CIRRUS LOGIC INC, 10-Q filed on 1/27/2016
Quarterly Report
Document and Entity Information
9 Months Ended
Dec. 26, 2015
Jan. 22, 2016
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
Dec. 26, 2015 
 
Document Fiscal Year Focus
2016 
 
Document Fiscal Period Focus
Q3 
 
Current Fiscal Year End Date
--03-26 
 
Entity Common Stock, Shares Outstanding
 
63,121,642 
Consolidated Condensed Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 26, 2015
Mar. 28, 2015
Assets
 
 
Cash and cash equivalents
$ 159,572 
$ 76,401 
Marketable securities
67,148 
124,246 
Accounts receivable, net
127,754 
112,608 
Inventories
137,723 
84,196 
Deferred tax assets
19,404 
18,559 
Prepaid assets
29,870 
27,093 
Other current assets
8,112 
8,810 
Total current assets
549,583 
451,913 
Long-term marketable securities
22,327 
60,072 
Property and equipment, net
159,149 
144,346 
Intangibles, net
171,664 
175,743 
Goodwill
287,518 
263,115 
Deferred tax assets
27,581 
25,593 
Other assets
18,099 
27,996 
Total assets
1,235,921 
1,148,778 
Liabilities and Stockholders' Equity
 
 
Accounts payable
114,483 
112,213 
Accrued salaries and benefits
22,438 
24,132 
Deferred income
4,162 
6,105 
Software license agreement
20,155 
18,711 
Other accrued liabilities
16,146 
15,417 
Total current liabilities
177,384 
176,578 
Debt
160,439 
180,439 
Software license agreement long-term
11,051 
26,204 
Other long-term liabilities
27,172 
8,786 
Total long-term liabilities
198,662 
215,429 
Stockholders' Equity:
 
 
Capital stock
1,198,547 
1,159,494 
Accumulated deficit
(336,653)
(400,613)
Accumulated other comprehensive loss
(2,019)
(2,110)
Total stockholders' equity
859,875 
756,771 
Total liabilities and stockholders' equity
$ 1,235,921 
$ 1,148,778 
Consolidated Condensed Statements of Income (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Dec. 26, 2015
Dec. 27, 2014
Dec. 26, 2015
Dec. 27, 2014
Consolidated Condensed Statements of Income [Abstract]
 
 
 
 
Net sales
$ 347,863 
$ 298,606 
$ 937,252 
$ 661,385 
Cost of sales
182,952 
167,775 
497,666 
354,612 
Gross profit
164,911 
130,831 
439,586 
306,773 
Operating expenses:
 
 
 
 
Research and development
70,290 
55,474 
203,383 
139,808 
Selling, general and administrative
30,632 
27,783 
89,854 
69,011 
Acquisition related costs
 
3,200 
 
18,137 
Restructuring and other, net
 
 
 
1,455 
Patent agreement and other
78 
 
(11,670)
 
Total operating expenses
101,000 
86,457 
281,567 
228,411 
Income from operations
63,911 
44,374 
158,019 
78,362 
Interest income
165 
89 
634 
419 
Interest expense
(756)
(1,131)
(2,464)
(4,598)
Other expense
(925)
(1,071)
(1,313)
(12,564)
Income before income taxes
62,395 
42,261 
154,876 
61,619 
Provision for income taxes
21,011 
19,532 
45,258 
27,790 
Net income
$ 41,384 
$ 22,729 
$ 109,618 
$ 33,829 
Basic earnings per share
$ 0.65 
$ 0.36 
$ 1.73 
$ 0.54 
Diluted earnings per share
$ 0.63 
$ 0.35 
$ 1.66 
$ 0.52 
Basic weighted average common shares outstanding
63,328 
62,885 
63,316 
62,386 
Diluted weighted average common shares outstanding
65,761 
65,214 
66,184 
65,024 
Consolidated Condensed Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Dec. 26, 2015
Dec. 27, 2014
Dec. 26, 2015
Dec. 27, 2014
Consolidated Condensed Statements of Comprehensive Income [Abstract]
 
 
 
 
Net income
$ 41,384 
$ 22,729 
$ 109,618 
$ 33,829 
Changes to foreign currency
 
 
 
 
Foreign currency translation
(4)
 
174 
 
Changes to available-for-sale securities
 
 
 
 
Unrealized gain (loss) on marketable securities
(104)
(51)
(183)
91 
Change to pension liabilities
 
 
 
 
Reclassification of actuarial loss to net income
17 
 
49 
 
Net changes to foreign currency derivatives
 
 
 
 
Reclassification of unrealized loss to net income
 
29 
 
 
Benefit (provision) for income taxes
37 
18 
51 
(32)
Comprehensive income
$ 41,330 
$ 22,725 
$ 109,709 
$ 33,888 
Consolidated Condensed Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Dec. 26, 2015
Dec. 27, 2014
Cash flows from operating activities:
 
 
Net income
$ 109,618 
$ 33,829 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
43,254 
21,978 
Stock compensation expense
24,717 
29,813 
Deferred income taxes
8,021 
24,931 
Loss on retirement or write-off of long-lived assets
1,405 
949 
Excess tax benefit from employee stock awards
(9,350)
(24,508)
Other non-cash charges
14,381 
16,129 
Net change in operating assets and liabilities:
 
 
Accounts receivable, net
(15,066)
(73,122)
Inventories
(53,527)
26,377 
Other current assets
(4,645)
2,733 
Accounts payable and other accrued liabilities
861 
888 
Deferred income
(1,943)
(765)
Income taxes payable
(1,428)
484 
Net cash provided by operating activities
116,298 
59,716 
Cash flows from investing activities:
 
 
Proceeds from sale of available for sale marketable securities
117,397 
272,510 
Purchases of available for sale marketable securities
(22,672)
(29,256)
Purchases of property, equipment and software
(33,720)
(19,927)
Investments in technology
(3,981)
(1,346)
Loss on foreign exchange hedging activities
 
(11,976)
Acquisition, net of cash obtained
(36,788)
 
Increase in deposits and other assets
(2,012)
(692)
Net cash provided by (used in) investing activities
18,224 
(234,825)
Cash flows from financing activities:
 
 
Proceeds from long-term revolver
 
226,439 
Principal payments on long-term revolver
(20,000)
(26,000)
Debt issuance costs
 
(2,825)
Issuance of common stock, net of shares withheld for taxes
4,958 
2,454 
Repurchase of stock to satisfy employee tax withholding obligations
(6,459)
(4,175)
Repurchase and retirement of common stock
(39,200)
(10,535)
Excess tax benefit from employee stock awards
9,350 
24,508 
Net cash (used in) provided by financing activities
(51,351)
209,866 
Net (decrease) increase in cash and cash equivalents
83,171 
34,757 
Cash and cash equivalents at beginning of period
76,401 
31,850 
Cash and cash equivalents at end of period
159,572 
66,607 
Wolfson[Member]
 
 
Cash flows from investing activities:
 
 
Acquisition, net of cash obtained
 
$ (444,138)
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 28, 2015, included in our Annual Report on Form 10-K filed with the Commission on May 27, 2015.  In our opinion, the financial statements reflect all material adjustments, including normal recurring adjustments, necessary for a fair presentation of the financial position, operating results and cash flows for those periods presented.  The preparation of financial statements in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect reported assets, liabilities, revenues and expenses, 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 FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606).  The purpose of this 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.  In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date after public comment respondents supported a proposal to delay the effective date of this ASU to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.  The Company is currently evaluating the impact of this ASU on its financial statements.  

 

In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  The amendments in this ASU provide guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.  The amendments are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter.  Early application is permitted.  The Company is currently evaluating this ASU and expects no material modifications to its financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.  The amendments in this update require that debt issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the carrying amount of that debt liability and that the amortization of debt issuance costs is reported as interest expense.  ASU 2015-03 is to be applied retrospectively and represents a change in accounting principle.  In August 2015, the FASB issued FASB ASU No. 2015-15, Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.  ASU 2015-15 clarified the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements.  Debt issuance costs related to a line-of-credit arrangement may be presented in the balance sheet as an asset and subsequently amortized ratably over the term of the arrangement regardless of whether there are any outstanding borrowings.  Both ASU 2015-03 and ASU 2015-15 are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years.  Earlier adoption is permitted for financial statements that have not been previously issued.  The Company is currently evaluating the effect that the adoption of these ASUs will have on its financial statements. 

 

In April 2015, the FASB issued ASU No. 2015-04, Compensation – Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets.  The ASU is part of the FASB’s “Simplification Initiative” to reduce complexity in accounting standards.  The FASB decided to permit entities to measure defined benefit plan assets and obligations as of the month-end that is closest to their fiscal year-end.  An entity is required to disclose the accounting policy election and the date used to measure defined benefit plan assets and obligations in accordance with the amendments in this update.  The amendments in this update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with earlier application permitted.  The Company is currently evaluating the likelihood of adoption and the impact this ASU would have on its financial statements.

 

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.  This ASU requires an acquirer in a business combination to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.  The effect on earnings of changes in depreciation, amortization or other income effects, as a result of the change in provisional amounts, are to be included in the same period’s financial statements, calculated as if the accounting had been completed at the acquisition date.  The amendments in this update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years and shall be applied prospectively to adjustments to provisional amounts that occur after the effective date of this ASU.  Earlier application is permitted for financial statements that have not been issued.  The Company is currently evaluating this ASU and its impact on the financial statements.

 

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.  The FASB determined that the current practice of separating deferred tax liabilities and assets into current and noncurrent amounts in the balance sheet resulted in little to no benefit to financial statement users.  Effective for financial statements issued for annual periods beginning after December 15, 2016 and interim periods therein, this ASU will require that deferred tax liabilities and assets be classified as noncurrent.  Earlier application is permitted as of the beginning of an interim or annual reporting period and can be applied either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented.  The Company is currently evaluating this ASU and its impact on the financial statements.

 

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 December 26, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

Gross

 

Gross

 

Fair Value

 

Amortized

 

Unrealized

 

Unrealized

 

(Net Carrying

As of December 26, 2015

Cost

 

Gains

 

Losses

 

Amount)

Corporate debt securities

$

89,731 

 

$

 -

 

$

(256)

 

$

89,475 

 

The Company’s specifically identified gross unrealized losses of $256 thousand relate to 28 different securities with total amortized cost of approximately $88.7 million at December 26, 2015.  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 December 26, 2015.  Further, the securities with gross unrealized losses had been in a continuous unrealized loss position for less than 12 months as of December 26, 2015. 

 

The following table is a summary of available-for-sale securities at March 28, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

Gross

 

Gross

 

Fair Value

 

Amortized

 

Unrealized

 

Unrealized

 

(Net Carrying

As of March 28, 2015

Cost

 

Gains

 

Losses

 

Amount)

Corporate debt securities

$

153,896 

 

$

 

$

(68)

 

$

153,836 

U.S. Treasury securities

 

28,010 

 

 

 -

 

 

(15)

 

 

27,995 

Commercial paper

 

2,485 

 

 

 

 

 -

 

 

2,487 

Total securities

$

184,391 

 

$

10 

 

$

(83)

 

$

184,318 

 

The Company’s specifically identified gross unrealized losses of $83 thousand relate to 34 different securities with total amortized cost of approximately $154.3 million at March 28, 2015.  Because the Company did not intend to sell the investments at a loss and the Company did not expect to 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 28, 2015.  Further, the securities with gross unrealized losses had been in a continuous unrealized loss position for less than 12 months as of March 28, 2015.  

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 26, 2015

 

March 28, 2015

 

 

Amortized

 

Estimated

 

Amortized

 

Estimated

 

 

Cost

 

Fair Value

 

Cost

 

Fair Value

Within 1 year

 

$

67,235 

 

$

67,148 

 

$

124,275 

 

$

124,246 

After 1 year

 

 

22,496 

 

 

22,327 

 

 

60,116 

 

 

60,072 

Total

 

$

89,731 

 

$

89,475 

 

$

184,391 

 

$

184,318 

 

Fair Value of Financial Instruments
Fair Value of Financial Instruments

4.     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, pension plan assets / liabilities and contingent consideration.  The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement.    The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

 

 

 

 

 

 

 

   

Level 1 - Quoted prices in active markets for identical assets or liabilities.

   

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

   

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

 

 

 

The Company’s cash equivalents and investment portfolio assets consist of corporate debt securities, money market funds, U.S. Treasury securities, and commercial paper 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.

 

In connection with one of the Company’s second quarter fiscal year 2016 acquisitions, the Company reported contingent consideration based upon achievement of certain milestones.  This liability is classified as Level 3 and initially valued using a discounted cash flow model.  The assumptions used in preparing the discounted cash flow include discount rate estimates and cash flow amounts.  See additional details below. 

 

The Company’s long-term revolving facility, described in Note 8, bears interest at a base rate plus applicable margin or LIBOR plus applicable margin.  As of December 26, 2015, the fair value of the Company’s long-term revolving facility approximates carrying value.

 

As of December 26, 2015 and March 28, 2015, the Company classified all of its investment portfolio and pension plan assets as Level 1 or Level 2 assets.  The only Level 3 liability is the contingent consideration described above and below.  The Company has no Level 3 assets.  There were no transfers between Level 1, Level 2, or Level 3 measurements for the nine months ending December 26, 2015.

 

The following table summarizes the fair value of our financial instruments, exclusive of pension plan assets, at December 26, 2015, (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

$

7,876 

 

$

 -

 

$

 -

 

$

7,876 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

$

 -

 

$

89,475 

 

$

 -

 

$

89,475 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Other accrued liabilities

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

$

 -

 

$

 -

 

$

8,600 

 

$

8,600 

 

 

The fair value of our financial assets at March 28, 2015, 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

$

996 

 

$

 -

 

$

 -

 

$

996 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

$

 -

 

$

153,836 

 

$

 -

 

$

153,836 

U.S. Treasury securities

 

27,995 

 

 

 -

 

 

 -

 

 

27,995 

Commercial paper

 

 -

 

 

2,487 

 

 

 -

 

 

2,487 

 

$

27,995 

 

$

156,323 

 

$

 -

 

$

184,318 

 

Contingent consideration

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maximum Value if Milestones Achieved (in thousands)

 

Estimated Discount Rate (%)

 

 

Fair Value (in thousands)

Tranche A - 18 month earn out period

 

$

5,000 

 

7.3 

 

$

4,500 

Tranche B - 30 month earn out period

 

 

5,000 

 

7.7 

 

 

4,100 

 

 

$

10,000 

 

 

 

$

8,600 

 

The valuation of contingent consideration was initially based on a weighted-average discounted cash flows model.  The fair value is reviewed and estimated on a quarterly basis based on the probability of achieving defined milestones and current interest rates.  Significant changes in any of the unobservable inputs used in the fair value measurement of contingent consideration could result in a significantly lower or higher fair value.  A change in projected outcomes if milestones are achieved would be accompanied by a directionally similar change in fair value.  A change in discount rate would be accompanied by a directionally opposite change in fair value.  Changes to the fair value due to changes in assumptions would be reported in research and development expense in the Consolidated Condensed Statements of Income.  No such changes to the observable inputs were noted in the current fiscal quarter. 

Accounts Receivable, net
Accounts Receivable, net

5.     Accounts Receivable, net

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 26,

 

March 28,

 

2015

 

2015

Gross accounts receivable

$

128,109 

 

$

112,964 

Allowance for doubtful accounts

 

(355)

 

 

(356)

Accounts receivable, net

$

127,754 

 

$

112,608 

 

Inventories
Inventories

 

6.     Inventories

 

Inventories are comprised of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 26,

 

March 28,

 

2015

 

2015

Work in process

$

77,378 

 

$

64,663 

Finished goods

 

60,345 

 

 

19,533 

 

$

137,723 

 

$

84,196 

 

 

 

 

 

The increase in inventory balances at December 26, 2015, as compared to March 28, 2015, is primarily related to production ramps ahead of customer demand.

Acquisition
Acquisition

7.    Acquisitions

Cirrus Logic completed the acquisition of Wolfson Microelectronics plc (the “Acquisition”), a public limited company incorporated in Scotland (“Wolfson”) in the second quarter of fiscal year 2015.  Upon completion of the Acquisition, Wolfson was re-registered as a private limited company. 

 

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 final allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition as of December 26, 2015 (in thousands):

 

 

 

 

 

 

 

Amount

Cash and cash equivalents

$

25,342 

Inventory

 

30,530 

Other current assets

 

16,226 

Property, plant and equipment

 

27,398 

Intangible assets

 

175,987 

Pension assets

 

1,625 

Total identifiable assets acquired

$

277,108 

 

 

 

Deferred tax liability

 

(12,426)

Deferred revenue

 

(551)

Other accrued liabilities

 

(39,417)

Other long-term liabilities

 

(2,449)

Total identifiable liabilities assumed

$

(54,843)

Net identifiable assets acquired

$

222,265 

Goodwill

 

247,216 

Net assets acquired

$

469,481 

 

The goodwill of $247.2 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. 

 

 

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

IPR&D

 

72,750 

 

7.3

Customer relationships

 

12,981 

 

10.0

Total

$

175,987 

 

 

 

 

In the second quarter of fiscal year 2016, the Company acquired two small technology companies for approximately $36.8 million, net of cash obtained, with the goal of broadening its software capabilities.  The acquisitions were recorded using the acquisition method of accounting.  The Company is currently finalizing the amounts recorded,  including review of working capital; however we do not expect a material change to the balances presented.  The Company expects to complete its purchase price allocation by fiscal year end.  The consolidated condensed statements of income presented include the results of operations of each acquired company since the date of the acquisition.  Pro forma information related to these acquisitions has not been presented because it would not be materially different from amounts reported.  See Note 4 – Fair Value of Financial Instruments above, for additional information related to contingent consideration reported in relation to one of the acquisitions. 

Revolving Credit Facilities
Revolving Credit Facilities

8.     Revolving Credit Facilities

Cirrus Logic’s credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as Administrative Agent, and the Lenders party thereto 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 0.25% 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 December 26, 2015, the Company was in compliance with all covenants under the Credit Agreement. 

 

On June 23, 2015, Cirrus Logic and Wells Fargo Bank, National Association, as Administrative Agent, entered into a first amendment of the Credit Agreement (the “First Amendment”).  The First Amendment primarily provides additional flexibility to the Company for certain intercompany transactions.  In particular, the First Amendment  (i) amended the definition of “Permitted Acquisition” to increase the threshold whereby the Company must provide certain financial statements and certifications to the Administrative Agent; (ii) expanded the Company’s ability to make intercompany investments, including unsecured intercompany indebtedness to fund a Permitted Acquisition; and (iii) provided the Company with the ability, under certain circumstances, to transfer capital stock in a non-guarantor subsidiary to another wholly-owned subsidiary that is not a credit party.

 

The Company had borrowed $160.4 million under the Credit Facility as of December 26, 2015, which is included in long-term liabilities on the consolidated condensed balance sheets.  The borrowings were primarily used for refinancing the $225 million interim credit facility described below, which was used for financing the Acquisition in the second quarter of fiscal year 2015.

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 was replaced with the Credit Facility described above, with all outstanding borrowings thereunder refinanced by the Credit Facility

Patent Agreement and Other
Patent Agreement Net Text Block

9.   Patent Agreement and Other

 

On May 8, 2015, we entered into a patent purchase agreement for the sale of certain Company-owned patents relating to our LED lighting products.  As a result of this agreement, on June 22, 2015, the Company received cash consideration of $12.5 million from the purchaser.  Under the agreement, the Company undertook to no longer be engaged in LED lighting and received a license under the sold patents for all other fields of use.  The proceeds were recorded during the first quarter of fiscal year 2016 as a recovery of costs previously incurred and are reflected as a separate line item on the Consolidated Condensed Statements of Income in operating expenses under the caption Patent agreement and other.”    Additionally, in the second and third quarter of fiscal year 2016, the Company recorded $0.8 million and $0.1 million, respectively, in expense related to a negotiated adjustment to a legal settlement.

 

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.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

December 26,

 

December 27,

 

December 26,

 

December 27,

 

2015

 

2014

 

2015

 

2014

Income before income taxes

$

62,395 

 

$

42,261 

 

$

154,876 

 

$

61,619 

Provision for income taxes

$

21,011 

 

$

19,532 

 

$

45,258 

 

$

27,790 

Effective tax rate

 

33.7% 

 

 

46.2% 

 

 

29.2% 

 

 

45.1% 

 

Our income tax expense for the third quarter and first nine months of fiscal year 2016 was below the federal statutory rate primarily due to the permanent extension of the U.S. R&D credit by the Consolidated Appropriations Act, 2016, which was enacted on December 18, 2015.  Income tax expense for the first nine months of fiscal year 2016 was further reduced by a one-time tax benefit of $4.6 million associated with deferred taxes related to U.S. R&D credit carry forwards recorded in the second quarter of fiscal year 2016.  Our income tax expense for the third quarter and first nine 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 period at foreign statutory rates below the U.S. federal statutory rate, which was partially offset by the extension of the U.S. R&D credit through December 31, 2014 by the Tax Increase Prevention Act of 2014, which was enacted on December 19, 2014. 

 

We record unrecognized tax benefits for the estimated risk associated with tax positions taken on tax returns.  As of December 26, 2015, the Company had unrecognized tax benefits of $13.8 million, all of which would affect the effective tax rate if recognized.  The Company’s total unrecognized tax benefits are classified as “Other long-term liabilities” in the consolidated condensed balance sheets.  We recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes.  As of December 26, 2015, the balance of accrued interest and penalties was zeroNo interest or penalties were incurred during the first nine months of fiscal year 2016 or 2015.

 

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 2013 through 2015 remain open to examination by the major taxing jurisdictions to which we are subject, although carry forward attributes that were generated in tax years prior to fiscal year 2013 may be adjusted upon examination by the tax authorities if they have been, or will be, used in a future period.  The Company is not currently under an income tax audit in any major taxing jurisdiction. 

Pension Plan
Pension Plan

11.   Pension Plan

 

The components of the Company’s net periodic pension expense for the three and nine months ended December 26, 2015 and December 27, 2014 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

December 26,

 

December 27,

 

December 26,

 

December 27,

 

2015

 

2014

 

2015

 

2014

Expenses

$

 -

 

$

 -

 

$

 -

 

$

 -

Interest cost

 

 -

 

 

 -

 

 

 -

 

 

254 

Expected return on plan assets

 

 -

 

 

 -

 

 

 -

 

 

(370)

Amortization of actuarial loss

 

17 

 

 

 -

 

 

49 

 

 

 -

 

$

17 

 

$

 -

 

$

49 

 

$

(116)

Based on an actuarial study performed as of March 28, 2015, the defined benefit pension plan is underfunded and a long-term liability is reflected in the Company’s consolidated condensed balance sheet under the caption “Other long-term liabilities”.    

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 the tax affected outstanding stock options and restricted stock awards.

 

The following table details the calculation of basic and diluted earnings per share for the three and nine months ended December 26, 2015 and December 27, 2014 (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

December 26,

 

December 27,

 

December 26,

 

December 27,

 

2015

 

2014

 

2015

 

2014

Numerator:

 

 

 

 

 

 

 

 

 

 

 

Net income

$

41,384 

 

$

22,729 

 

$

109,618 

 

$

33,829 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

63,328 

 

 

62,885 

 

 

63,316 

 

 

62,386 

Effect of dilutive securities

 

2,433 

 

 

2,329 

 

 

2,868 

 

 

2,638 

Weighted average diluted shares

 

65,761 

 

 

65,214 

 

 

66,184 

 

 

65,024 

Basic earnings per share

$

0.65 

 

$

0.36 

 

$

1.73 

 

$

0.54 

Diluted earnings per share

$

0.63 

 

$

0.35 

 

$

1.66 

 

$

0.52 

 

The weighted outstanding shares excluded from our diluted calculation for the three and nine months ended December 26,  2015 were 563 thousand and 374 thousand, respectively, as the shares were anti-dilutive.  The weighted outstanding shares excluded from our diluted calculation for the three and nine months ended December 27, 2014 were 911 thousand and 715 thousand, respectively, as the shares were anti-dilutive. 

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. 

 

Based on current knowledge, management does not believe that there are any pending matters that could potentially have a material adverse effect on our business, financial condition, results of operations or cash flows.  However, we are engaged in various legal actions in the normal course of business.  While there can be no assurances in light of the inherent uncertainties involved in any potential legal proceedings, some of which are beyond our control, an adverse outcome in any legal proceeding could be material to our results of operations or cash flows for any particular reporting period.

 

Stockholders' Equtiy
Stockholders Equity Note Disclosure Text Block

14.   Stockholders’ Equity

 

Common Stock 

   

The Company issued a net 0.6 million and 1.4 million shares of common stock during the three and nine month periods ending December 26, 2015, respectively,  in connection with stock issuances primarily pursuant to the Company’s 2006 Stock Incentive Plan.    The Company issued a net 0.7 million and 1.3 million shares of common stock during the three and nine month periods ending December 27, 2014, respectively, in connection with stock issuances primarily pursuant to the Company’s 2006 Stock Incentive Plan.

 

Share Repurchase Program   

    

Since inception, $187.5 million of the Company’s common stock has been repurchased under the Company’s 2012 $200 million share repurchase program, leaving $12.5 million available for repurchase under this plan as of December 26, 2015.  During the three months ended December 26, 2015, the Company repurchased 0.7 million shares of its common stock for $20.0 million, at an average cost of $29.08.  During the nine months ended December 26, 2015, the Company repurchased 1.3 million shares of its common stock for $39.2 million, at an average cost of $29.26.  All of these shares were repurchased in the open market and were funded from existing cash.  All shares of our common stock that were repurchased were retired as of December 26, 2015.  In October 2015, the Board of Directors authorized the repurchase of up to an additional $200 million of the Company’s common stock, in addition to the remaining available above. 

 

Accumulated Other Comprehensive Loss

 

In the first quarter of fiscal year 2016, the Company updated the functional currencies of its smaller foreign entities (from the U.S. dollar to certain local currencies).  As a result, the Company is now presenting the effect of foreign currency translation, which resulted in  an insignificant amount and $0.2 million gain for the quarter and nine months ended December 26, 2015, respectively.  Additionally, in the current fiscal year, the Company is amortizing the pension actuarial losses out of accumulated other comprehensive income / (loss) to selling, general and administrative expenses.  See Note 11 - Pension Plan above.    The gains  and losses are presented within other comprehensive income in the Consolidated Condensed Statements of Comprehensive Income.

 

Segment Information
Segment Information

15.   Segment Information

 

We determine our operating segments in accordance with FASB guidelines.  Our Chief Executive Officer (“CEO”) has been identified as the chief operating decision maker under these guidelines. 

 

The Company operates and tracks its results in one reportable segment, but reports revenue performance in two product lines, which, beginning in the second quarter of fiscal year 2015, are Portable Audio and Non-Portable Audio and Other.  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 is maintained for these product lines.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

December 26,

 

December 27,

 

December 26,

 

December 27,

 

2015

 

2014

 

2015

 

2014

Portable Audio Products

$

308,803 

 

$

253,355 

 

$

801,821 

 

$

529,487 

Non-Portable Audio and Other Products

 

39,060 

 

 

45,251 

 

 

135,431 

 

 

131,898 

 

$

347,863 

 

$

298,606 

 

$

937,252 

 

$

661,385 

 

Marketable Securities (Tables)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

Gross

 

Gross

 

Fair Value

 

Amortized

 

Unrealized

 

Unrealized

 

(Net Carrying

As of December 26, 2015

Cost

 

Gains

 

Losses

 

Amount)

Corporate debt securities

$

89,731 

 

$

 -

 

$

(256)

 

$

89,475 

 

The Company’s specifically identified gross unrealized losses of $256 thousand relate to 28 different securities with total amortized cost of approximately $88.7 million at December 26, 2015.  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 December 26, 2015.  Further, the securities with gross unrealized losses had been in a continuous unrealized loss position for less than 12 months as of December 26, 2015. 

 

The following table is a summary of available-for-sale securities at March 28, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

Gross

 

Gross

 

Fair Value

 

Amortized

 

Unrealized

 

Unrealized

 

(Net Carrying

As of March 28, 2015

Cost

 

Gains

 

Losses

 

Amount)

Corporate debt securities

$

153,896 

 

$

 

$

(68)

 

$

153,836 

U.S. Treasury securities

 

28,010 

 

 

 -

 

 

(15)

 

 

27,995 

Commercial paper

 

2,485 

 

 

 

 

 -

 

 

2,487 

Total securities

$

184,391 

 

$

10 

 

$

(83)

 

$

184,318 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 26, 2015

 

March 28, 2015

 

 

Amortized

 

Estimated

 

Amortized

 

Estimated

 

 

Cost

 

Fair Value

 

Cost

 

Fair Value

Within 1 year

 

$

67,235 

 

$

67,148 

 

$

124,275 

 

$

124,246 

After 1 year

 

 

22,496 

 

 

22,327 

 

 

60,116 

 

 

60,072 

Total

 

$

89,731 

 

$

89,475 

 

$

184,391 

 

$

184,318 

 

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

$

7,876 

 

$

 -

 

$

 -

 

$

7,876 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

$

 -

 

$

89,475 

 

$

 -

 

$

89,475 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Other accrued liabilities

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

$

 -

 

$

 -

 

$

8,600 

 

$

8,600 

 

 

The fair value of our financial assets at March 28, 2015, 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

$

996 

 

$

 -

 

$

 -

 

$

996 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

$

 -

 

$

153,836 

 

$

 -

 

$

153,836 

U.S. Treasury securities

 

27,995 

 

 

 -

 

 

 -

 

 

27,995 

Commercial paper

 

 -

 

 

2,487 

 

 

 -

 

 

2,487 

 

$

27,995 

 

$

156,323 

 

$

 -

 

$

184,318 

 

Fair Value of Financial Instruments Contingent Consideration (Tables)
Fair Value Inputs, Liabilities, Quantitative Information [Table Text Block]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maximum Value if Milestones Achieved (in thousands)

 

Estimated Discount Rate (%)

 

 

Fair Value (in thousands)

Tranche A - 18 month earn out period

 

$

5,000 

 

7.3 

 

$

4,500 

Tranche B - 30 month earn out period

 

 

5,000 

 

7.7 

 

 

4,100 

 

 

$

10,000 

 

 

 

$

8,600 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

December 26,

 

March 28,

 

2015

 

2015

Gross accounts receivable

$

128,109 

 

$

112,964 

Allowance for doubtful accounts

 

(355)

 

 

(356)

Accounts receivable, net

$

127,754 

 

$

112,608 

 

Inventories (Tables)
Schedule of Inventories

 

 

 

 

 

 

 

 

 

 

 

 

 

December 26,

 

March 28,

 

2015

 

2015

Work in process

$

77,378 

 

$

64,663 

Finished goods

 

60,345 

 

 

19,533 

 

$

137,723 

 

$

84,196 

 

Acquisition (Tables)
Schedule of Recognized Identified Assets Acquired and Liabilities Assumed [Table Text Block]

 

 

 

 

 

Amount

Cash and cash equivalents

$

25,342 

Inventory

 

30,530 

Other current assets

 

16,226 

Property, plant and equipment

 

27,398 

Intangible assets

 

175,987 

Pension assets

 

1,625 

Total identifiable assets acquired

$

277,108 

 

 

 

Deferred tax liability

 

(12,426)

Deferred revenue

 

(551)

Other accrued liabilities

 

(39,417)

Other long-term liabilities

 

(2,449)

Total identifiable liabilities assumed

$

(54,843)

Net identifiable assets acquired

$

222,265 

Goodwill

 

247,216 

Net assets acquired

$

469,481 

 

Acquisition Acquired Intangibles (Tables)
Schedule of Finite-Lived Intangible Assets Acquired as Part of Business Combination [Table Text Block]

 

 

 

 

 

 

 

 

 

 

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