1.      Description of Business 

 

Description of Business

 

Cirrus Logic, Inc. (“Cirrus Logic,” “We,” “Us,” “Our,” or the “Company”) develops high-precision, analog and mixed-signal integrated circuits (“ICs”) for a broad range of consumer and industrial markets.  Building on our diverse analog mixed-signal patent portfolio, Cirrus Logic delivers highly optimized products for consumer and professional audio, automotive entertainment, and targeted industrial applications including energy control, energy management, light emitting diode (“LED”) and energy exploration.   

 

We were incorporated in California in 1984, became a public company in 1989, and were reincorporated in the State of Delaware in February 1999.  Our primary facility housing engineering, sales and marketing, and administration functions is located in Austin, Texas.  In addition, we have sales locations internationally and throughout the United States.  Specifically, we serve customers from international sales offices in Europe and Asia, including the People’s Republic of China, Hong Kong, South Korea, Japan, Singapore, Taiwan, and the United Kingdom.  Our common stock, which has been publicly traded since 1989, is listed on the NASDAQ Global Select Market under the symbol CRUS.

 

Basis of Presentation

 

We prepare financial statements on a 52- or 53-week year that ends on the last Saturday in March.  Fiscal years 2014 and 2013 were 52-week years, whereas fiscal year 2012 was a 53-week year.

 

Principles of Consolidation

 

The accompanying consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles (U.S. GAAP) and include the accounts of the Company and its wholly-owned subsidiaries.  All significant intercompany balances and transactions have been eliminated.

 

Reclassifications    

 

Certain reclassifications have been made to prior year balances in order to conform to the current year’s presentation of financial information.

 

Use of Estimates

 

The preparation of financial statements in accordance with U.S. GAAP requires the use of management estimates.  These estimates are subjective in nature and involve judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at fiscal year-end and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from these estimates.

2.      Summary of Significant Accounting Policies

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist primarily of money market funds, commercial paper, and U.S. Government Treasury and Agency instruments with original maturities of three months or less at the date of purchase. 

 

Marketable Securities

 

We determine the appropriate classification of marketable securities at the time of purchase and reevaluate this designation as of each balance sheet date.  We classify these securities as either held-to-maturity, trading, or available-for-sale.  As of March 29, 2014 and March 30, 2013, all marketable securities were classified as available-for-sale securities.  The Company classifies its investments as “available for sale” because it expects to possibly sell some securities prior to maturity.  The Company’s investments are subject to market risk, primarily interest rate and credit risk.  The Company’s investments are managed by an outside professional manager within investment guidelines set by the Company.  Such guidelines include security type, credit quality, and maturity, and are intended to limit market risk by restricting the Company’s investments to high quality debt instruments with relatively short-term maturities.  The fair value of investments is determined using observable or quoted market prices for those securities.

 

Available-for-sale securities are carried at fair value, with unrealized gains and losses included as a component of accumulated other comprehensive loss.  Realized gains and losses, declines in value judged to be other than temporary, and interest on available-for-sale securities are included in net income.  The cost of securities sold is based on the specific identification method.

 

Inventories 

 

We use the lower of cost or market method to value our inventories, with cost being determined on a first-in, first-out basis.  One of the factors we consistently evaluate in the application of this method is the extent to which products are accepted into the marketplace.  By policy, we evaluate market acceptance based on known business factors and conditions by comparing forecasted customer unit demand for our products over a specific future period, or demand horizon, to quantities on hand at the end of each accounting period.

 

On a quarterly and annual basis, we analyze inventories on a part-by-part basis.  Product life cycles and the competitive nature of the industry are factors considered in the evaluation of customer unit demand at the end of each quarterly accounting period.  Inventory quantities on-hand in excess of forecasted demand is considered to have reduced market value and, therefore, the cost basis is adjusted to the lower of cost or market.  Typically, market values for excess or obsolete inventories are considered to be zero.  During fiscal year 2013, the Company recorded excess and obsolete inventory charges of $25.5 million, primarily associated with a customer build forecast that exceeded actual market demand and resulted in excess inventory levels for certain high volume products.  No significant inventory charges were recorded in fiscal year 2014 for excess and obsolete inventory.  

 

Inventories were comprised of the following (in thousands):

 

 

Property, Plant and Equipment, net

 

Property, plant and equipment is recorded at cost, net of depreciation and amortization.  Depreciation and amortization is calculated on a straight-line basis over estimated economic lives, ranging from three to 39 years.  Leasehold improvements are depreciated over the shorter of the term of the lease or the estimated useful life.  Furniture, fixtures, machinery, and equipment are all depreciated over a useful life of three to 10 years, while buildings are depreciated over a period of up to 39 years.  In general, our capitalized software is amortized over a useful life of three years, with capitalized enterprise resource planning software being amortized over a useful life of 10 years.  Gains or losses related to retirements or dispositions of fixed assets are recognized in the period incurred. 

 

Property, plant and equipment was comprised of the following (in thousands):

 

 

 

Depreciation and amortization expense on property, plant, and equipment for fiscal years 2014, 2013, and 2012, was $12.1 million, $10.2 million, and $6.3 million, respectively. 

 

Goodwill and Intangibles, net

 

Intangible assets include purchased technology licenses and patents that are reported at cost and are amortized on a straight-line basis over their useful lives, generally ranging from one to ten years.  Acquired intangibles include existing technology, core technology or patents, license agreements, trademarks, tradenames, and customer relationships.  These assets are amortized on a straight-line basis over lives ranging from four to fifteen years. 

 

Goodwill is recorded at the time of an acquisition and is calculated as the difference between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired.  Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests.  If the assumptions and estimates used to allocate the purchase price are not correct, or if business conditions change, purchase price adjustments or future asset impairment charges could be required.  The value of our intangible assets, including goodwill, could be impacted by future adverse changes such as: (i) any future declines in our operating results, (ii) a decline in the valuation of technology company stocks, including the valuation of our common stock, (iii) a significant slowdown in the worldwide economy and the semiconductor industry, or (iv) any failure to meet the performance projections included in our forecasts of future operating results.  The Company tests goodwill and indefinite lived intangibles for impairment on an annual basis or more frequently if the Company believes indicators of impairment exist.  Impairment evaluations involve management’s assessment of qualitative factors to determine whether it is more likely than not that goodwill and other intangible assets are impaired.  If management concludes from its assessment of qualitative factors that it is more likely than not that impairment exists, then a quantitative impairment test will be performed involving management estimates of asset useful lives and future cash flows.  Significant management judgment is required in the forecasts of future operating results that are used in these evaluations.  If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges in a future period.  There were no impairments of goodwill in fiscal years 2014, 2013 or 2012.  There were no material intangible asset impairments in fiscal years 2014, 2013 and 2012. 

 

Long-Lived Assets

 

We test for impairment losses on long-lived assets and definite-lived intangibles used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts.  We measure any impairment loss by comparing the fair value of the asset to its carrying amount.  We estimate fair value based on discounted future cash flows, quoted market prices, or independent appraisals. 

 

Foreign Currency Translation

 

All of our international subsidiaries have the U.S. dollar as the functional currency.  The local currency financial statements are remeasured into U.S. dollars using current rates of exchange for assets and liabilities.  Gains and losses from remeasurement are included in other income (expense), net.  Revenue and expenses from our international subsidiaries are remeasured using the monthly average exchange rates in effect for the period in which the items occur.  For all periods presented, our foreign currency remeasurement expense was not significant.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject us to material concentrations of credit risk consist primarily of cash equivalents, marketable securities, long-term marketable securities, and trade accounts receivable.  We are exposed to credit risk to the extent of the amounts recorded on the balance sheet.  By policy, our cash equivalents, marketable securities, and long-term marketable securities are subject to certain nationally recognized credit standards, issuer concentrations, sovereign risk, and marketability or liquidity considerations.

 

In evaluating our trade receivables, we perform credit evaluations of our major customers’ financial condition and monitor closely all of our receivables to limit our financial exposure by limiting the length of time and amount of credit extended.  In certain situations, we may require payment in advance or utilize letters of credit to reduce credit risk.  By policy, we establish a reserve for trade accounts receivable based on the type of business in which a customer is engaged, the length of time a trade account receivable is outstanding, and other knowledge that we may possess relating to the probability that a trade receivable is at risk for non-payment. 

 

We had three contract manufacturers, Futaihua Industrial, Hongfujin Precision and Protek, who represented 14 percent, 44 percent, and 12 percent, respectively, for fiscal year 2014 and 21 percent, 36 percent, and 16 percent, respectively for fiscal year 2013,  of our consolidated gross accounts receivable.  Additionally, in fiscal year 2014, we had one distributor, Avnet, Inc. who represented 11 percent of our consolidated gross accounts receivable.  No other distributor or customer had receivable balances that represented more than 10 percent of consolidated gross trade accounts receivable as of the end of fiscal year 2014 or 2013.

 

Since the components we produce are largely proprietary and generally not available from second sources, we consider our end customer to be the entity specifying the use of our component in their design.  These end customers may then purchase our products directly from us, from a distributor, or through a third party manufacturer contracted to produce their end product.  For fiscal years 2014, 2013, and 2012, our ten largest end customers represented approximately 88 percent, 89 percent, and 74 percent, of our sales, respectively.  For fiscal years 2014, 2013, and 2012, we had one end customer, Apple Inc., who purchased through multiple contract manufacturers and represented approximately 80 percent, 82 percent, and 62 percent, of the Company’s total sales, respectively.  Further, we had one distributor, Avnet, Inc., that represented 15 percent of our sales for fiscal year 2012.    No other customer or distributor represented more than 10 percent of net sales in fiscal years 2014, 2013, or 2012.    

 

Revenue Recognition

 

We recognize revenue when all of the following criteria are met: persuasive evidence that an arrangement exists, delivery of goods has occurred, the sales price is fixed or determinable and collectability is reasonably assured.  We evaluate our distributor arrangements, on a distributor by distributor basis, with respect to each of the four criteria above.  For a majority of our distributor arrangements, we provide rights of price protection and stock rotation.  As a result, revenue is deferred at the time of shipment to our domestic distributors and certain international distributors due to the determination that the ultimate sales price to the distributor is not fixed or determinable.  Once the distributor has resold the product, and our final sales price is fixed or determinable, we recognize revenue for the final sales price and record the related costs of sales.  For certain of our smaller international distributors, we do not grant price protection rights and provide minimal stock rotation rights.  For these distributors, revenue is recognized upon delivery to the distributor, less an allowance for estimated returns, as the revenue recognition criteria have been met upon shipment. 

 

Further, for sales where revenue is deferred, the Company defers the associated cost of goods sold on our Consolidated Balance Sheet, net within the deferred income caption.  The Company routinely evaluates the products held by our distributors for impairment to the extent such products may be returned by the distributor within these limited rights and such products would be considered excess or obsolete if included within our own inventory.  Products returned by distributors and subsequently scrapped have historically been immaterial to the Company.

 

Warranty Expense

 

We warrant our products and maintain a provision for warranty repair or replacement of shipped products.  The accrual represents management’s estimate of probable returns.  Our estimate is based on an analysis of our overall sales volume and historical claims experience.  The estimate is re-evaluated periodically for accuracy.

 

Shipping Costs

 

Our shipping and handling costs are included in cost of sales for all periods presented in the Consolidated Statements of Comprehensive Income.

 

Advertising Costs

 

Advertising costs are expensed as incurred.  Advertising costs were $1.4 million, $1.5 million, and $1.8 million, in fiscal years 2014, 2013, and 2012, respectively.

 

Stock-Based Compensation

 

Stock-based compensation is measured at the grant date based on the grant-date fair value of the awards and is recognized as an expense, on a ratable basis, over the vesting period, which is generally between zero and four years.  Determining the amount of stock-based compensation to be recorded requires the Company to develop estimates used in calculating the grant-date fair value of stock options.  The Company calculates the grant-date fair value for stock options using the Black-Scholes valuation model.  The use of valuation models requires the Company to make estimates of assumptions such as expected volatility, expected term, risk-free interest rate, expected dividend yield, and forfeiture rates.  The grant-date fair value of restricted stock units is the market value at grant date multiplied by the number of units. 

 

Income Taxes

 

We provide for the recognition of deferred tax assets if realization of such assets is more likely than not.  The Company evaluates the ability to realize its deferred tax assets based on all the facts and circumstances, including projections of future taxable income and expiration dates of carryover attributes on a quarterly basis.  We have provided a valuation allowance against a portion of our net U.S. deferred tax assets due to uncertainties regarding its realization.  The calculation of our tax liabilities involves assessing uncertainties with respect to the application of complex tax rules and the potential for future adjustment of our uncertain tax positions by the Internal Revenue Service or other taxing jurisdiction.  We recognize liabilities for uncertain tax positions based on the two-step process.  The first step requires us to determine if the weight of available evidence indicates that the tax position has met the threshold for recognition; therefore, we must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes.  The second step requires us to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50 percent likely of being realized upon ultimate settlement.  We reevaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, expirations of statutes of limitation, effectively settled issues under audit, and new audit activity.  If our estimates of these taxes are greater or less than actual results, an additional tax benefit or charge will result. 

 

Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, we cannot assure that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals.  If additional taxes are assessed as a result of an audit or litigation, it could have a material effect on our income tax provision and net income in the period or periods for which that determination is made.  We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions.  These audits can involve complex issues which may require an extended period of time to resolve and could result in additional assessments of income tax.  We believe adequate provisions for income taxes have been made for all periods.    

 

Net Income Per Share

 

Basic net income per share is based on the weighted effect of common shares issued and outstanding and is calculated by dividing net income by the basic weighted average shares outstanding during the period.  Diluted net income per share is calculated by dividing net income by the weighted average number of common shares used in the basic net income per share calculation, plus the equivalent number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares outstanding.  These potentially dilutive items consist primarily of outstanding stock options and restricted stock grants.

 

The following table details the calculation of basic and diluted earnings per share for fiscal years 2014, 2013, and 2012 (in thousands, except per share amounts):

 

   

The weighted outstanding options excluded from our diluted calculation for the years ended March 29, 2014, March 30, 2013, and March 31, 2012, were 833 thousand,  453 thousand,  and 1,052 thousand, respectively, as the exercise price exceeded the average market price during the period.

 

Accumulated Other Comprehensive Loss

 

Our accumulated other comprehensive loss is comprised of foreign currency translation adjustments from prior years when we had subsidiaries whose functional currency was not the U.S. Dollar, as well as unrealized gains and losses on investments classified as available-for-sale.  See Note 16 – Accumulated Other Comprehensive loss for additional discussion. 

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 Balance Sheet as marketable securities, as appropriate.

 

The following table is a summary of available-for-sale securities (in thousands):

 

 

The Company’s specifically identified gross unrealized losses of $253 thousand relates to 74 different securities with a 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 Company’s specifically identified gross unrealized losses of  $164 thousand relates to 43 different securities with a total amortized cost of approximately $124.1 million at March 30, 2013.  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 30, 2013.  Further, the securities with gross unrealized losses had been in a continuous unrealized loss position for less than 12 months as of March 30, 2013.

 

The cost and estimated fair value of available-for-sale investments by contractual maturity were as follows:

 

 

 

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 investment portfolio assets. 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).

 

 

The Company’s investment portfolio assets consist of corporate debt securities, money market funds, U.S. Treasury securities, obligations of U.S. government-sponsored enterprises, commercial paper, and certificates of deposit and are reflected on our Consolidated Balance Sheet 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. 

 

As of March 29, 2014 and March 30, 2013, the Company classified all investment portfolio assets as Level 1 or Level 2 assets.  The Company has no Level 3 assets.  There were no transfers between Level 1, Level 2, or Level 3 measurements for the years ending March 29, 2014 and March 30, 2013.

 

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

 

 

 

The fair value of our financial assets at March 30, 2013, was determined using the following inputs (in thousands):

 

 

 

5.      Accounts Receivable, net 

 

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

 

 

 

The following table summarizes the changes in the allowance for doubtful accounts (in thousands):

 

 

6.      Goodwill and Intangibles, net

 

The goodwill balance included on the Consolidated Balance Sheets under the caption “Goodwill and intangibles, net” is $16.4 million and $6.0 million at March 29, 2014 and March 30, 2013, respectively.  The increase in the goodwill and intangibles balances resulted from the acquisition discussed below in Note 7 - Acquisition. 

 

The following information details the gross carrying amount and accumulated amortization of our intangible assets (in thousands):

 

 

 

Amortization expense for intangibles in fiscal years 2014, 2013, and 2012 was $2.8 million, $3.4 million, and $3.7 million, respectively.  The following table details the estimated aggregate amortization expense for all intangibles owned as of March 29, 2014, for each of the five succeeding fiscal years (in thousands):

 

 

7.     Acquisition

 

On October 1, 2013, the Company acquired 100 percent of the outstanding equity of Acoustic Technologies, Inc. (“Acoustic”), a privately held company.  The Mesa, Ariz.,-based firm is a leader in embedded firmware voice processing technology, including noise reduction, echo cancelation and voice enhancement.  This strategic acquisition enhances the Company’s technology and software expertise in our portable audio applications.

 

The Company acquired Acoustic for approximately $20.4 million, net of cash obtained, and recorded the purchase using the acquisition method of accounting.  This method allows for the recognition of the assets acquired and liabilities assumed at their fair values as of the acquisition date.  The Consolidated Statements of Comprehensive Income presented include Acoustic’s results of operations beginning on the date of the acquisition.  Pro forma information related to this acquisition has not been presented because it would not be materially different from amounts reported.

 

Goodwill was recorded in relation to the acquisition, as the purchase price was in excess of the fair value of the net assets acquired.  None of the goodwill is tax-deductible.  The final purchase price was allocated as follows (in thousands):

 

 

 

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

 

 

8.     Asset Sale

 

The Company entered into an agreement to sell certain assets associated with Apex Precision Power (“Apex”) products in Tucson, Arizona for $26.1 million.  On August 17, 2012, the Company closed the transaction under this agreement.  After closing the transaction, the Company maintained a high voltage / high power IC design team in Tucson.  See Note 10 – Restructuring Costs for information regarding the subsequent closure and relocation of the Tucson design center. The Company received $22.2 million in cash and has recorded a long-term note receivable for $3.9 million to be paid in its entirety by August 17, 2014.  The gain recorded on the sale was $0.2 million and is included on the Consolidated Statement of Comprehensive Income under the caption, “Restructuring and other, net.”

 

9.     Revolving Line of Credit

 

The Company maintained a revolving credit agreement (the “Expired Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent and issuing lender, Barclays Bank, as syndication agent, Wells Fargo Securities, LLC and Barclays Capital, as joint lead arrangers and co-book managers until early fiscal year 2014.  The aggregate borrowing limit under the unsecured revolving credit 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 interest rate payable was, at the Company's election, (i) a base rate plus the applicable margin, where the base rate is determined by reference to the highest of 1) the prime rate publicly announced by the administrative agent, 2) the federal funds rate plus 0.50%, and 3) LIBOR for a one month period plus the difference between the applicable margin for LIBOR rate loans and the applicable margin for base rate loans, or (ii) the LIBOR rate plus the applicable margin that varies according to the leverage ratio of the Company.  Certain representations and warranties were required under the Expired Credit Agreement, and the Company must have been in compliance with specified financial covenants, including (i) the requirement that the Company maintain a ratio of consolidated funded indebtedness to consolidated EBITDA of not greater than 1.75 to 1.0, computed in accordance with the terms of the Expired Credit Agreement, and (ii) a minimum ratio of consolidated EBITDA to consolidated interest expense of not less than 3.50 to 1.0.  The Company was in compliance with these covenants during the period.  The Company had no outstanding amounts under the facility as of March 29, 2014 and March 30, 2013, and there were no borrowings under the facility prior to its expiration on April 19, 2013.  See Note 20 – Subsequent Event for details on new revolving line of credit.

 

10.      Restructuring Costs

 

In the third quarter of fiscal year 2013, the Company committed to a plan to close its Tucson, Arizona design center and move those operations to the Company’s headquarters in Austin, Texas.  As a result, the Company incurred a one-time charge for relocation, severance-related items and facility-related costs to operating expenses totaling $3.5 million in the third quarter of fiscal year 2013. The charge included $1.5 million in severance and relocation-related costs and $2.0 million in facility and other related charges.  In fiscal year 2014, the Company recorded a credit of approximately $0.6 million related to changes in estimates for the facility, due to new subleases on the vacated property. This information is presented in a separate line item on the Consolidated Statements of Comprehensive Income in operating expenses under the caption “Restructuring and other, net.”

   

Of the net $2.9 million expense incurred, approximately $2.5 million has been completed, and consisted of severance and relocation-related costs of approximately $1.1 million, an asset impairment charge of approximately $1.0 million, and facility-related costs of approximately $0.4 million.  As of March 29, 2014, we have a remaining restructuring accrual of $0.4 million, included in “Other accrued liabilities” on the Consolidated Balance Sheet.

 

11.      Employee Benefit Plans

 

We have a 401(k) Profit Sharing Plan (the “401(k) Plan”) covering all of our qualifying domestic employees.  Under the 401(k) Plan, employees may elect to contribute any percentage of their annual compensation up to the annual IRS limitations.  Beginning in the fourth quarter of fiscal year 2014, the Company matches 50 percent of the first 8 percent of the employees’ annual contribution; prior to the fourth quarter of the current fiscal year, the Company matched 50 percent of the first 6 percent of the employee’s annual contribution.  We made matching employee contributions of $1.8 million, $1.5 million, and $1.3 million during fiscal years 2014, 2013, and 2012, respectively.

 

12.      Equity Compensation

 

The Company is currently granting equity awards from the 2006 Stock Incentive Plan (the “Plan”), which was approved by stockholders in July 2006.  The Plan provides for granting of stock options, restricted stock awards, performance awards, phantom stock awards, and bonus stock awards, or any combination of the foregoing.  To date, the Company has granted stock options, restricted stock awards, and phantom stock awards (also called restricted stock units) under the Plan.  Stock options generally vest between zero and four years, and are exercisable for a period of ten years from the date of grant.  Generally, restricted stock awards are subject to vesting schedules up to four years.  Restricted stock units are generally subject to vesting from one to three years, depending upon the terms of the grant.

 

The following table summarizes the activity in total shares available for grant (in thousands):

 

 

Stock Compensation Expense

 

The following table summarizes the effects of stock-based compensation on cost of goods sold, research and development, sales, general and administrative, pre-tax income, and net income after taxes for options granted under the Company’s equity incentive plans (in thousands, except per share amounts):  

 

 

 

The total share based compensation expense included in the table above and which is attributable to restricted stock awards and restricted stock units was $18.6 million, $16.3 million, and $6.3 million, for fiscal years 2014, 2013, and 2012, respectively.

 

As of March 29, 2014, there was $37.5 million of compensation costs related to non-vested stock options, restricted stock awards, and restricted stock units granted under the Company’s equity incentive plans not yet recognized in the Company’s financial statements.  The unrecognized compensation cost is expected to be recognized over a weighted average period of 1.21 years for stock options, 0.27 years for restricted stock awards, and 1.49 years for restricted stock units.

 

Stock Option Awards

 

We estimated the fair value of each stock option grant on the date of grant using the Black-Scholes option-pricing model using a dividend yield of zero and the following additional assumptions:

 

 

The Black-Scholes valuation calculation requires us to estimate key assumptions such as stock price volatility, expected term, risk-free interest rate and dividend yield.  The expected stock price volatility is based upon implied volatility from traded options on our stock in the marketplace.  The expected term of options granted is derived from an analysis of historical exercises and remaining contractual life of stock options, and represents the period of time that options granted are expected to be outstanding after becoming vested.  The risk-free interest rate reflects the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term assumption.  Finally, we have never paid cash dividends, do not currently intend to pay cash dividends, and thus have assumed a zero percent dividend yield.

 

Using the Black-Scholes option valuation model, the weighted average estimated fair values of employee stock options granted in fiscal years 2014, 2013, and 2012, were $10.45,  $20.43, $7.58, respectively. 

 

During fiscal year 2014, 2013, and 2012, we received a net $5.1 million, $12.0 million, and $4.1 million, respectively, from the exercise of 0.8 million, 1.7 million, and 0.6 million, respectively, stock options granted under the Company’s Stock Plan.

 

The total intrinsic value of stock options exercised during fiscal year 2014, 2013, and 2012, was $12.4 million, $48.6 million, and $7.6 million, respectively.  Intrinsic value represents the difference between the market value of the Company’s common stock at the time of exercise and the strike price of the stock option.

 

As of March 29, 2014, approximately 7.3 million shares of common stock were reserved for issuance under the Company’s Stock Plan.  

 

Additional information with respect to stock option activity is as follows (in thousands, except per share amounts): 

 

 

Additional information with regards to outstanding options that are vesting, expected to vest, or exercisable as of March 29, 2014 is as follows (in thousands, except years and per share amounts): 

 

 

 

In accordance with U.S. GAAP, stock options outstanding that are expected to vest are presented net of estimated future option forfeitures, which are estimated as compensation costs are recognized.  Options with a fair value of $4.8 million, $4.8 million, and $6.3 million, became vested during fiscal years 2014, 2013, and 2012, respectively.

 

The following table summarizes information regarding outstanding and exercisable options as of March 29, 2014 (in thousands, except per share amounts): 

 

 

As of March 29, 2014 and March 30, 2013, the number of options exercisable was 3.0 million and 3.2 million, respectively.

 

Restricted Stock Awards

 

The Company periodically grants restricted stock awards (“RSA’s”) to select employees.  The grant date for these awards is equal to the measurement date and the awards are valued as of the measurement date and amortized over the requisite vesting period, which is no more than four years.  Each full value award, including RSA’s, reduces the total shares available for grant under the Plan at a rate of 1.5 shares per RSA granted.  As of March 29, 2014, approximately 0.1 million shares attributable to RSA awards were reserved for issuance under the Plan, which includes the additional shares associated with this full value multiplier.  A summary of the activity for RSA’s in fiscal year 2014, 2013, and 2012, is presented below (in thousands, except per share amounts):

 

 

 

The aggregate intrinsic value of RSA’s outstanding as of March 29, 2014 was $98 thousand. RSA’s with a fair value of $951 thousand and $637 thousand became vested during fiscal years 2013 and 2012, respectively.    No RSA’s became vested during fiscal year 2014.

 

Restricted Stock Units

 

Commencing in fiscal year 2011, the Company began granting restricted stock units (“RSU’s”) to select employees. These awards are valued as of the grant date and amortized over the requisite vesting period.  Generally, RSU’s vest 100 percent on the first to third anniversary of the grant date depending on the vesting specifications.  Each full value award, including RSU’s, reduces the total shares available for grant under the 2006 option plan at a rate of 1.5 shares per RSU granted.  As of March 29, 2014, approximately 3.9 million shares attributable to RSU awards were reserved for issuance under the Plan, which includes the additional shares associated with this full value award multiplier. A summary of the activity for RSU’s in fiscal year 2014, 2013, and 2012 is presented below (in thousands, except year and per share amounts):

 

 

 

 

The aggregate intrinsic value of RSU’s outstanding as of March 29, 2014 was $45.1 million. Additional information with regards to outstanding restricted stock units that are vesting or expected to vest as of March 29, 2014, is as follows (in thousands, except year and per share amounts): 

   

 

RSU’s outstanding that are expected to vest are presented net of estimated future forfeitures, which are estimated as compensation costs are recognized.  RSU’s with a fair value of $11.1 million and $3.8 million became vested during fiscal years 2014 and 2013, respectively.  No RSU’s became vested during fiscal year 2012. The majority of RSUs that vested in 2014 and 2013 were net settled such that the Company withheld a portion of the shares at fair value to satisfy tax withholding requirements. In fiscal years 2014 and 2013, the vesting of RSU’s reduced the authorized and unissued share balance by approximately 0.6 million and 0.2 million, respectively. Total shares withheld and subsequently retired out of the Plan were approximately 0.2 million and 0.1 million, and total payments for the employees’ tax obligations to taxing authorities were $3.9 million and $1.7 million for fiscal years 2014 and 2013, respectively. A portion of RSUs that vested in fiscal year 2014 were cash settled such that the Company received cash from employees in lieu of withholding shares to satisfy tax withholding requirements. The total amount received from cash settled shares during fiscal year 2014 was $0.2 million.