CIRRUS LOGIC INC, 10-Q filed on 10/30/2014
Quarterly Report
Document and Entity Information
6 Months Ended
Sep. 27, 2014
Oct. 24, 2014
Document and Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Entity Registrant Name
CIRRUS LOGIC INC 
 
Entity Central Index Key
0000772406 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Well-known Seasoned Issuer
Yes 
 
Entity Current Reporting Status
Yes 
 
Entity Voluntary Filers
No 
 
Document Period End Date
Sep. 27, 2014 
 
Document Fiscal Year Focus
2015 
 
Document Fiscal Period Focus
Q2 
 
Current Fiscal Year End Date
--03-28 
 
Entity Common Stock, Shares Outstanding
 
63,163,170 
Consolidated Condensed Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 27, 2014
Mar. 29, 2014
Assets
 
 
Cash and cash equivalents
$ 48,214 
$ 31,850 
Marketable securities
85,796 
263,417 
Accounts receivable, net
126,161 
63,220 
Inventories
121,169 
69,743 
Deferred tax assets
16,435 
22,024 
Other current assets
29,089 
25,079 
Total current assets
426,864 
475,333 
Long-term marketable securities
9,228 
89,243 
Property and equipment, net
133,458 
103,650 
Intangibles, net
187,030 
11,999 
Goodwill
265,410 
16,367 
Deferred tax assets
24,998 
25,065 
Other assets
17,658 
3,087 
Total assets
1,064,646 
724,744 
Liabilities and Stockholders' Equity
 
 
Accounts payable
81,549 
51,932 
Accrued salaries and benefits
17,706 
13,388 
Deferred income
5,218 
5,631 
Other accrued liabilities
34,946 
11,572 
Total current liabilities
139,419 
82,523 
Debt
226,439 
 
Other long-term liabilities
25,376 
4,863 
Stockholders' equity:
 
 
Capital stock
1,104,379 
1,078,878 
Accumulated deficit
(430,144)
(440,634)
Accumulated other comprehensive loss
(823)
(886)
Total stockholders' equity
673,412 
637,358 
Total liabilities and stockholders' equity
$ 1,064,646 
$ 724,744 
Consolidated Condensed Statements of Income (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Sep. 27, 2014
Sep. 28, 2013
Sep. 27, 2014
Sep. 28, 2013
Consolidated Condensed Statements of Income [Abstract]
 
 
 
 
Net sales
$ 210,214 
$ 190,671 
$ 362,779 
$ 345,796 
Cost of sales
109,647 
91,223 
186,837 
166,850 
Gross profit
100,567 
99,448 
175,942 
178,946 
Operating expenses:
 
 
 
 
Research and development
44,557 
29,722 
84,334 
58,252 
Selling, general and administrative
21,545 
19,215 
41,228 
38,413 
Acquisition related costs
14,937 
 
14,937 
 
Restructuring and other
1,455 
(154)
1,455 
(584)
Patent infringement settlements, net
 
 
 
695 
Total operating expenses
82,494 
48,783 
141,954 
96,776 
Income from operations
18,073 
50,665 
33,988 
82,170 
Interest income
136 
201 
331 
359 
Interest expense
(2,806)
 
(3,468)
 
Other income (expense)
(11,994)
(38)
(11,493)
(55)
Income before income taxes
3,409 
50,828 
19,358 
82,474 
Provision for income taxes
2,557 
17,461 
8,258 
28,465 
Net income
$ 852 
$ 33,367 
$ 11,100 
$ 54,009 
Basic earnings per share
$ 0.01 
$ 0.53 
$ 0.18 
$ 0.85 
Diluted earnings per share
$ 0.01 
$ 0.50 
$ 0.17 
$ 0.82 
Basic weighted average common shares outstanding
62,241 
63,217 
62,137 
63,329 
Diluted weighted average common shares outstanding
65,085 
66,125 
64,892 
66,203 
Consolidated Condensed Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Sep. 27, 2014
Sep. 28, 2013
Sep. 27, 2014
Sep. 28, 2013
Consolidated Condensed Statements of Comprehensive Income [Abstract]
 
 
 
 
Net income
$ 852 
$ 33,367 
$ 11,100 
$ 54,009 
Net changes to available-for-sale securities
 
 
 
 
Unrealized gain on marketable securities
42 
256 
142 
216 
Net changes to foreign currency derivatives
 
 
 
 
Unrealized loss on foreign currency derivatives
(29)
 
(29)
 
Provision for income taxes
(15)
(90)
(50)
(23)
Comprehensive income
$ 850 
$ 33,533 
$ 11,163 
$ 54,202 
Consolidated Condensed Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Sep. 27, 2014
Sep. 28, 2013
Cash flows from operating activities:
 
 
Net income
$ 11,100 
$ 54,009 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
11,109 
6,912 
Stock compensation expense
19,529 
11,650 
Deferred income taxes
5,656 
26,572 
Loss on retirement or write-off of long-lived assets
325 
 
Excess tax benefit from employee stock options
(4,138)
 
Other non-cash charges
14,233 
2,359 
Net change in operating assets and liabilities:
 
 
Accounts receivable, net
(50,897)
(28,351)
Inventories
(22,768)
28,053 
Other assets
2,305 
(8,003)
Accounts payable and other accrued liabilities
8,777 
(2,099)
Deferred income
(964)
(98)
Income taxes payable
4,059 
97 
Net cash (used in) provided by operating activities
(1,674)
91,101 
Cash flows from investing activities:
 
 
Proceeds from sale of available for sale marketable securities
266,989 
14,317 
Purchases of available for sale marketable securities
(9,290)
(83,657)
Purchases of property, equipment and software
(10,622)
(6,938)
Investments in technology
(1,107)
(1,295)
Loss on foreign exchange hedging activities
(11,976)
 
Acquisition of Wolfson, net of cash obtained
(444,138)
 
Increase in deposits and other assets
(756)
(16)
Net cash used in investing activities
(210,900)
(77,589)
Cash flows from financing activities:
 
 
Proceeds from long-term revolver
226,439 
 
Debt issuance costs
(2,825)
 
Issuance of common stock, net of shares withheld for taxes
1,796 
1,636 
Repurchase of stock to satisfy employee tax withholding obligations
(610)
(12,664)
Excess tax benefit from employee stock options
4,138 
 
Net cash provided by (used in) financing activities
228,938 
(11,028)
Net increase in cash and cash equivalents
16,364 
2,484 
Cash and cash equivalents at beginning of period
31,850 
66,402 
Cash and cash equivalents at end of period
$ 48,214 
$ 68,886 
Basis of Presentation
Basis of Presentation

1.     Basis of Presentation

 

The 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 29, 2014, included in our Annual Report on Form 10-K filed with the Commission on May 28, 2014.  In our opinion, the financial statements reflect all 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, as well as disclosure of contingent assets and liabilities.  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.  Additionally, prior period amounts have been adjusted to conform to current year presentation.   

Recently Issued Accounting Pronouncements
Recently Issued Accounting Pronouncements

2.     Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606).  The purpose of the ASU is to converge revenue recognition requirements per GAAP and International Financial Reporting Standards (IFRS).  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The amendments in this ASU are effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption not permitted by the FASB.  The Company is currently evaluating the impact of this ASU on its consolidated financial position, results of operations and cash flows.

 

Marketable Securities
Marketable Securities

3.     Marketable Securities

 

The Company’s investments that have original maturities greater than 90 days 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 short- and long-term marketable securities, as appropriate.  

 

The following table is a summary of available-for-sale securities at September 27, 2014 (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

Gross

 

Gross

 

Fair Value

 

Amortized

 

Unrealized

 

Unrealized

 

(Net Carrying

As of September 27, 2014

Cost

 

Gains

 

Losses

 

Amount)

Corporate debt securities

$

78,574 

 

$

 

$

(38)

 

$

78,538 

Commercial paper

 

16,487 

 

 

 

 

(5)

 

 

16,486 

Total securities

$

95,061 

 

$

 

$

(43)

 

$

95,024 

 

The Company’s specifically identified gross unrealized losses of $43 thousand relates to 15 different securities with total amortized cost of approximately $63.1 million at September 27, 2014.  Because the Company does not intend to sell the investments at a loss and the Company will not be required to sell the investments before recovery of its amortized cost basis, it did not consider the investment in these securities to be other-than-temporarily impaired at September 27, 2014.  Further, the securities with gross unrealized losses had been in a continuous unrealized loss position for less than 12 months as of September 27, 2014. 

The following table is a summary of available-for-sale securities at March 29, 2014 (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

Gross

 

Gross

 

Fair Value

 

Amortized

 

Unrealized

 

Unrealized

 

(Net Carrying

As of March 29, 2014

Cost

 

Gains

 

Losses

 

Amount)

Corporate debt securities

$

246,878 

 

$

52 

 

$

(245)

 

$

246,685 

U.S. Treasury securities

 

56,986 

 

 

10 

 

 

(2)

 

 

56,994 

Agency discount notes

 

2,008 

 

 

 

 

 -

 

 

2,009 

Commercial paper

 

41,962 

 

 

10 

 

 

(2)

 

 

41,970 

Certificates of deposit

 

5,006 

 

 

 -

 

 

(4)

 

 

5,002 

Total securities

$

352,840 

 

$

73 

 

$

(253)

 

$

352,660 

 

The Company’s specifically identified gross unrealized losses of $253 thousand relates to 74 different securities with total amortized cost of approximately $207.8 million at March 29, 2014.  Because the Company does not intend to sell the investments at a loss and the Company will not be required to sell the investments before recovery of its amortized cost basis, it did not consider the investment in these securities to be other-than-temporarily impaired at March 29, 2014.  Further, the securities with gross unrealized losses had been in a continuous unrealized loss position for less than 12 months as of March 29, 2014.

 

The cost and estimated fair value of available-for-sale securities by contractual maturities were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 27, 2014

 

March 29, 2014

 

 

Amortized

 

Estimated

 

Amortized

 

Estimated

 

 

Cost

 

Fair Value

 

Cost

 

Fair Value

Within 1 year

 

$

85,821 

 

$

85,796 

 

$

263,418 

 

$

263,417 

After 1 year

 

 

9,240 

 

 

9,228 

 

 

89,422 

 

 

89,243 

Total

 

$

95,061 

 

$

95,024 

 

$

352,840 

 

$

352,660 

 

Derivative Financial Instruments
Derivative Financial Instruments

4.     Derivative Financial Instruments

 

Our primary objective for holding derivative financial instruments is to manage currency exchange rate risk and interest rate risk.

 

Currency Exchange Rate Risk

 

We are exposed to currency exchange rate risk and generally hedge our exposures with currency forward contracts.  Substantially all of our revenue is transacted in U.S. dollars.  However, a portion of our operating expenditures are incurred in or exposed to other currencies, primarily the British pound.  We have established a forecasted transaction currency risk management program to protect against fluctuations in the volatility of the functional currency equivalent of future cash flows caused by changes in exchange rates.  This program may reduce, but not eliminate, the impact of currency exchange movements. 

 

Fair Value of Derivative Instruments in the Consolidated Condensed Balance Sheets

 

The fair value of our derivative instruments at the end of each period were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Accrued Liabilities

 

September 27,

 

March 29,

 

2014

 

2014

 

 

 

 

 

 

Currency forwards

$

29 

 

$

 -

 

Fair Value of Financial Instruments
Fair Value of Financial Instruments

5.     Fair Value of Financial Instruments

 

The Company has determined that the only 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, investment portfolio, and foreign currency derivative assets/liabilities.  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 or liabilities (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 investment portfolio assets consist of corporate debt securities, money market funds, U.S. Treasury securities, obligations of certain U.S. government-sponsored enterprises, commercial paper, and certificates of deposit and are reflected on our consolidated condensed balance sheets under the headings cash and cash equivalents, marketable securities, and long-term marketable securities.  The Company determines the fair value of its investment portfolio assets by obtaining non-binding market prices from its third-party portfolio managers 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 fair value of the foreign currency derivatives is included in “Other accrued liabilities” on the consolidated condensed balance sheet.    

 

The Company’s long-term revolving facility, described in Note 9, bears interest at a base rate plus applicable margin or LIBOR plus applicable margin.  As of September 27, 2014, the fair value of the Company’s long-term revolving facility approximates carrying value based on estimated margin.

 

As of September 27, 2014, the Company classified its investment portfolio assets and foreign currency derivative liabilities as Level 1 or Level 2 inputs.  The Company has no Level 3 assets.  There were no transfers between Level 1, Level 2, or Level 3 measurements for the three month period ending September 27, 2014.

 

The fair value of our financial assets and liabilities at September 27, 2014, was determined using the following inputs (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Assets

 

Inputs

 

Inputs

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

17,577 

 

$

 -

 

$

 -

 

$

17,577 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

$

 -

 

$

78,538 

 

$

 -

 

$

78,538 

Commercial paper

 

 -

 

 

16,486 

 

 

 -

 

 

16,486 

 

$

 -

 

$

95,024 

 

$

 -

 

$

95,024 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Other accrued liabilities

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange derivative

$

 -

 

$

29 

 

$

 -

 

$

29 

 

 

The fair value of our financial assets at March 29, 2014, was determined using the following inputs (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Assets

 

Inputs

 

Inputs

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

20,456 

 

$

 -

 

$

 -

 

$

20,456 

Commercial paper

 

 -

 

 

1,878 

 

 

 -

 

 

1,878 

 

$

20,456 

 

$

1,878 

 

$

 -

 

$

22,334 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

$

 -

 

$

246,685 

 

$

 -

 

$

246,685 

U.S. Treasury securities

 

56,994 

 

 

 -

 

 

 -

 

 

56,994 

Agency discount notes

 

 -

 

 

2,009 

 

 

 -

 

 

2,009 

Commercial paper

 

 -

 

 

41,970 

 

 

 -

 

 

41,970 

Certificates of deposit

 

 -

 

 

5,002 

 

 

 -

 

 

5,002 

 

$

56,994 

 

$

295,666 

 

$

 -

 

$

352,660 

 

Accounts Receivable, net
Accounts Receivable, net

6.     Accounts Receivable, net

 

The following are the components of accounts receivable, net (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

September 27,

 

March 29,

 

2014

 

2014

Gross accounts receivable

$

126,532 

 

$

63,449 

Allowance for doubtful accounts

 

(371)

 

 

(229)

Accounts receivable, net

$

126,161 

 

$

63,220 

 

Inventories
Inventories

 

7.     Inventories

 

Inventories are comprised of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

September 27,

 

March 29,

 

2014

 

2014

Work in process

$

64,518 

 

$

37,967 

Finished goods

 

56,651 

 

 

31,776 

 

$

121,169 

 

$

69,743 

 

Acquisition
Acquisition

8.    Acquisition

On August 21, 2014, Cirrus Logic completed the acquisition of Wolfson Microelectronics plc (the “Acquisition”), a public limited company incorporated in Scotland (“Wolfson”).  Upon completion of the acquisition, Wolfson was re-registered as a private limited company.  Wolfson is a supplier of high performance, mixed-signal audio solutions for the consumer electronics market.  The Acquisition accelerates Cirrus Logic’s strategic roadmap, further strengthens our technology portfolio with the addition of MEMS microphones and extensive software capabilities, while significantly expanding our development capacity.  

The enterprise value for Wolfson in connection with the Acquisition was approximately £283 million (approximately $469 million based on a U.S. dollar to pound sterling exchange rate of 1.659), and was based on the agreed upon offer of £2.35 per share (the “Offer”) for the entire issued and to be issued share capital of Wolfson.  Cirrus Logic financed the Acquisition through a combination of existing cash on Cirrus Logic’s balance sheet and $225 million in debt funding from Wells Fargo Bank, National Association, as discussed below in Note 9.    Upon completion of the Acquisition, the Company recorded approximately $12.0 million, in the current fiscal quarter, of realized losses on foreign currency fluctuations in the initial valuation exchange rate of 1.682 (U.S. dollar to pound sterling) and the actual exchange rate at Acquisition date of 1.659.  The loss is included in the consolidated condensed statements of income under the caption “Other income (expense)”. 

The Acquisition was accounted for as a business purchase pursuant to ASC Topic 805, Business Combinations, and the operations of Wolfson have been included in the Company’s consolidated financial statements since August 21, 2014, the date of acquisition. The following table presents the initial allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition (in thousands):

 

 

 

 

 

 

Amount

Cash and cash equivalents

$

25,342 

Inventory

 

28,658 

Other current assets

 

15,633 

Property, plant and equipment

 

29,093 

Intangible assets

 

175,987 

Pension assets

 

1,625 

Total identifiable assets acquired

$

276,338 

 

 

 

Deferred tax liability - current

 

(11,483)

Deferred revenue

 

(551)

Other accrued liabilities

 

(41,417)

Other long-term liabilities

 

(2,449)

Total identifiable liabilities assumed

$

(55,900)

Net identifiable assets acquired

$

220,438 

Goodwill

 

249,043 

Net assets acquired

$

469,481 

 

The goodwill of $249.0 million arising from the Acquisition is attributable primarily to expected synergies and the product and customer base of Wolfson.  None of the goodwill is expected to be deductible for income tax purposes.  As of September 27, 2014, there were no changes in the recognized amounts of goodwill resulting from the Acquisition.

 

The components of the acquired intangible assets and related weighted average amortization periods are detailed below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Intangible assets

 

Amount

 

Weighted-average Amortization Period (years)

Developed technology

$

74,247 

 

6.2

Technology intellectual property

 

14,572 

 

5.3

Trademark

 

1,437 

 

1.3

In-process research & development

 

72,750 

 

7.5

Customer relationships

 

12,981 

 

10.0

Total

$

175,987 

 

 

 

The initial allocation of the purchase price is preliminary and subject to completion, including the areas of taxation, inventory, real property, intangible assets, other assets, deferred revenue, and other liabilities, where valuation assessments are in progress.  The adjustments arising from the completion of the outstanding matters may materially affect the preliminary purchase accounting and would be retroactively reflected in the financial statements as of September 27, 2014 and for the interim periods then ended.

 

The Company recognized $14.9 million of acquisition related costs that were expensed in the current period.  These costs are included in the consolidated condensed statements of income in the line item entitled “Acquisition related costs.”  

 

The Company’s consolidated condensed statements of income for the period ending September 27, 2014 included $13.0 million of revenue attributable to Wolfson, which reflects revenues from the acquisition date to the end of the period.  The earnings related to Wolfson included in the Company’s consolidated condensed statements of income for the period ending September 27, 2014, are excluded as it would be impracticable to allocate costs and services shared across product lines for the Company as to not be misleading. 

 

Giving pro forma effect to the Acquisition as if it had occurred as of March 30, 2014, the beginning of the Company’s fiscal year, and after applying the Company’s accounting policies and adjusting the results to reflect these changes since March 30, 2014, $57.2 million of pro forma revenue would have been attributable to Wolfson.  Pro forma earnings attributable to Wolfson is excluded as it would be impracticable.  Costs and services shared across product lines for the Company cannot appropriately be allocated as to not be misleading.

Revolving Credit Facilities
Revolving Credit Facilities

9.     Revolving Credit Facilities

On August 29, 2014, Cirrus Logic entered into a credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as Administrative Agent, and the Lenders party thereto.

The Credit Agreement provides for a $250 million senior secured revolving credit facility (the “Credit Facility”).  The Credit Facility replaced Cirrus Logic’s Interim Credit Facility described below, and may be used for general corporate purposes.  The Credit Facility matures on August 29, 2017.

 

The Credit Facility is required to be guaranteed by all of Cirrus Logic’s material domestic subsidiaries (the “Subsidiary Guarantors”). The Credit Facility is secured by substantially all of the assets of Cirrus Logic and any Subsidiary Guarantors, except for certain excluded assets.  Borrowings under the 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 .25% per annum for Base Rate Loans and 1.50% to 2.00% per annum for LIBOR Rate Loans based on Cirrus Logic’s Leverage Ratio (discussed below).

 

A Commitment Fee accrues at a rate per annum ranging from 0.25% to 0.35% (based on the Leverage Ratio) on the average daily unused portion of the Commitment of the Lenders.  The 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 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 Credit Facility also contains certain financial covenants providing that (a) the ratio of consolidated funded indebtedness to consolidated EBITDA for the prior four consecutive quarters must not be greater than 2.00 to 1.00 (the “Leverage Ratio”) and (b) the sum of cash and Cash Equivalents of Cirrus Logic and its Subsidiaries on a consolidated basis must not be less than $100 million.  At September 27, 2014, the Company was in compliance with all covenants under the Credit Agreement.  The Company had borrowed $226.4 million under this facility as of September 27, 2014, which is included in long-term liabilities on the consolidated condensed balance sheets.  The borrowings were primarily used for financing Acquisition.

Cirrus Logic entered into a credit agreement (the “Interim Credit Agreement”) with Wells Fargo Bank, National Association as administrative agent and lender, on April 29, 2014, in connection with the Acquisition.  The Interim Credit Agreement provided for a $225 million senior secured revolving credit facility (the “Interim Facility”).  The Interim Facility was to be used for, among other things, payment of the offer consideration in connection with the Acquisition.  The Interim Facility would have matured on the earliest to occur of (a) January 23, 2015, (b) the date of termination of the Commitments as a result of a permanent reduction of all of the Commitments (as defined in the Interim Credit Agreement) by Cirrus Logic or (c) the date of termination of the Commitments as a result of an event of default.  The Interim Facility actually matured under scenario (b) above with no outstanding borrowings or accrued interest on the maturity date. 

The Company maintained an unsecured revolving credit facility until early fiscal year 2014.  The aggregate borrowing limit under this facility was $100 million, with a $15 million letter of credit sublimit and was intended to provide the Company with short-term borrowings for working capital and other general corporate purposes.  The Company had no outstanding amounts under the facility prior to its expiration on April 19, 2013.

 

Income Taxes
Income Taxes

10.   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. Our income tax expense is primarily a non-cash charge due to the utilization of U.S. net operating losses.

 

The following table presents the provision for income taxes and the effective tax rates (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

2014

 

2013

 

2014

 

2013

Income before income taxes

$

3,409 

 

$

50,828 

 

$

19,358 

 

$

82,474 

Provision for income taxes

$

2,557 

 

$

17,461 

 

$

8,258 

 

$

28,465 

Effective tax rate

 

75.0% 

 

 

34.4% 

 

 

42.7% 

 

 

34.5% 

 

Our income tax expense for the second quarter and first six months of fiscal year 2015 was above the federal statutory rate primarily due to the inclusion of foreign losses in the period from the close of the Acquisition to the end of the quarter at foreign statutory rates below the U.S. federal statutory rate.  Our income tax expense for the second quarter and first six months of fiscal year 2014 was slightly below the federal statutory rate primarily due to the effect of the federal research and development credit which was extended through December 31, 2013 by the American Taxpayer Relief Act of 2012, which was enacted on January 2, 2013.

 

We had no unrecognized tax benefits as of September 27, 2014.  The Company does not believe that its unrecognized tax benefits will significantly increase or decrease during the next 12 months.    

 

We accrue interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes.  As of September 27, 2014, the balance of accrued interest and penalties was zeroNo interest or penalties were incurred during the first six months of fiscal year 2015 or 2014.

 

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 2011 through 2014 remain open to examination by the major taxing jurisdictions to which we are subject.

Pension Plan
Pension Plan

11.   Pension Plan

 

As a result of the Acquisition, the Company now fully funds a defined benefit pension scheme (“the Plan”) maintained by Wolfson, for non-U.S. employees, which was closed to new participants as of July 2, 2002.  As of April 30, 2011, the participants in the Plan no longer accrue benefits and therefore the Company will not be required to pay contributions in respect to future accrual.

Prior to the acquisition, Wolfson paid deficit contributions of approximately $1.65 million in April 2014.  The Company will be obligated to pay approximately $1.65 million by April 30, 2015 and approximately $0.6 million by April 30, 2016.  The Company expects to completely close the Plan over the next ten years.

 

The components of the Company’s net periodic pension expense (income) for the three and six months ended September 27, 2014 and September 28, 2013 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

2014

 

2013

 

2014

 

2013

Interest cost

$

254 

 

$

 -

 

$

254 

 

$

 -

Expected return on plan assets

 

(370)

 

 

 -

 

 

(370)

 

 

 -

 

 

(116)

 

 

 -

 

 

(116)

 

 

 -

The following weighted-average assumptions were used to determine net periodic benefit costs for the three months ended September 27, 2014: 

  

 

 

 

 

 

 

 

Discount rate 

 

4.20 

%

Expected long-term return on plan assets 

 

5.58 

%

The following tables set forth the benefit obligation, the fair value of plan assets, and the funded status of the Company’s plan (in thousands):

 

 

 

 

 

 

 

 

Change in benefit obligation:

 

 

Beginning balance at June 29, 2014

$

24,538 

Interest cost

 

254 

Benefits paid and expenses

 

(69)

Actuarial loss

 

1,344 

Total benefit obligation at September 27, 2014

 

26,067 

 

 

 

Change in plan assets:

 

 

Beginning balance at June 29, 2014

 

27,089 

Actual return on plan assets

 

672 

Benefits paid and expenses

 

(69)

Fair value of plan assets at September 27, 2014

 

27,692 

 

 

 

Funded status of plan at September 27, 2014

$

1,625 

Based on an actuarial study performed as of September 27, 2014, the plan is overfunded and a long-term asset is reflected in the Company’s consolidated condensed balance sheet under the caption “Other assets”.  The weighted-average discount rate assumption used to determine benefit obligations as of September 27, 2014 was 3.9%.

Net Income Per Share
Net Income Per Share

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 awards.

 

The following table details the calculation of basic and diluted earnings per share for the three and six months ended September 27, 2014 and September 28, 2013 (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

2014

 

2013

 

2014

 

2013

Numerator:

 

 

 

 

 

 

 

 

 

 

 

Net income

$

852 

 

$

33,367 

 

$

11,100 

 

$

54,009 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

62,241 

 

 

63,217 

 

 

62,137 

 

 

63,329 

Effect of dilutive securities

 

2,844 

 

 

2,908 

 

 

2,755 

 

 

2,874 

Weighted average diluted shares

 

65,085 

 

 

66,125 

 

 

64,892 

 

 

66,203 

Basic earnings per share

$

0.01 

 

$

0.53 

 

$

0.18 

 

$

0.85 

Diluted earnings per share

$

0.01 

 

$

0.50 

 

$

0.17 

 

$

0.82 

 

The weighted outstanding shares excluded from our diluted calculation for the three and six months ended September 27, 2014 were 642 thousand and 731 thousand, respectively, as the shares were anti-dilutive.  The weighted outstanding shares excluded from our diluted calculation for the three and six months ended September 28, 2013 were 991 thousand and 986 thousand, respectively.

 

Legal Matters
Legal Matters

13.   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 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. 

 

On June 4, 2012, U.S. Ethernet Innovations, LLC (the “Plaintiff”) filed suit against Cirrus Logic and two other defendants in the U.S. District Court, Eastern District of Texas.  The Plaintiff alleges that Cirrus Logic infringed four U.S. patents relating to Ethernet technology.  In its complaint, the Plaintiff indicated that it is seeking unspecified monetary damages, including up to treble damages for willful infringement.  We answered the complaint on June 29, 2012, denying the allegations of infringement and seeking a declaratory judgment that the patents in suit were invalid and not infringed.  The parties entered into a settlement agreement on May 30, 2013.  In exchange for a full release of claims as it relates to the asserted patent, we paid the Plaintiff $0.7 million.  This amount is recorded as a separate line item on the consolidated condensed statements of comprehensive income under the caption “Patent infringement settlements, net.”

 

For the case described below, management is unable to provide a meaningful estimate of the possible loss or range of possible loss because, among other reasons, (i) the proceedings are in various stages; (ii) damages have not been sought or specified; (iii) damages are unsupported and/or exaggerated; (iv) there is uncertainty as to the outcome of pending appeals or motions; (v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories to be presented or a large number of parties.  For this case, however, management does not believe, based on currently available information, that the outcome of this proceeding will have a material adverse effect on our financial condition.  However, the ultimate resolutions of this proceeding and matters are inherently difficult to predict; as such, our operating results could be materially affected  by the unfavorable resolution of this proceeding or matters for any particular period, depending, in part, upon the operating results for such period.  We intend to vigorously defend ourselves against the allegations made in the legal case described below.

 

On June 17, 2014, Enterprise Systems Technologies S.a.r.l. (the “Plaintiff”) filed suit against Cirrus Logic, Inc. in the U.S. District Court, District of Delaware.  The Plaintiff alleges that Cirrus Logic indirectly infringes two U.S. patents through the manufacture and sale of digital signal processors, audio codecs, audio processors, and other components included in communications and consumer electronic devices such as smartphones and computers.  The Plaintiff is seeking unspecified monetary damages.  On July 23, 2014, the Plaintiff filed an amended complaint removing allegations associated with one of the two patents.  On August 25, 2014, the lawsuit was stayed pending resolution of the proceedings in the International Trade Commission described below. 

 

On July 16, 2014, the Plaintiff requested the International Trade Commission to investigate the impact of certain products that allegedly infringe the same patent asserted in the District Court of Delaware.  The Plaintiff is seeking a limited exclusion order against certain Apple, Inc. products that incorporate the Company’s components.  The target date for completion of the investigation is December 21, 2015.

Stockholder's Equity
Stockholder's Equity

 

14.   Stockholders’ Equity

Common Stock

 

The Company issued a net 0.4 million and 0.6 million shares of common stock during the three and six month periods ending September 27, 2014, respectively, in connection with stock issuances pursuant to the Company’s 2006 Stock Incentive Plan.  The Company issued a net 0.2 million and 0.3 million shares of common stock during the three and six month periods ending September 28, 2013, respectively, in connection with stock issuances pursuant to the Company’s 2006 Stock Incentive Plan.    

 

Segment Information
Segment Information

15.   Segment Information

 

We determine our operating segments in accordance with Financial Accounting Standards Board 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 performance in two product lines.  We are adjusting how we present product line revenue to better reflect our business model.  Beginning this quarter we will report revenue by Portable Audio Products, which includes devices selling into such end applications as tablets and smartphones.  The remainder of the revenue will be defined as Non-Portable Audio and Other Products, which target high-end home entertainment, automotive, energy, industrial and various general markets.  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 operations 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, no complete, discrete financial information maintained for these product lines.

 

Revenues from our product lines are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

September 27,

 

September 28,

 

September 27,

 

September 28,

 

2014

 

2013

 

2014

 

2013

Portable Audio Products

$

163,563 

 

$

150,949 

 

$

276,132 

 

$

267,556 

Non-Portable Audio and Other Products

 

46,651 

 

 

39,722 

 

 

86,647 

 

 

78,240 

 

$

210,214 

 

$

190,671 

 

$

362,779 

 

$

345,796 

 

Marketable Securities (Tables)

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

Gross

 

Gross

 

Fair Value

 

Amortized

 

Unrealized

 

Unrealized

 

(Net Carrying

As of September 27, 2014

Cost

 

Gains

 

Losses

 

Amount)

Corporate debt securities

$

78,574 

 

$

 

$

(38)

 

$

78,538 

Commercial paper

 

16,487 

 

 

 

 

(5)

 

 

16,486 

Total securities

$

95,061 

 

$

 

$

(43)

 

$

95,024 

 

The Company’s specifically identified gross unrealized losses of $43 thousand relates to 15 different securities with total amortized cost of approximately $63.1 million at September 27, 2014.  Because the Company does not intend to sell the investments at a loss and the Company will not be required to sell the investments before recovery of its amortized cost basis, it did not consider the investment in these securities to be other-than-temporarily impaired at September 27, 2014.  Further, the securities with gross unrealized losses had been in a continuous unrealized loss position for less than 12 months as of September 27, 2014. 

The following table is a summary of available-for-sale securities at March 29, 2014 (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

Gross

 

Gross

 

Fair Value

 

Amortized

 

Unrealized

 

Unrealized

 

(Net Carrying

As of March 29, 2014

Cost

 

Gains

 

Losses

 

Amount)

Corporate debt securities

$

246,878 

 

$

52 

 

$

(245)

 

$

246,685 

U.S. Treasury securities

 

56,986 

 

 

10 

 

 

(2)

 

 

56,994 

Agency discount notes

 

2,008 

 

 

 

 

 -

 

 

2,009 

Commercial paper

 

41,962 

 

 

10 

 

 

(2)

 

 

41,970 

Certificates of deposit

 

5,006 

 

 

 -

 

 

(4)

 

 

5,002 

Total securities

$

352,840 

 

$

73 

 

$

(253)

 

$

352,660 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 27, 2014

 

March 29, 2014

 

 

Amortized

 

Estimated

 

Amortized

 

Estimated

 

 

Cost

 

Fair Value

 

Cost

 

Fair Value

Within 1 year

 

$

85,821 

 

$

85,796 

 

$

263,418 

 

$

263,417 

After 1 year

 

 

9,240 

 

 

9,228 

 

 

89,422 

 

 

89,243 

Total

 

$

95,061 

 

$

95,024 

 

$

352,840 

 

$

352,660 

 

Derivative Instruments Fair Value (Tables)
Schedule of Derivative Instruments Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Accrued Liabilities

 

September 27,

 

March 29,

 

2014

 

2014

 

 

 

 

 

 

Currency forwards

$

29 

 

$

 -

 

Fair Value of Financial Instruments (Tables)
Schedule of Fair Value of Financial Assets and Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Assets

 

Inputs

 

Inputs

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

17,577 

 

$

 -

 

$

 -

 

$

17,577 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

$

 -

 

$

78,538 

 

$

 -

 

$

78,538 

Commercial paper

 

 -

 

 

16,486 

 

 

 -

 

 

16,486 

 

$

 -

 

$

95,024 

 

$

 -

 

$

95,024 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Other accrued liabilities

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange derivative

$

 -

 

$

29 

 

$

 -

 

$

29 

 

 

The fair value of our financial assets at March 29, 2014, was determined using the following inputs (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Assets

 

Inputs

 

Inputs

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

20,456 

 

$

 -

 

$

 -

 

$

20,456 

Commercial paper

 

 -

 

 

1,878 

 

 

 -

 

 

1,878 

 

$

20,456 

 

$

1,878 

 

$

 -

 

$

22,334 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

$

 -

 

$

246,685 

 

$

 -

 

$

246,685 

U.S. Treasury securities

 

56,994 

 

 

 -

 

 

 -

 

 

56,994 

Agency discount notes

 

 -

 

 

2,009 

 

 

 -

 

 

2,009 

Commercial paper

 

 -

 

 

41,970 

 

 

 -

 

 

41,970 

Certificates of deposit

 

 -

 

 

5,002 

 

 

 -

 

 

5,002 

 

$

56,994 

 

$

295,666 

 

$

 -

 

$

352,660 

 

Accounts Receivable, net (Tables)
Components of Accounts Receivable, net