# CIRRUS LOGIC, INC. (CRUS) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from CIRRUS LOGIC, INC.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/772406/000077240624000031/crus-20240330.htm
Accession: 0000772406-24-000031
Filing date: 2024-05-24
Report date: 2024-03-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/CRUS/
All MD&A years: /company/CRUS/mda/
Previous year: /company/CRUS/mda/fy2023/ (FY 2023)
Next year: /company/CRUS/mda/fy2025/ (FY 2025)

ITEM 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Please read the following discussion in conjunction with our audited historical consolidated financial statements and notes thereto, which are included elsewhere in this Form 10-K. Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties and other factors. Actual results could differ materially because of the factors discussed in Part I, Item 1A. “Risk Factors” of this Form 10-K and elsewhere in this report, as well as in the documents we file with the SEC, including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

Critical Accounting Estimates

Our discussion and analysis of the Company’s financial condition and results of operations are based upon the consolidated financial statements included in this report, which have been prepared in accordance with U.S. generally accepted accounting principles. 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. Our accounting policies are more fully described in Note 2 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements contained in Item 8.

The Company considers the following accounting policies to involve the highest degree of judgment in the preparation of the consolidated financial statements:

Inventory Valuation

Inventories are stated at the lower of cost or net realizable value, with cost being determined on a first-in, first-out basis. The Company writes down inventories to net realizable value based on forecasted customer unit demand while taking into account product release schedules and product life cycles. The Company also reviews and writes down inventory, as appropriate, based on the age and condition of the inventory. Actual demand and market conditions may be different from those projected by management, which could have a material effect on our operating results and financial position.

Uncertain Tax Positions

The calculation of our tax liabilities involves assessing uncertainties with respect to the application of complex tax rules. Uncertain tax positions must meet a more likely than not threshold to be recognized in the financial statements and the tax benefits recognized are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon final settlement. The ultimate settlement of uncertain tax positions may differ from our estimates, which could result in the recognition of a tax benefit or an additional charge to the income tax provision in the relevant period. See Note 19 — Income Taxes of the Notes to Consolidated Financial Statements contained in Item 8 for additional details.

Recently Issued Accounting Pronouncements

For a discussion of recently issued accounting pronouncements, refer to Note 2 of the Notes to the Consolidated Financial Statements.

Overview

Cirrus Logic develops low-power, high-precision mixed-signal processing solutions for a broad range of customers. We track operating results in one reportable segment, but report revenue performance by product line: audio and HPMS products. In fiscal year 2024, the Company made good progress executing on our strategic initiatives. In our flagship audio business we completed design work on, and sampled, two next-generation products: a boosted amplifier and a smart codec during the year. We also introduced our third-generation camera controller, and gained traction in the laptop market.

While we are proud of our achievements in fiscal year 2024, we also encountered and successfully navigated through short-term challenges that were associated with our new HPMS product not coming to market as planned in fall 2023. Throughout the year we remained committed to disciplined execution, seeking to increase both operational efficiency and the efficiency and competitiveness within our supply chain.

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Fiscal Year 2024

Fiscal year 2024 net sales of $1.79 billion represented a decrease over fiscal year 2023 net sales of $1.90 billion. Audio product line sales of $1.08 billion in fiscal year 2024 decreased 7.5 percent from fiscal year 2023 sales of $1.17 billion. The most significant drivers of the decrease were continued weakness in general market sales, and to a lesser extent, a reduction in components shipping in tablets versus the prior fiscal year. HPMS product line sales of $705.0 million represented a 2.8 percent decrease from fiscal year 2023 sales of $725.6 million, largely attributable to a decline in general market sales, primarily in non-smartphone applications.

Overall, gross margin for fiscal year 2024 was 51.2 percent. The increase in gross margin for fiscal year 2024 was primarily attributable to a decline in supply chain costs, including the absence of wafer premiums and lower freight expense, in addition to a reduction in inventory reserves, partially offset by a less favorable product mix. The Company’s number of employees decreased to 1,625 as of March 30, 2024. The Company achieved net income of $274.6 million in fiscal year 2024, which included an income tax provision in the amount of $89.4 million.

Fiscal Year 2023

Fiscal year 2023 net sales of $1.90 billion represented an increase over fiscal year 2022 net sales of $1.78 billion. HPMS product line sales of $725.6 million represented a 22.1 percent increase from fiscal year 2022 sales of $594.3 million, primarily attributable to content gains in smartphones and higher ASPs. Audio product line sales of $1.17 billion in fiscal year 2023 decreased from fiscal year 2022 sales of $1.19 billion. The most significant driver of the decrease was the softening in general market and smartphone demand, partially offset by ASP increases during fiscal year 2023.

Overall, gross margin for fiscal year 2023 was 50.4 percent. The decrease in gross margin for fiscal year 2023 was primarily attributable to an increase in supply chain costs, partially offset by higher ASPs and the absence of the purchase price fair value adjustment to inventory, which was a one-time event in the second quarter of fiscal year 2022, as a result of the Lion Semiconductor, Inc. ("Lion") acquisition (the "Acquisition"). The Company’s number of employees increased to 1,702 as of March 25, 2023. The Company achieved net income of $176.7 million in fiscal year 2023, which included an income tax provision in the amount of $78.0 million.

Results of Operations

The following table summarizes the results of our operations for each of the past three fiscal years as a percentage of net sales. All percentage amounts were calculated using the underlying data, in thousands:

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Net Sales

We report sales in two product line categories: audio products and HPMS products. Our sales by product line are shown in the table below (in thousands).

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[["","","Fiscal Years Ended"],["","","March 30, 2024","","March 25, 2023","","March 26, 2022"],["Audio Products","","$","1,083,939","","","$","1,172,007","","","$","1,187,126"],["HPMS Products","","704,951","","","725,610","","","594,334"],["","","$","1,788,890","","","$","1,897,617","","","$","1,781,460"]]
[[/GREPCENT_TABLE]]

Net sales for fiscal year 2024 decreased by 5.7 percent, to $1.79 billion from $1.90 billion in fiscal year 2023. Audio product sales decreased $88.1 million, or 7.5 percent in fiscal year 2024. The most significant drivers of the decrease were continued weakness in general market sales, primarily in non-smartphone applications, and to a lesser extent, a reduction in components shipping in tablets versus the prior fiscal year. The decrease in net sales also reflects a $20.7 million decrease in HPMS product sales, or 2.8 percent, from fiscal year 2023 sales of $725.6 million, largely due to a decline in general market sales, primarily in non-smartphone applications.

Net sales for fiscal year 2023 increased by 6.5 percent, to $1.90 billion from $1.78 billion in fiscal year 2022. The increase in net sales reflects a $131.3 million increase in HPMS product sales, or 22.1 percent, from fiscal year 2022 sales of $594.3 million, which was primarily attributable to content gains in smartphones and higher ASPs. Additionally, audio product sales decreased $15.1 million in fiscal year 2023. The most significant driver of the decrease was the softening in general market and smartphone demand, partially offset by ASP increases versus fiscal year 2022.

International sales, including sales to U.S.-based end customers that manufacture products through contract manufacturers or plants located overseas, were approximately $1.8 billion in each of fiscal years 2024, 2023, and 2022, representing 99 percent, 97 percent, and 98 percent of net sales in fiscal year 2024, 2023, and 2022, respectively. Our sales are denominated primarily in U.S. dollars.

Gross Margin

Overall gross margin of 51.2 percent for fiscal year 2024 increased from fiscal year 2023 gross margin of 50.4 percent. The increase was primarily due to a decline in supply chain costs, including the absence of wafer premiums and lower freight expense, in addition to a reduction in inventory reserves compared to fiscal year 2023. The increase was partially offset by a less favorable product mix. Changes in excess and obsolete inventory charges, including scrapped inventory, and sales of product written down in prior periods did not have a material impact on margin in fiscal year 2024.

Overall gross margin of 50.4 percent for fiscal year 2023 decreased from fiscal year 2022 gross margin of 51.8 percent. The decrease reflects an increase in supply chain costs, partially offset by higher ASPs and the absence of the purchase price fair value adjustment to inventory, as a result of the Acquisition. Changes in excess and obsolete inventory charges, including scrapped inventory, and sales of product written down in prior periods did not have a material impact on margin in fiscal year 2023.

Research and Development Expenses

Fiscal year 2024 research and development expenses of $426.5 million reflect a decrease of $31.9 million, or 7.0 percent, from fiscal year 2023. The decrease was attributable to reduced amortization of acquisition intangibles expense, increased R&D incentives compared to the prior fiscal year, and a decrease in acquisition-related charges, variable compensation and product development costs, partially offset by an increase in employee-related expenses, stock-based compensation and facilities-related costs. See Note 2 - Summary of Significant Accounting Policies - Government Assistance for additional details relating to R&D incentives.

Fiscal year 2023 research and development expenses of $458.4 million reflect an increase of $52.1 million, or 12.8 percent, from fiscal year 2022. The increase was attributable to increased stock-based compensation, product development costs, employee-related expenses, primarily driven by a 7.0 percent increase in total R&D headcount, facilities-related costs, amortization of acquisition intangibles, and acquisition-related expenses, partially offset by reduced variable compensation and increased R&D incentives compared to fiscal year 2022.

Selling, General and Administrative Expenses

Fiscal year 2024 selling, general and administrative expenses of $144.2 million reflect a decrease of $9.0 million, or 5.9 percent, compared to fiscal year 2023. The decrease was primarily attributable to decreased employee-related and variable compensation costs, partially offset by increased stock-based compensation costs in fiscal year 2024.

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Fiscal year 2023 selling, general and administrative expenses of $153.1 million reflect an increase of $2.1 million, or 1.4 percent, compared to fiscal year 2022. The increase was primarily attributable to increased employee-related and stock-based compensation costs, partially offset by reduced variable compensation costs in fiscal year 2023.

Restructuring

During the fourth quarter of fiscal year 2023, as part of our strategy to improve operational efficiency, the Company abandoned or subleased office space at various properties to align our real property lease arrangements with our anticipated operating needs. In fiscal year 2024, the Company recorded an additional $2.0 million in net costs related to a workforce reduction action taken in the second quarter of fiscal year 2024 and the described events above. The Company recorded restructuring costs of $10.6 million related to impairment of right-of-use lease assets and leasehold improvements of $6.9 million, as well as other related charges of $3.7 million in fiscal year 2023. See Note 12 - Restructuring for additional details.

Intangibles Impairment

Due to the prolonged weakness in the China smartphone market, the sales of our general market battery and power products associated with the Acquisition were adversely affected. As a result, the Company revalued the acquired intangible assets recorded in purchase accounting. In the fourth quarter of fiscal year 2023, the Company impaired the related acquired intangible assets by $85.8 million. See additional details in Note 7 - Intangibles, net and Goodwill.

Interest Income

Interest income in fiscal years 2024, 2023, and 2022, was $21.5 million, $10.0 million, and $1.6 million, respectively. The increases in interest income in fiscal year 2024 and 2023 versus prior years were a function of higher interest rates on average cash, cash equivalent, and marketable securities balances throughout the year.

Interest Expense

The Company reported interest expense of $0.9 million, $0.9 million and $0.9 million for fiscal years 2024, 2023, and 2022, respectively, primarily as a result of commitment fees under the Revolving Credit Facility, described in Note 9.

Other Income (Expense)

In fiscal years 2024, 2023, and 2022 the Company reported $(0.1) million, $(3.4) million, and $1.7 million respectively, in other income (expense), related to remeasurement on foreign currency denominated monetary assets and liabilities and other non-operating income and expenses. Additionally, in fiscal year 2023, the Company recorded a $2.7 million write down related to a technology start-up equity investment.

Provision for Income Taxes

We recorded income tax expense of $89.4 million in fiscal year 2024 on pre-tax income of $363.9 million, yielding an effective tax rate of 24.6 percent. We recorded income tax expense of $78.0 million in fiscal year 2023 on pre-tax income of $254.7 million, yielding an effective tax rate of 30.6 percent. Our effective tax rates in both fiscal year 2024 and 2023 were higher than the U.S. statutory rate of 21.0 percent, primarily due to U.S. tax paid on our foreign earnings resulting from an increase in global intangible low-taxed income (GILTI), which is treated as a period cost, and a reduction in foreign tax credits. GILTI is unfavorably impacted by a provision in the Tax Cuts and Jobs Act of 2017 that requires research and development expenditures incurred starting in fiscal year 2023 to be capitalized and amortized ratably over five or fifteen years depending on the location in which the research activities are conducted. In addition, U.S. tax rules introduced in fiscal year 2023 related to refundable tax credits, including R&D expenditure credits available to us in the United Kingdom, reduce the amount of foreign tax credits available to offset GILTI.

We recorded income tax expense of $42.3 million in fiscal year 2022 on pre-tax income of $368.7 million, yielding an effective tax provision rate of 11.5 percent. Our effective tax rate was lower than the U.S. statutory rate of 21.0 percent, primarily due to the effect of income earned in certain foreign jurisdictions that is taxed below the federal statutory rate and excess tax benefits from stock-based compensation.

The Organization for Economic Cooperation and Development has announced an Inclusive Framework on Base Erosion and Profit Shifting, including Pillar Two Model Rules for a global minimum tax that call for the taxation of large multinational corporations at a minimum rate of 15%. Certain jurisdictions, including the United Kingdom, have enacted Pillar Two legislation that will start to become effective for our fiscal year 2025. Based on enacted laws, Pillar Two is not expected to have a material impact on our consolidated financial statements.

For additional discussion about our income taxes, see Note 19 - Income Taxes.

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Liquidity and Capital Resources

Operating Activities

In fiscal year 2024, cash flow from operations was $421.7 million. Operating cash flow during fiscal year 2024 was related to the cash components of our net income and an $18.4 million favorable change in working capital. The favorable change in working capital was driven primarily by prepaid wafer usage (related to the Capacity Reservation Agreement), decreases in other assets and increased income taxes payable, partially offset by decreased accounts payable and acquisition-related liabilities, as well as increases in accounts receivable. In fiscal year 2023, cash flow from operations was $339.6 million. Operating cash flow during fiscal year 2023 was related to the cash components of our net income and a $55.6 million unfavorable change in working capital, primarily driven by an increase in inventory and decreases in accounts payable and other accrued liabilities, partially offset by a decrease in accounts receivable. In fiscal year 2022, cash flow from operations was $124.8 million. Operating cash flow during fiscal year 2022 was related to the cash components of our net income and a $316.1 million unfavorable change in working capital, primarily as a result of increases in long-term prepaid wafers associated with terms of the Capacity Reservation Agreement with GlobalFoundries (discussed further in Note 15 - Commitments and Contingencies of the Notes to the Consolidated Financial Statements), accounts receivables and other assets (a portion of which resulted from terms of the Capacity Reservation Agreement with GlobalFoundries), partially offset by increases in acquisition-related liabilities and decreases in inventory for the period.

Investing Activities

In fiscal year 2024, the Company used $163.0 million in cash for investing activities primarily related to $124.7 million in net purchases of marketable securities and capital expenditures and technology investments of $38.3 million. In fiscal year 2023, the Company used $33.3 million in cash for investing activities principally related to capital expenditures and technology investments of $36.7 million, offset by $3.4 million in net sales of marketable securities. In fiscal year 2022, the Company used approximately $18.4 million in cash for investing activities primarily related to $276.9 million associated with the acquisition of Lion and capital expenditures and technology investments of $30.0 million, partially offset by $288.5 million in net sales of marketable securities.

Financing Activities

In fiscal years 2024, 2023, and 2022, the Company used $201.7 million, $230.3 million, and $178.7 million, respectively, related to financing activities. In fiscal years 2024, 2023, and 2022, the Company utilized approximately $186.0 million, $191.4 million, and $167.5 million, respectively, in cash to repurchase and retire portions of its outstanding common stock. See Note 17 - Stockholders' Equity for a description of our share repurchase authorization.

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.

On March 20, 2023, the Company, entered into the First Amendment (the "Amendment") to its Second Amended Credit Agreement, with the lending institutions party thereto and Wells Fargo Bank, National Association, as administrative agent. The Amendment updates the benchmark interest rate provisions to replace the London interbank offered rate ("LIBOR") with the forward-looking secured overnight financing rate ("Term SOFR"), for the purposes of calculating interest under the terms of the Second Amended Credit Agreement.

As of March 30, 2024, the Company had no amounts outstanding under the Revolving Credit Facility and was in compliance with all covenants under the Second Amended Credit Agreement.  

See Note 9 — Revolving Credit Facility for additional information including material terms and related covenants.

Capital Requirements

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, and potential future acquisitions of companies or technologies, commitments under the Capacity Reservation Agreement with GlobalFoundries (discussed further in Note 15 - Commitments and Contingencies of the Notes to the Consolidated Financial Statements and Item 1A. Risk Factors) and the expansion of our sales and marketing activities. We believe our expected future cash earnings, existing cash, cash equivalents,

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investment balances, and available borrowings under our Revolving Credit Facility will be sufficient to meet our capital requirements both domestically and internationally, in the short-term (i.e. the next 12 months) and in the long-term, although we could be required, or could elect, to seek additional funding prior to that time. As of March 30, 2024, the Company did not have any off-balance-sheet arrangements, that were reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Cash Obligations

In our business activities, we incur certain commitments to make future payments under contracts such as debt agreements, purchase orders, operating leases and other long-term contracts.  See Note 9 - Revolving Credit Facility, Note 11 - Leases and Note 15 - Commitments and Contingencies, of the notes to the Consolidated Financial Statements in Item 8, for additional information related to these contractual obligations.