information provided under the headings “Critical Accounting Estimates” and "Summary of Significant Accounting Policies" included in our fiscal year 2022 Annual Report on Form 10-K for the fiscal year ended March 26, 2022.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, refer to Note 2 of the Notes to the Consolidated Condensed Financial Statements.
Results of Operations
Our fiscal year is the 52- or 53-week period ending on the last Saturday in March. Fiscal years 2023 and 2022 are both 52-week fiscal years.
18
The following table summarizes the results of our operations for the first three months of fiscal years 2023and2022, respectively,as apercentageof net sales. Allpercentageamounts were calculated using the underlying data in thousands, unaudited:
Three Months Ended
June 25,
June 26,
2022
2021
Net sales
100
%
100
%
Gross margin
51
%
50
%
Research and development
28
%
31
%
Selling, general and administrative
9
%
12
%
Income from operations
14
%
7
%
Interest income
—
%
—
%
Interest expense
—
%
—
%
Other income
—
%
—
%
Income before income taxes
14
%
7
%
Provision for income taxes
4
%
1
%
Net income
10
%
6
%
Net Sales
Net sales for the first quarter of fiscal year 2023 increased $116.4 million, or 42 percent, to $393.6 million from $277.3 million in the first quarter of fiscal year 2022. Net sales from high-performance mixed-signal products increased $79.2 million for the quarter versus the first quarter of fiscal year 2022, primarily due to content gains, particularly in smartphones. Net sales from our audio products increased $37.1 million, primarily driven by higher ASPs.
International sales, including sales to U.S.-based end customers that manufacture products through contract manufacturers or plants located overseas, were approximately 98 percent of net sales for each of the first quarters of fiscal years 2023 and 2022. Our sales are denominated primarily in U.S. dollars.
Since the components we produce are largely proprietary, we consider our end customer to be the entity specifying the use of our component in their design. These end customers may purchase our products directly from us, through distributors or third-party manufacturers contracted to produce theirdesigns. For thefirstquarter of fiscal years 2023and 2022, our ten largest end customers represented approximately89 percent and 90percent of our net sales, respectively.
We had one end customer, Apple Inc., that purchased through multiple contract manufacturers and represented approximately 79 percent and 72 percent, of the Company’s total net sales for the first quarter of fiscal years 2023 and 2022, respectively.
No other end customer or distributor represented more than 10 percent of net sales for the three months ended June 25, 2022orJune 26, 2021.
For more information, please see Part II—Item 1A—Risk Factors—“We depend on a limited number of customers and distributors for a substantial portion of our sales, and the loss of, or a significant reduction in orders from,or pricing on products sold to,any key customer or distributor could significantly reduce our salesand our profitability.”
Gross Margin
Gross margin was 51.5 percent in the first quarter of fiscal year 2023, up from 50.5 percent in the first quarter of fiscal year 2022. The increase reflects the favorable impact of higher ASPs on general market products in excess of supply chain cost increases.
Research and Development Expense
Research and development expense for the first quarter of fiscal year 2023 was $109.7 million, an increase of $24.0 million, from $85.7 million in the first quarter of fiscal year 2022. The primary drivers were higher employee-related expenses,
19
including additional headcount, amortization of acquisition intangibles, acquisition-related costs, stock compensation, variable compensation, product development and facilities-related costs.
Selling, General and Administrative Expense
Selling, general and administrative expense for the first quarter of fiscal year 2023 was $38.6 million, an increase of $3.5 million, from $35.1 million in the first quarter of fiscal year 2022, primarily due to higher employee-related expenses and variable compensation.
Interest Income
The Company reported interest income of $0.5 million and $1.0 million, for the three months ended June 25, 2022 and June 26, 2021, respectively. Interest income decreased in the current period due tolower yields on lower combined average cash, cash equivalents and marketable securities balances, compared to thepriorperiod.
Interest Expense
The Company reported interest expense of $0.2 million and $0.3 million for the three months ended June 25, 2022 and June 26, 2021,respectively. Interest expense consists primarily of commitment fees associated with the Company's Revolving Credit Facility (see Note 9).
Other Income (Expense)
For the three months ended June 25, 2022 and June 26, 2021, the Company reported $0.5 million in other income and $0.2 million in other expense, respectively, primarilyrelated to remeasurement onforeign currencydenominated monetary assets and liabilities.
Income Taxes
Our provision for income taxes is based on estimated effective tax rates derived from an estimate of annual consolidated earnings before taxes, adjusted for nondeductible expenses, other permanent items and any applicable credits.
The following table presents the provision for income taxes (in thousands) and the effective tax rates:
Three Months Ended
June 25,
June 26,
2022
2021
Income before income taxes
$
55,087
$
19,622
Provision for income taxes
$
15,380
$
2,413
Effective tax rate
27.9
%
12.3
%
Our income tax expense for the first quarter of fiscal year 2023 was $15.4 million compared to $2.4 million for the first quarter of fiscal year 2022, resulting in effective tax rates of 27.9% and 12.3%, respectively. Our effective tax rate for the first quarter of fiscal year 2023 increased significantly year over year and was higher than the federal statutory rate primarily due to a provision in the Tax Cuts and Jobs Act of 2017 (the "Act") whereby research and development expenditures incurred in tax years beginning after December 31, 2021 must be capitalized and amortized ratably over five or fifteen years for tax purposes, depending on the location in which the research activities are conducted. The resulting capitalization of research and experimental costs impacted the calculation of the Company's global intangible low-taxed income ("GILTI"), which is treated as a period cost, beginning in the first quarter of fiscal year 2023. Our effective tax rate for the first quarter of fiscal year 2022 was lower than the federal statutory rate primarily due to the effect of income earned in certain foreign jurisdictions that is taxed below the federal statutory rate.
Liquidity and Capital Resources
We require cash to fund our operating expenses and working capital requirements, including outlays for inventory, capital expenditures, share repurchases, and strategic acquisitions. Our principal sources of liquidity are cash on hand, cash
20
generated from operations, cash generated from the sale and maturity of marketable securities, and available borrowings under our $300 million Revolving Credit Facility.
Cash from operating activities is net income adjusted for certain non-cash items and changes in working capital. Cash flow from operations was$74.4 million for the firstthree monthsof fiscal year 2023versus cash used in operations of $26.8 millionfor thecorresponding period of fiscal year 2022. The cashflow fromoperations during thefirst three months of fiscal year 2023 was related to the cash components of our net income and a $5.5 million favorable change in working capital, primarily as a result of a decrease in accounts receivables and increase in income taxes payable, partially offset by an increase in inventory and decrease in accounts payable and other accrued liabilities for the period. The cash flow used in operations during the corresponding period of fiscal year 2022 was related to the cash components of our net income and a $61.7 million unfavorable change in working capital, primarily as a result of increases in accounts receivable and inventories, as well as decreases in accounts payable and other accrued liabilities.
Net cashused in investing activities was $7.7 million during the first three months of fiscal year 2023 versus $16.7 million during the first three months of fiscal year 2022. The cash used in investing activities in the first three months of fiscal year 2023 was related to capital expenditures and technology investments of $7.2 million and net purchases of marketable securities of $0.5 million. The cash used in investing activities in the corresponding period in fiscal year 2022 was related to capital expenditures and technology investments of $11.9 million and net purchases of marketable securities of $4.8 million.
Net cash used in financing activities was $57.1 million during the first three months of fiscal year 2023 and was primarily associated with stock repurchases for the period of $56.4 million. The cash used in financing activities during the first three months of fiscal year 2022 of $13.5 million was primarily associated with stock repurchases during the period of $12.5 million.
Our future capital requirements will depend on many factors, including the rate of sales growth, market acceptance of our products, the timing and extent of research and development projects, the Acquisition (discussed further in Note 8 - Acquisition of the Notes to the Consolidated Condensed Financial Statements) and potential future acquisitions of companies or technologies, commitments under the Capacity Reservation Agreement with GlobalFoundries (discussed further in Note 13 - Commitments and Contingencies of the Notes to the Consolidated Condensed Financial Statements), and the expansion of our sales and marketing activities. We believe our expected future cash earnings, existing cash, cash equivalents, investment balances, and available borrowings under our Revolving Credit Facility will be sufficient to meet our capital requirements through at least the next 12 months, although we could be required, or could elect, to seek additional funding prior to that time.
Revolving Credit Facility
On July 8, 2021, the Company entered into a second amended and restated credit agreement (the “Second Amended Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto. The Second Amended Credit Agreement provides for a $300 million senior secured revolving credit facility (the “Revolving Credit Facility”). The Revolving Credit Facility matures on July 8, 2026 (the “Maturity Date”). The Revolving Credit Facility is required to be guaranteed by all of Cirrus Logic’s material domestic subsidiaries ("Subsidiary Guarantors"). The Revolving Credit Facility is secured by substantially all the assets of Cirrus Logic and any Subsidiary Guarantors, except for certain excluded assets.
Borrowings under the Revolving Credit Facility may, at Cirrus Logic’s election, bear interest at either (a) a base rate plus the applicable margin ("Base Rate Loans") or (b) a LIBOR rate plus the applicable margin ("LIBOR Rate Loans"). The Applicable Margin ranges from 0% to 0.75% per annum for Base Rate Loans and 1.00% to 1.75% per annum for LIBOR Rate Loans based on the ratio of consolidated funded indebtedness to consolidated EBITDA for the most recently ended period of four consecutive fiscal quarters (the “Consolidated Leverage Ratio”). The Second Amended Credit Agreement further provides a method for determining an alternative rate of interest if the LIBOR Rate is no longer available or upon the occurrence of certain other events. A Commitment Fee accrues at a rate per annum ranging from 0.175% to 0.275% (based on the Consolidated Leverage Ratio) on the average daily unused portion of the commitment of the lenders.
The Second Amended Credit Agreement contains customary affirmative covenants, including, among others, covenants regarding the payment of taxes and other obligations, maintenance of insurance, reporting requirements, and compliance with applicable laws and regulations. Further, the Second Amended Credit Agreement contains customary negative covenants limiting the ability of Cirrus Logic or any Subsidiary to, among other things, incur debt, grant liens, make investments, effect certain fundamental changes, make certain asset dispositions, and make certain restricted payments. The Revolving Credit Facility also contains certain financial covenants providing that (a) the ratio of consolidated funded indebtedness (minus up to $200 million of unrestricted cash and cash equivalents available on such date) to consolidated
21
EBITDA for the prior four consecutive quarters must not be greater than 3.00 to 1.00 (the “Consolidated Net Leverage Ratio”) and (b) the ratio of consolidated EBITDA for the prior four consecutive quarters to consolidated interest expense paid or payable in cash for the prior four consecutive quarters must not be less than 3.00 to 1.00 (the “Consolidated Interest Coverage Ratio”).
As of June 25, 2022, the Company had no amounts outstanding under the Revolving Credit Facility and was in compliance with all covenants under the Second Amended Credit Agreement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks associated with interest rates on our debt securities, currency movements on non-functional currency assets and liabilities, and the effect of market factors on the value of our marketable securities. We assess these risks on a regular basis and have established policies that are designed to protect against the adverse effects of these and other potential exposures. We use forward contracts to manage exposure to foreign currency exchange risk attributable to certain non-U.S. dollar balance sheet exposures. Gains and losses from these foreign currency forward contracts are recognized currently in earnings along with the gains and losses resulting from remeasuring the underlying exposures. For further description of our market risks, see “Part II – Item 7A – Quantitative and Qualitative Disclosures about Market Risk” in our fiscal year 2022 Annual Report on Form 10-K filed with the Commission on May 20, 2022. For related financial statement impact see Note 5 - Derivative Financial Instruments.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controlsand procedures
As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our chief executive officer (CEO) and chief financial officer (CFO), the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Commission rules and forms and (ii) accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Based upon the evaluation, our management, including our CEO and CFO, has concluded that our disclosure controls and procedures were effective as of June 25, 2022.
Changes in control over financial reporting
There has been no change in the Company’s internal control over financial reporting during the quarter ended June 25, 2022, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding legal proceedings to which the Company is a party is set forth in Note 14 – Legal Matters to our unaudited consolidated condensed financial statements and is incorporated herein by reference.
ITEM 1A. RISK FACTORS
In evaluating all forward-looking statements, you should specifically consider risk factors that may cause actual results to vary from those contained in the forward-looking statements. Various risk factors associated with our business are included in our Annual Report on Form 10-K for the year ended March 26, 2022, as filed with the Commission on May 20, 2022, and available at www.sec.gov. Other than as set forth below, there have been no material changes to those risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended March 26, 2022.
22
We depend on a limited number of customers and distributors for a substantial portion of our sales, and the loss of, or a significant reduction in orders from, or pricing on products sold to, any key customer or distributor could significantly reduce our sales and our profitability.
While we generate sales from a broad base of customers worldwide, the loss of any of our key customers, or a significant reduction in salesor selling pricesto anykey customer, or reductions in selling prices made to retain key customer relationships,would significantly reduce ourrevenue, margins and earnings andadversely affect our business. For thefirstquarter of fiscal years 2023and 2022, our ten largest end customers represented approximately89 percent and 90percent of our net sales, respectively. Wehad one end customer, Apple Inc., that purchased through multiple contract manufacturers and represented approximately79 percent and 72 percent of the Company’s total net sales for the first quarter of fiscal years 2023 and 2022, respectively. No other end customer or distributor represented more than 10 percent of net sales for the three months ended June 25, 2022, or June 26, 2021.
We may not be able to maintain or increase sales to certain of our key customers for a variety of reasons, including:
- most of our customers can stop incorporating our products into their own products with limited notice to us and suffer little or no penalty;
- our agreements with our customers typically do not require them to purchase a minimum quantity of our products;
- many of our customers have pre-existing or concurrent relationships with our current or potential competitors that may affect the customers’ decisions to purchase our products;
- many of our customers have sufficient resources to internally develop technology solutions and semiconductor components that could replace the products that we currently supply in our customers’ end products;
- our customers face intense competition from other manufacturers that do not use our products; and
- our customers regularly evaluate alternative sources of supply in order to diversify their supplier base, which increases their negotiating leverage with us and their ability to either obtain or dual source components from other suppliers.
In addition, our dependence on a limited number of key customers may make it easier for them to pressure us on price reductions. We have experienced pricing pressure from certain key customers and we expect that the average selling prices for certain of our products will decline from time to time, potentially reducing our revenue, margins, and earnings.
Our key customer relationships often require us to develop new products that may involve significant technological challenges. Our customers frequently place considerable pressure on us to meet tight development schedules. In addition, we have, and may again in the future, entered into customer agreements providing for exclusivity periods during which we may only sell specified products or technology to a specific customer. Even without exclusivity periods, the products that we develop are often specific to our customer's system architecture and frequently cannot be sold to other customers. Accordingly, we may have to devote a substantial amount of resources to strategic relationships, which could detract from or delay our completion of other important development projects or the development of next generation products and technologies.
Moreover, our reliance on certain customers may continue to increase, which could heighten the risks associated with having key customers, including making us more vulnerable to significant reductions in revenue, margins and earnings, pricing pressure, and other adverse effects on our business.
Our results may be impacted by recent significant increases in inflation in the U.S. and overseas.
As previously disclosed in the risk factor section of our May 20, 2022 Annual Report on Form 10-K filing, we may be adversely impacted by global economic conditions. In recent months, inflation has continued to increase significantly in the U.S. and overseas resulting in rising transportation, wages, and other costs. There is a risk that inflation may generally affect us by increasing our cost of labor, manufacturing, and other costs. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, if our costs become subject to significant inflationary pressures, we may not be able to fully offset such higher costs with increased revenues. Our inability or failure to do so could
23
harm our business, financial condition, and results of operations. In addition, inflationary pressures could also result in a decline in consumer confidence and spending, potentially impacting demand for our customers' end products in the consumer electronics and smartphone markets. Any such decline would likely impact our business, operating results, and financial condition.
ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS
The following table provides information about purchases of equity securities that are registered by us pursuant to Section 12 of the Exchange Act during the three months ended June 25, 2022 (in thousands, except per share amounts):
Monthly Period
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1)
March 27, 2022 - April 23, 2022
—
$
—
—
$
192,514
April 24, 2022 - May 21, 2022
725
77.78
725
136,131
May 22, 2022 - June 25, 2022
—
—
—
136,131
Total
725
$
77.78
725
$
136,131
(1) The Company currently has one active share repurchase program, the $350 million share repurchase program authorized by the Board of Directors in January 2021. The repurchases are to be funded from existing cash and intended to be effected from time to time in accordance with applicable securities laws through the open market or in privately negotiated transactions. The timing of the repurchases and the actual amount purchased depend on a variety of factors including general market and economic conditions and other corporate considerations. The program does not have an expiration date, does not obligate the Company to repurchase any particular amount of common stock, and may be modified or suspended at any time at the Company's discretion. The Company repurchased 0.7 million shares of its common stock for $56.4 million during the first quarter of fiscal year 2023 under the 2021 repurchase program. All of these shares were repurchased in the open market and were funded from existing cash. All shares of our common stock that were repurchased were retired as of June 25, 2022.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
24
ITEM 6. EXHIBITS
The following exhibits are filed as part of or incorporated by reference into this Report:
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
1.Incorporated by reference from Registrant’s Report on Form 10-K for the fiscal year ended March 31, 2001, filed with the Commission on June 22, 2001 (Registration No. 000-17795).
2.Incorporated by reference from Registrant’s Report on Form 8-K filed with the Commission on March 26, 2021 (Registration No. 000-17795).
* The certifications attached as Exhibits 32.1 and 32.2 accompanying this Quarterly Report on Form 10-Q, are deemed furnished and not filed with the SEC and are not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CIRRUS LOGIC, INC.
Date:
August 2, 2022
/s/ Venk Nathamuni
Venk Nathamuni
Chief Financial Officer and Principal Accounting Officer
