CIRRUS LOGIC, INC. 
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 endedMarch 27, 2021 , contained in our fiscal year 2021 Annual Report on Form 10-K filed with theSecurities and Exchange Commission (the "Commission") onMay 21, 2021 . We maintain a website at investor.cirrus.com, which makes available free of charge our most recent annual report and all other filings we have made with the Commission.
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 2021 Annual Report on Form 10-K filed with the Commission onMay 21, 2021 , 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. 18
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Overview
In the second quarter of fiscal year 2022, the Company acquiredLion Semiconductor, Inc. ("Lion") (the "Acquisition"), a leading provider of proprietary fast-charging and power ICs. We entered the transaction with the expectation that the Acquisition would accelerate growth of our high-performance mixed-signal product line in the coming years. See additional information in Note 8 - Acquisition of the Notes to the Consolidated Condensed Financial Statements and Item 1A. Risk Factors below.Cirrus Logic continues to experience demand significantly above available capacity and are actively working with our suppliers to meet as much demand as possible while also balancing our customer relationships and financial health. In the second quarter of fiscal year 2022, we entered into a long-termCapacity Reservation and Wafer Supply Commitment Agreement with GlobalFoundries, a foundry partner for many of our strategic products. This will expand our ability to address unprecedented market demand and provide customers with much-needed supply assurance. We agreed to$255 million in payments to GlobalFoundries under this agreement, which includes the previously announced$225 million in capacity commitments and an additional$30 million associated with a technology option that was exercised in the second quarter of fiscal year 2022. These payments were made in the third quarter of fiscal year 2022. See additional information in Note 14 - Commitments and Contingencies of the Notes to the Consolidated Condensed Financial Statements and Item 1A. Risk Factors below.
Additionally, the Company has observed increased competition in hiring and retaining qualified executives and employees, which is expected to result in increased research and development costs in future periods. For more information, please see Item 1A "Risk Factors".
Impact of COVID-19
The Company remains committed to the safety and well-being of our employees, their families and our communities across the globe, while maintaining business continuity and continuing to provide outstanding support to our customers. At this time, the majority of our employees worldwide continue to work remotely and remain subject to travel restrictions, due to COVID-19. Despite these challenges, all teams across the organization remain highly productive and we currently anticipate that the Company will be able to continue to maintain a similar level of productivity for the foreseeable future. Although we have not experienced a significant reduction in our overall productivity through fiscal year 2022 to date, any increased or additional disruptions to our business operations or those of our suppliers, or additional supply chain costs or constraints, would likely impact our ability to continue to maintain current levels of productivity. The COVID-19 pandemic is likely to continue to cause volatility and uncertainty in customer demand, worldwide economies and financial markets for some period of time. 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, although we are addressing capacity constraints in our supply chain as described above. The Company has not accessed its Revolving Credit Facility or raised capital in the public or private markets. Given our strong net cash position and available borrowings under our$300 million Revolving Credit Facility, we believe the Company has sufficient liquidity to satisfy our cash needs for the foreseeable future.
Critical Accounting Policies
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 withU.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 nine months endedDecember 25, 2021 , to the information provided under the heading "Critical Accounting Policies" included in our fiscal year 2021 Annual Report on Form 10-K for the fiscal year endedMarch 27, 2021 , with the exception of the following as a result of the Acquisition. 19 --------------------------------------------------------------------------------
Business combinations
We account for business combinations using the acquisition method of accounting and allocate the fair value of acquisition consideration to the assets acquired and liabilities assumed based on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of the assets acquired and liabilities assumed is recorded as goodwill. The results of operations of the business acquired is included in our consolidated condensed statements of income beginning on the date of the acquisition.
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 2022 and 2021 are both 52-week fiscal years.
The following table summarizes the results of our operations for the first three
and nine months of fiscal years 2022 and 2021, respectively, as a percentage of
net sales. All percentage amounts were calculated using the underlying data in
thousands, unaudited:
Three Months Ended Nine Months Ended
December 25, December 26, December 25, December 26,
2021 2020 2021 2020
Net sales 100 % 100 % 100 % 100 %
Gross margin 53 % 52 % 51 % 52 %
Research and development 20 % 18 % 23 % 23 %
Selling, general and administrative 7 % 7 % 8 % 9 %
Restructuring costs - % - % - % - %
Income from operations 26 % 27 % 20 % 20 %
Interest income - % - % - % - %
Interest expense - % - % - % - %
Other income - % - % - % - %
Income before income taxes 26 % 27 % 20 % 20 %
Provision for income taxes 3 % 3 % 2 % 2 %
Net income 23 % 24 % 18 % 18 %
Net Sales
Net sales for the third quarter of fiscal year 2022 increased $62.5 million , or
13 percent, to $548.3 million from $485.8 million in the third quarter of fiscal
year 2021. Net sales from high-performance mixed-signal products increased
$102.5 million for the quarter versus the third quarter of fiscal year 2021,
primarily due to content gains in smartphones and, to a lesser extent, higher
sales of fast-charging ICs in smartphones. Net sales from our audio products
decreased $40.0 million , primarily driven by lower volumes of smartphone
components, partly due to a later product launch in calendar 2020 versus 2021;
as a result, our inventory build and initial volumes for this cycle began in the
September quarter. This decrease was partially offset by increases in audio
products in laptops.
Net sales for the first nine months of fiscal year 2022 increased $215.8
million , or 20.1 percent, to $1.29 billion from $1.08 billion in the first nine
months of fiscal year 2021. Net sales from high-performance mixed-signal
products increased $224.0 million for the first nine months of fiscal year 2022
versus the comparable period in the prior fiscal year due to content gains in
smartphones and, to a lesser extent, higher sales of fast-charging ICs in
smartphones. Net sales from our audio products decreased $8.2 million , primarily
due to lower volumes in smartphones and headwinds in wired headset codecs,
partially offset by an increase in audio products in laptops.
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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 third quarters and
first nine month periods of fiscal years 2022 and 2021. 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 their
designs. For the third quarter of fiscal years 2022 and 2021, our ten largest
end customers represented approximately 93 percent and 95 percent of our net
sales, respectively. For the first nine months of fiscal years 2022 and 2021,
our ten largest customers represented approximately 93 percent and 94 percent of
our net sales, respectively.
We had one end customer, Apple Inc., that purchased through multiple contract
manufacturers and represented approximately 82 percent and 87 percent, of the
Company's total net sales for the third quarters of fiscal years 2022 and 2021,
respectively and 79 percent and 84 percent for the first nine months of fiscal
years 2022 and 2021, respectively.
No other end customer or distributor represented more than 10 percent of net
sales for the three and nine months ended
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 sales and our profitability."
Gross Margin
Gross margin was 52.8 percent in the third quarter of fiscal year 2022, up from 51.8 percent in the third quarter of fiscal year 2021. The increase reflects the phasing in of price increases across a number of our products in response to escalating costs within our supply chain. Gross margin was 51.5 percent for the first nine months of fiscal year 2022, down from 52.0 percent for the first nine months of fiscal year 2021. The decrease was due primarily to increased supply chain costs, amortization of the fair value adjustment of inventory as a result of the Acquisition and higher reserves, offset by the phasing in of price increases across a number of our products in response to escalating costs within our supply chain.
Research and Development Expense
Research and development expense for the third quarter of fiscal year 2022 was$107.1 million , an increase of$17.7 million , from$89.4 million in the third quarter of fiscal year 2021. The primary drivers were increased amortization of acquisition intangibles, employee-related expenses, acquisition-related costs, stock compensation and variable compensation costs, offset by reduced product development costs. Research and development expense for the first nine months of fiscal year 2022 was$294.9 million , an increase of$41.9 million , from$253.0 million for the first nine months of fiscal year 2021 primarily due to increased employee-related expenses, including costs associated with the expansion of our power-related products team, amortization of acquisition intangibles, variable compensation, acquisition-related, stock compensation and facilities-related costs, offset by decreased product development costs and increased R&D incentives.
Selling, General and Administrative Expense
Selling, general and administrative expense for the third quarter of fiscal year 2022 was$38.2 million , an increase of$5.8 million , from$32.4 million in the third quarter of fiscal year 2021 primarily due to increases in employee-related expenses, stock compensation and professional services costs. Selling, general and administrative expense for the first nine months of fiscal year 2022 was$111.5 million , an increase of$18.1 million , from$93.4 million for the first nine months of fiscal year 2021. The increase was primarily due to increased employee-related expenses, professional services costs, variable compensation and stock compensation costs during the year. 21
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Restructuring Costs
During the fourth quarter of fiscal year 2020, the Company approved the MEMS Restructuring, including discontinuing efforts relating to the MEMS microphone product line. The Company recorded charges of approximately$0.4 million in the first quarter of fiscal year 2021, which included equipment disposal costs and other nonrecurring costs. See Note 11 - Restructuring Costs for additional details.
Interest Income
The Company reported interest income of$0.1 million and$1.4 million , for the three and nine months endedDecember 25, 2021 , respectively and$1.5 million and$5.0 million for the three and nine months endedDecember 26, 2020 , respectively. Interest income decreased in the current periods due to lower yields on lower combined average cash, cash equivalent and marketable securities balances, compared to the prior periods. Interest Expense The Company reported interest expense of$0.2 million and$0.7 million for the three and nine months endedDecember 25, 2021 , respectively and$0.3 million and$0.8 million for the three and nine months endedDecember 26, 2020 , 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 and nine months endedDecember 25, 2021 , the Company reported$0.1 million in other expense and$1.5 million in other income, respectively, and$0.2 million in other expense and$0.7 million in other income for the three and nine months endedDecember 26, 2020 , respectively, primarily related to remeasurement on foreign currency denominated 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 Nine Months Ended
December 25 , December 26 ,
2021 2020 2021 2020
Income before income taxes $ 144,009 $ 130,649 $ 260,721 $ 217,326
Provision for income taxes $ 16,373 $ 16,281 $ 30,780 $ 25,263
Effective tax rate 11.4 % 12.5 % 11.8 % 11.6 %
Our income tax expense for the third quarter of fiscal year 2022 was $16.4
million compared to $16.3 million for the third quarter of fiscal year 2021,
resulting in effective tax rates of 11.4% and 12.5%, respectively. Our income
tax expense was $30.8 million and $25.3 million for the first nine months of
fiscal years 2022 and 2021, respectively, resulting in effective tax rates of
11.8% and 11.6%, respectively. Our effective tax rates for the third quarter and
first nine months of fiscal year 2022 were 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 and excess tax benefits from
stock-based compensation. Our effective tax rates for the third quarter and
first nine months of fiscal year 2021 were 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 and excess tax benefits from
stock-based compensation. The effective tax rate for the first nine months of
fiscal year 2021 was further impacted by the favorable remeasurement of
previously unrecognized tax benefits recognized as a discrete item in the second
quarter of fiscal year 2021.
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
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generated from operations, cash generated from the sale and maturity of
marketable securities, and available borrowings under our
Cash from operating activities is net income adjusted for certain non-cash items and changes in working capital. Cash used in operations was$133.5 million for the first nine months of fiscal year 2022 versus cash provided by operations of$176.4 million for the corresponding period of fiscal year 2021. The cash flow used in operations during the first nine months of fiscal year 2022 was related to the cash components of our net income and a$450.5 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 14 - Commitments and Contingencies of the Notes to the Consolidated Condensed Financial Statements), accounts receivables and other assets (a large 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. The cash flow from operations during the corresponding period of fiscal year 2021 was related to the cash components of our net income and a$97.4 million unfavorable change in working capital, primarily as a result of increases in accounts receivable and decreases in income taxes payable. Net cash used in investing activities was$9.6 million during the first nine months of fiscal year 2022 versus$69.1 million during the first nine months of fiscal year 2021. The cash used in investing activities in the first nine months of fiscal year 2022 was related to the Acquisition, net of cash obtained, of$276.9 million and capital expenditures and technology investments of$21.6 million . Cash used in investing activities was partially offset by net sales of marketable securities of$288.9 million in fiscal year 2022. The cash used in investing activities in the corresponding period in fiscal year 2021 was related to net purchases of marketable securities of$56.1 million and capital expenditures and technology investments of$13.0 million . Net cash used in financing activities was$104.0 million during the first nine months of fiscal year 2022 and was primarily associated with stock repurchases for the period of$92.5 million . The cash used in financing activities during the first nine months of fiscal year 2021 of$72.1 million was primarily associated with stock repurchases during the period of$65.0 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 Item 1A. Risk Factors below) and potential future acquisitions of companies or technologies, commitments under the Capacity Reservation Agreement with GlobalFoundries (discussed further in Note 14 - Commitments and Contingencies of the Notes to the Consolidated Condensed Financial Statements and Item 1A. Risk Factors below), 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.
Contractual Obligations
See Note 14 - Commitments and Contingencies, for material changes to our
contractual obligations from those previously disclosed in our fiscal year 2021
Annual Report on Form 10-K for the fiscal year ended
OnJuly 8, 2021 , the Company entered into a second amended and restated credit agreement (the "Second Amended Credit Agreement") withWells 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 onJuly 8, 2026 (the "Maturity Date"). The Revolving Credit Facility is required to be guaranteed by all ofCirrus Logic's material domestic subsidiaries ("Subsidiary Guarantors"). The Revolving Credit Facility is secured by substantially all the assets ofCirrus Logic and any Subsidiary Guarantors, except for certain excluded assets. Borrowings under the Revolving Credit Facility may, atCirrus 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 23 -------------------------------------------------------------------------------- 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 ofCirrus 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") 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
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