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 30, 2013, included in our Annual Report on Form 10-K filed with the Commission on May 29, 2013.  In our opinion, the financial statements reflect all adjustments, including normal recurring adjustments, necessary for a fair presentation of the financial position, operating results and cash flows for those periods presented.  The preparation of financial statements in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect reported assets, liabilities, revenues and expenses, as well as disclosure of contingent assets and liabilities.  Actual results could differ from those estimates and assumptions.  Moreover, the results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the entire year.      

2.     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 28, 2013 (in thousands): 

The Company’s specifically identified gross unrealized losses of $79 thousand relates to 47 different securities with total amortized cost of approximately  $131.6 million at December 28, 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 December 28, 2013.  Further, the securities with gross unrealized losses had been in a continuous unrealized loss position for less than 12 months as of December 28, 2013. 

The following table is a summary of available-for-sale securities at March 30, 2013 (in thousands): 

The Company’s specifically identified gross unrealized losses of $164 thousand relates to 43 different securities with 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 securities by contractual maturities were as follows (in thousands):

3.     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 and 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 certain U.S. government-sponsored enterprises, 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.  

As of  December 28, 2013, the Company classified its investment portfolio assets as Level 1 or Level 2 inputs.  The Company has no Level 3 assets.  There were no transfers between Level 1, Level 2, or Level 3 measurements for the three month period ending December 28, 2013.

The fair value of our financial assets at  December 28, 2013, 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):

4.     Accounts Receivable, net

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

5.     Inventories

Inventories are comprised of the following (in thousands):

6.     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 restructuring 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.  For the three months ended December 28, 2013, the Company reported an insignificant charge and for the nine months ended December 28, 2013, the Company reported a credit of approximately $0.6 million, respectively, related to changes in estimates for the facility, due to a new sublease on the vacated property.  This information, along with asset sale activities described in Note 7 of our Form 10-K for the year ended March 30, 2013,  is presented as a separate line item on the consolidated condensed statements of comprehensive income in operating expenses under the caption “Restructuring and other, net.” 

Of the net $2.9 million expense incurred, approximately $2.4 million has been completed, and consisted of severance and relocation-related costs of approximately $1.2 million, an asset impairment charge of approximately $1.0 million, and facility-related costs of approximately $0.2 million.    As of December 28, 2013, we have a remaining restructuring accrual of $0.5  million, included in “Other accrued liabilities” and “Long-term liabilities” on the consolidated condensed balance sheet, which will continue to be completed through calendar year 2015.

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 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 Company is continuing to evaluate the fair values of the consideration transferred, assets acquired and liabilities assumed and expects to complete its purchase price allocation by the end of fiscal year 2014.

The consolidated condensed 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. 

8.    Income Taxes

Our provision for income taxes is based on estimated effective tax rates derived from an estimate of annual consolidated earnings before taxes, adjusted for nondeductible expenses, other permanent items and any applicable credits. Our income tax expense is primarily a non-cash charge due to the utilization of U.S. net operating losses.

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

Our income tax expense for the third quarter and first nine months of fiscal year 2014 was below the federal statutory rate primarily due to the effect of a tax benefit of $6.3 million provided by the Extraterritorial Income Exclusion Act, an elective provision of the Internal Revenue Code.  Another factor causing our tax expense to be below the federal statutory rate was the federal research development credit, which was extended through December 31, 2013 by the American Taxpayer Relief Act of 2012, which was enacted on January 2, 2013.   Our income tax expense for the third quarter of fiscal year 2013 was slightly above the federal statutory rate primarily due to the effect of state income taxes and nondeductible expenses.  Our income tax expense for the first nine months of fiscal year 2013 was below the federal statutory rate primarily due to the release of valuation allowance on the Company’s deferred tax assets in the second quarter of fiscal year 2013.  The release was due to the sale of assets of Apex Microtechnology (“Apex”), which generated sufficient capital gain to utilize a capital loss carry forward that was previously expected to expire unutilized.

We had no unrecognized tax benefits as of December 28, 2013.  The Company does not believe that its unrecognized tax benefits will significantly increase or decrease during the next 12 months.    

We accrue interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes.  As of December 28, 2013, the balance of accrued interest and penalties was zero.  No interest or penalties were incurred during the first nine months of fiscal year 2014 or 2013.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions.  Fiscal years 2011 through 2013 remain open to examination by the major taxing jurisdictions to which we are subject. 

9.     Net Income Per Share

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

The following table details the calculation of basic and diluted earnings per share for the three and nine months ended December 28, 2013 and December 29, 2012 (in thousands, except per share amounts):

The weighted outstanding options excluded from our diluted calculation for the three and nine months ended December 28, 2013, were 1,226,000,  and 1,305,000, respectively.  The weighted outstanding options excluded from our diluted calculation for the three and nine months ended December 29, 2012, were 924,000 and 309,000, respectively.  These options were excluded as the exercise price exceeded the average market price during the periods.

10.     Legal Matters

From time to time, we are involved in legal proceedings concerning matters arising in connection with the conduct of our business activities.  We regularly evaluate the status of legal proceedings in which we are involved in order to assess whether a loss is probable or there is a reasonable possibility that a loss or additional loss may have been incurred and determine if accruals are appropriate.  We further evaluate each legal proceeding to assess whether an estimate of possible loss or range of loss can be made. 

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

On February 4, 2013, a purported shareholder filed a class action complaint in the U.S. District Court, Southern District of New York against the Company and two of the Company’s executives (the “Securities Case”). Koplyay v. Cirrus Logic, Inc., et al., Civil Action No. 13-CV-0790. The complaint alleges that the defendants violated the federal securities laws by making materially false and misleading statements regarding our business results between July 31, 2012, and October 31, 2012, and seeks unspecified damages along with plaintiff’s costs and expenses, including attorneys’ fees.  A second complaint was filed on April 13, 2013, by a different purported shareholder, in the same Court, setting forth substantially the same allegations.  On April 19, 2013, the Court appointed the plaintiff and counsel in the first class action complaint as the lead plaintiff and lead counsel.  The lead plaintiff filed an amended complaint on May 1, 2013, including substantially the same allegations as the original complaint.  On May 24, 2013, the Company filed a motion to dismiss the amended complaint for failure to state a claim.  On December 2, 2013, the Court granted the Company’s motion and dismissed the case with prejudice.  The plaintiff did not appeal the Court’s order and the case has concluded.

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

On April 13, 2013, another purported shareholder filed a shareholder derivative complaint against several of our current officers and directors in the District Court of Travis County, Texas, 53rd Judicial District. Graham, derivatively on behalf of Cirrus Logic, Inc. v. Rhode, et al., Cause No. D-1-GN-13-001285.  In this complaint, the plaintiff makes allegations similar to those presented in the Securities Case, but the plaintiff asserts various state law causes of action, including claims of breach of fiduciary duty and unjust enrichment.  The Company is named solely as a nominal defendant against whom no recovery is sought. 

11.   Stockholders’ Equity

Common Stock

The Company issued a net 0.8 million and 1.1 million shares of common stock for the three and nine month periods ending December 28, 2013, respectively, in connection with stock issuances during the respective periods pursuant to our 2006 Stock Incentive Plan.  The Company issued a net 0.3 million and 1.4 million shares of common stock for the three and nine month periods ending December  29, 2012, respectively,  in connection with stock issuances during the respective periods pursuant to our 2006 Stock Incentive Plan.  

Share Repurchase Program

On November 20, 2012, we announced that our Board of Directors authorized a share repurchase program of up to $200 million of the Company’s common stock.  Since inception, $128.0 million of the Company’s common stock has been repurchased under the plan, leaving $72.0 million available for repurchase under this plan as of December 28, 2013.  During the three months ended December 28, 2013, the Company repurchased 1.5 million shares of its common stock for $29.7 million, at an average cost of $19.37.  The Company repurchased 2.1 million shares of its common stock for $42.4 million during the nine months ended December 28, 2013, at an average cost of $19.85 per share.  During fiscal year 2013, the Company repurchased 3.0 million shares of its common stock for a total of $85.6  million.  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 28, 2013.

12.   Segment Information

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

The Company operates and tracks its results in one reportable segment, but reports revenue performance in two product lines, which currently are audio and energy.   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, there is no complete, discrete financial information maintained for these product lines.

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

The Company’s specifically identified gross unrealized losses of $79 thousand relates to 47 different securities with total amortized cost of approximately  $131.6 million at December 28, 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 December 28, 2013.  Further, the securities with gross unrealized losses had been in a continuous unrealized loss position for less than 12 months as of December 28, 2013. 

The following table is a summary of available-for-sale securities at March 30, 2013 (in thousands): 

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