10-Q 1 crus-20151226x10q.htm 10-Q crus-20151226 Q3

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December  26,  2015

 

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from ____ to ____

 

Commission File Number 0-17795

 

CIRRUS LOGIC, INC.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE

 

77-0024818

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

800 W. 6th Street, Austin, TX 78701

(Address of principal executive offices)

 

Registrant’s telephone number, including area code: (512) 851-4000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  YES    NO  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES        NO   

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES    NO

 

The number of shares of the registrant's common stock, $0.001 par value, outstanding as of January 22,  2016  was 63,121,642.

 


 

CIRRUS LOGIC, INC.

 

FORM 10-Q QUARTERLY REPORT

 

QUARTERLY PERIOD ENDED DECEMBER  26, 2015

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Condensed Balance Sheets - December 26, 2015 (unaudited) and March 28, 2015

3

 

 

 

 

Consolidated Condensed Statements of Income (unaudited) - Three and Nine Months Ended December 26, 2015 and December 27, 2014

4

 

 

 

 

Consolidated Condensed Statements of Comprehensive Income (unaudited) - Three and Nine Months Ended December 26, 2015 and December 27, 2014

5

 

 

 

 

Consolidated Condensed Statements of Cash Flows (unaudited) - Nine Months Ended December 26, 2015 and December 27, 2014

6

 

 

 

 

Notes to Consolidated Condensed Financial Statements (unaudited)

7

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

24

 

 

 

Item 4.

Controls and Procedures

24

 

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

25

 

 

 

Item 1A.

Risk Factors

25

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

26

 

 

 

Item 3.

Defaults Upon Senior Securities

27

 

 

 

Item 4.

Mine Safety Disclosures

27

 

 

 

Item 5.

Other Information

27

 

 

 

Item 6.

Exhibits

27

 

 

 

 

Signatures

28

 

 

 

 

 

2

 


 

 

Part I. FINANCIAL INFORMATION

 

ITEM 1FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CIRRUS LOGIC, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands)

 

 

 

 

 

 

 

 

 

December 26,

 

March 28,

 

 

2015

 

2015

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current 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

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

114,483 

 

$

112,213 

Accrued salaries and benefits

 

 

22,438 

 

 

24,132 

Deferred income

 

 

4,162 

 

 

6,105 

Software license agreements

 

 

20,155 

 

 

18,711 

Other accrued liabilities

 

 

16,146 

 

 

15,417 

Total current liabilities

 

 

177,384 

 

 

176,578 

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

Debt

 

 

160,439 

 

 

180,439 

Software license agreements

 

 

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 

 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

3

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CIRRUS LOGIC, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(in thousands, except per share amounts; unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

December 26,

 

December 27,

 

December 26,

 

December 27,

 

2015

 

2014

 

2015

 

2014

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 

 

 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

4

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CIRRUS LOGIC, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands; unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

December 26,

 

December 27,

 

 

December 26,

 

December 27,

 

2015

 

2014

 

 

2015

 

2014

Net income

 

41,384 

 

 

22,729 

 

 

 

109,618 

 

 

33,829 

Other comprehensive income (loss), before tax

 

 

 

 

 

 

 

 

 

 

 

 

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 

Changes 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 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

5

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

CIRRUS LOGIC, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(in thousands; unaudited)

 

 

 

 

 

 

 

Nine Months Ended

 

December 26,

 

December 27,

 

2015

 

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 of Wolfson, net of cash obtained

 

 -

 

 

(444,138)

Acquisition of businesses, 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 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 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

6

 


 

CIRRUS LOGIC, INC.

NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

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.   

 

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

7

 


 

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.

 

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

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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 

 

 

 

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 portfoliopension 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.

 

 

 

 

9

 


 

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):

10

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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. 

 

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 

 

 

6.     Inventories

 

Inventories are comprised of the following (in thousands):

11

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

 

 

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 2015Upon 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):

 

 

 

 

 

 

 

 

 

 

12

 


 

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.  

 

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

13

 


 

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

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.

 

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 2016Our 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. 

14

 


 

 

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. 

 

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.    

 

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):

15

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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