10-Q 1 crus-20161224x10q.htm 10-Q crus-20161224 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  24,  2016



  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 27,  2017  was 64,231,952.

 


 

CIRRUS LOGIC, INC.



FORM 10-Q QUARTERLY REPORT



QUARTERLY PERIOD ENDED DECEMBER  24, 2016



TABLE OF CONTENTS







 

 



 

 

PART I - FINANCIAL INFORMATION



 

 

Item 1.

Financial Statements

 



 

 



Consolidated Condensed Balance Sheets - December 24, 2016 (unaudited) and March 26, 2016

3



 

 



Consolidated Condensed Statements of Income (unaudited) - Three and Nine Months Ended December 24, 2016 and December 26, 2015

4



 

 



Consolidated Condensed Statements of Comprehensive Income (unaudited) - Three and Nine Months Ended December 24, 2016 and December 26, 2015

5



 

 



Consolidated Condensed Statements of Cash Flows (unaudited) - Nine Months Ended December 24, 2016 and December 26, 2015

6



 

 



Notes to Consolidated Condensed Financial Statements (unaudited)

7



 

 

Item 2.

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

18



 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

26



 

 

Item 4.

Controls and Procedures

26



 

 

PART II - OTHER INFORMATION



 

 

Item 1.

Legal Proceedings

27



 

 

Item 1A.

Risk Factors

27



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29



 

 

Item 3.

Defaults Upon Senior Securities

29



 

 

Item 4.

Mine Safety Disclosures

29



 

 

Item 5.

Other Information

29



 

 

Item 6.

Exhibits

29



 

 



Signatures

30







2

 


 



Part I. FINANCIAL INFORMATION



ITEM 1FINANCIAL STATEMENTS





 

 

 

 

 

 



 

 

 

 

 

 

CIRRUS LOGIC, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands)



 

 

 

 

 

 



 

December 24,

 

March 26,



 

2016

 

2016



 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

310,375 

 

$

168,793 

Marketable securities

 

 

72,342 

 

 

60,582 

Accounts receivable, net

 

 

246,630 

 

 

88,532 

Inventories

 

 

154,128 

 

 

142,015 

Prepaid assets

 

 

24,223 

 

 

29,924 

Other current assets

 

 

17,524 

 

 

16,283 

Total current assets

 

 

825,222 

 

 

506,129 



 

 

 

 

 

 

Long-term marketable securities

 

 

 -

 

 

20,631 

Property and equipment, net

 

 

167,933 

 

 

162,656 

Intangibles, net

 

 

144,005 

 

 

162,832 

Goodwill

 

 

287,518 

 

 

287,518 

Deferred tax assets

 

 

34,737 

 

 

25,772 

Other assets

 

 

13,990 

 

 

16,345 

Total assets

 

$

1,473,405 

 

$

1,181,883 



 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

154,930 

 

$

71,619 

Accrued salaries and benefits

 

 

33,122 

 

 

21,239 

Software license agreements

 

 

12,310 

 

 

20,308 

Other accrued liabilities

 

 

12,377 

 

 

14,958 

Total current liabilities

 

 

212,739 

 

 

128,124 



 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

Debt

 

 

100,000 

 

 

160,439 

Software license agreements

 

 

3,131 

 

 

8,136 

Other long-term liabilities

 

 

53,500 

 

 

25,701 

Total long-term liabilities

 

 

156,631 

 

 

194,276 



 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Capital stock

 

 

1,247,191 

 

 

1,203,496 

Accumulated deficit

 

 

(141,027)

 

 

(344,345)

Accumulated other comprehensive (loss) income

 

 

(2,129)

 

 

332 

Total stockholders' equity

 

 

1,104,035 

 

 

859,483 

Total liabilities and stockholders' equity

 

$

1,473,405 

 

$

1,181,883 





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 24,

 

December 26,

 

December 24,

 

December 26,



2016

 

2015

 

2016

 

2015

Net sales

$

523,029 

 

$

347,863 

 

$

1,211,076 

 

$

937,252 

Cost of sales

 

267,877 

 

 

182,952 

 

 

617,540 

 

 

497,666 

Gross profit

 

255,152 

 

 

164,911 

 

 

593,536 

 

 

439,586 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

76,079 

 

 

70,290 

 

 

225,686 

 

 

203,383 

Selling, general and administrative

 

32,884 

 

 

30,632 

 

 

95,513 

 

 

89,854 

Patent agreement and other

 

 -

 

 

78 

 

 

 -

 

 

(11,670)

Total operating expenses

 

108,963 

 

 

101,000 

 

 

321,199 

 

 

281,567 

Income from operations

 

146,189 

 

 

63,911 

 

 

272,337 

 

 

158,019 

Interest income

 

415 

 

 

165 

 

 

978 

 

 

634 

Interest expense

 

(765)

 

 

(863)

 

 

(3,020)

 

 

(2,786)

Other expense

 

(47)

 

 

(818)

 

 

(161)

 

 

(991)

Income before income taxes

 

145,792 

 

 

62,395 

 

 

270,134 

 

 

154,876 

Provision for income taxes

 

23,751 

 

 

21,011 

 

 

43,983 

 

 

45,258 

Net income

 

122,041 

 

 

41,384 

 

 

226,151 

 

 

109,618 



 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

1.91 

 

$

0.65 

 

$

3.59 

 

$

1.73 

Diluted earnings per share

$

1.83 

 

$

0.63 

 

$

3.41 

 

$

1.66 

Basic weighted average common shares outstanding

 

63,837 

 

 

63,328 

 

 

63,025 

 

 

63,316 

Diluted weighted average common shares outstanding

 

66,748 

 

 

65,761 

 

 

66,378 

 

 

66,184 







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 24,

 

December 26,

 

December 24,

 

December 26,



2016

 

2015

 

2016

 

2015

Net income

$

122,041 

 

$

41,384 

 

$

226,151 

 

$

109,618 

Other comprehensive income (loss), before tax

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

(500)

 

 

(4)

 

 

(247)

 

 

174 

Unrealized gain (loss) on marketable securities

 

40 

 

 

(104)

 

 

31 

 

 

(183)

Actuarial gain (loss) on pension plan

 

(2,646)

 

 

 -

 

 

(2,646)

 

 

 -

Reclassification of actuarial (gain) loss to net income

 

(27)

 

 

17 

 

 

(80)

 

 

49 

Benefit for income taxes

 

461 

 

 

37 

 

 

481 

 

 

51 

Comprehensive income

$

119,369 

 

$

41,330 

 

$

223,690 

 

$

109,709 



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 24,

 

December 26,



2016

 

2015

Cash flows from operating activities:

 

 

 

 

 

Net income

$

226,151 

 

$

109,618 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

47,989 

 

 

43,254 

Stock compensation expense

 

28,708 

 

 

24,717 

Deferred income taxes

 

5,285 

 

 

8,021 

Loss on retirement or write-off of long-lived assets

 

424 

 

 

1,405 

Actuarial (gain) loss amortization on defined benefit pension plan

 

64 

 

 

 -

Excess tax benefit from employee stock awards

 

 -

 

 

(9,350)

Other non-cash charges

 

(2,547)

 

 

14,381 

Net change in operating assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

(158,098)

 

 

(15,066)

Inventories

 

(12,113)

 

 

(53,527)

Other current assets

 

(1,279)

 

 

(4,645)

Accounts payable and other accrued liabilities

 

96,673 

 

 

861 

Deferred income

 

 -

 

 

(1,943)

Income taxes payable

 

13,636 

 

 

(1,428)

Net cash provided by operating activities

 

244,893 

 

 

116,298 



 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Maturities and sales of available-for-sale marketable securities

 

157,234 

 

 

117,397 

Purchases of available-for-sale marketable securities

 

(148,342)

 

 

(22,672)

Purchases of property, equipment and software

 

(26,380)

 

 

(33,720)

Investments in technology

 

(8,920)

 

 

(3,981)

Acquisition of businesses, net of cash obtained

 

 -

 

 

(36,788)

Increase in deposits and other assets

 

 -

 

 

(2,012)

Net cash (used in) provided by investing activities

 

(26,408)

 

 

18,224 



 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Principal payments on long-term revolver

 

(60,439)

 

 

(20,000)

Debt issuance costs

 

(2,152)

 

 

 -

Payments on capital lease agreements

 

(699)

 

 

 -

Issuance of common stock, net of shares withheld for taxes

 

14,869 

 

 

4,958 

Repurchase of stock to satisfy employee tax withholding obligations

 

(13,043)

 

 

(6,459)

Repurchase and retirement of common stock

 

(15,439)

 

 

(39,200)

Excess tax benefit from employee stock awards

 

 -

 

 

9,350 

Net cash used in financing activities

 

(76,903)

 

 

(51,351)



 

 

 

 

 

Net decrease in cash and cash equivalents

 

141,582 

 

 

83,171 



 

 

 

 

 

Cash and cash equivalents at beginning of period

 

168,793 

 

 

76,401 

Cash and cash equivalents at end of period

$

310,375 

 

$

159,572 



 

 

 

 

 





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 26, 2016, included in our Annual Report as amended on Form 10-K/A on February 1, 2017.  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 Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606).  The purpose of this ASU is to converge revenue recognition requirements per U.S. 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 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 and expects no material modifications.  



In August 2014, the FASB issued 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 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 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

7

 


 

periods within those fiscal years.  Earlier adoption is permitted for financial statements that have not been previously issued.  The Company adopted these ASUs in the current fiscal year with no material impact.    



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 adopted this ASU in the first quarter of the current fiscal year, with no modifications to its financial statements.  The Company’s plan assets and obligations are measured as of the fiscal year-end



In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory.  This ASU requires companies to subsequently measure inventory at the lower of cost and net realizable value versus the previous lower of cost or market.  The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, to be applied prospectively.  Early application is permitted. The Company expects no material modifications to its financial statements as a result.



In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The FASB issued this update to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key leasing arrangement details.  Lessees would recognize operating leases on the balance sheet under this ASU — with the future lease payments recognized as a liability, measured at present value, and the right-of-use asset recognized for the lease term. A single lease cost would be recognized over the lease term.  For terms less than twelve months, a lessee would be permitted to make an accounting policy election to recognize lease expense for such leases generally on a straight-line basis over the lease term.  This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Early adoption is permitted.  The Company is currently evaluating the impact of this ASU.



In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.  This ASU requires all excess tax benefits and deficiencies to be recognized as income tax benefit / expense in the income statement and presented as an operating activity in the statement of cash flows.  Forfeitures can be calculated based on either the estimated number of awards that are expected to vest, as required by current guidance, or when forfeitures actually occurThis ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  Early adoption is permitted, but all amendments must be adopted in the same period and any adjustments should be reflected as of the beginning of the fiscal year if adopted in an interim period.  The Company early adopted in the current fiscal quarter, which resulted in the following:



·

We recorded excess tax benefits within income tax expense, rather than in additional paid-in capital (“APIC”), of $2.2 million, $8.0 million and $10.8 million for the first, second and third quarters of fiscal year 2017, respectively. 

·

We recorded a cumulative-effect adjustment as of March 27, 2016 to increase retained earnings by $5.6 million, with a corresponding increase to deferred tax assets, to recognize net operating loss and tax credit carryforwards attributable to excess tax benefits on stock-based compensation that had not been previously recognized.

·

We now include the excess tax benefits in net operating cash rather than net financing cash in our Consolidated Condensed Statements of Cash Flows.  



We applied this change in presentation prospectively and thus prior years have not been adjusted.



8

 


 

We elected not to change our policy on accounting for forfeitures and continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period.



The adoption of this new guidance impacted our previously reported quarterly results for fiscal year 2017 as follows:







 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

 

Six Months Ended



 

June 25, 2016

 

September 24, 2016

 

 

September 24, 2016



 

As reported

 

As adjusted

 

As reported

 

As adjusted

 

 

As reported

 

As adjusted



 

(in thousands, except per share data)

Consolidated Condensed Statements of Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

$

5,805 

$

3,598 

$

24,608 

$

16,634 

 

$

30,413 

$

20,232 

Net income

$

15,864 

$

18,071 

$

78,065 

$

86,039 

 

$

93,929 

$

104,110 

Basic net income per share

$

0.25 

$

0.29 

$

1.24 

$

1.37 

 

$

1.50 

$

1.66 

Diluted net income per share

$

0.24 

$

0.27 

$

1.19 

$

1.30 

 

$

1.43 

$

1.58 

Weighted average shares used in diluted net income per share computation

 

65,232 

 

65,723 

 

65,717 

 

66,410 

 

 

65,521 

 

66,101 



 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Condensed Statements of Cash Flows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

$

12,226 

$

12,756 

$

19,990 

$

24,091 

 

$

32,216 

$

36,847 

Net cash used in financing activities

$

(13,140)

$

(13,670)

$

(13,859)

$

(17,960)

 

$

(26,999)

$

(31,630)





In June 2016, the FASB issued ASU 2016-13,  Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  This ASU requires credit losses on available-for-sale debt securities to be presented as an allowance rather than a write-down. Unlike current U.S. GAAP, the credit losses could be reversed with changes in estimates, and recognized in current year earnings. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods.  Early adoption is permitted for annual periods beginning after December 15, 2018, including interim periods.  The Company is currently evaluating the impact of this ASU with no expected material impact. 



In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.  This ASU covers several cash flow issues, including the presentation of contingent consideration payments made after a business combination.  Cash payments up to the amount of the liability recognized at the acquisition date (including measurement-period adjustments) should be classified as financing activities.  This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods.  Early adoption is permitted, including in an interim period, with a required retrospective transition method applied to each period presented.  The Company is currently evaluating the impact of this ASU. 



In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.  This ASU relates to non-inventory intercompany asset transfers.  This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods.  Early adoption is permitted, as of the beginning of an annual reporting period.  The guidance requires companies to apply a modified retrospective approach with a cumulative catch-up adjustment to beginning retained earnings in the period of adoption.  The Company is currently evaluating the impact of this ASU.

9

 


 



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 24, 2016 (in thousands):

 







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Estimated



 

 

 

Gross

 

Gross

 

Fair Value



Amortized

 

Unrealized

 

Unrealized

 

(Net Carrying

As of December 24, 2016

Cost

 

Gains

 

Losses

 

Amount)

Corporate debt securities

$

36,052 

 

$

 - 

 

$

(36)

 

$

36,016 

Commercial paper

 

36,354 

 

 

-

 

 

(28)

 

 

36,326 

Total securities

$

72,406 

 

$

 - 

 

$

(64)

 

$

72,342 



The Company’s specifically identified gross unrealized losses of $64 thousand related to 18 different securities with total amortized cost of approximately $72.4 million at December  24, 2016.    Four securities had been in a continuous unrealized loss position for more than 12 months as of December 24, 2016.  The gross unrealized loss on these securities was less than one percent of the position value.  Because the Company does not intend to sell the investments at a loss and it is not more likely than not that the Company will 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 24, 2016.   



The following table is a summary of available-for-sale securities at March 26, 2016 (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Estimated



 

 

 

Gross

 

Gross

 

Fair Value



 

Amortized

 

Unrealized

 

Unrealized

 

(Net Carrying

As of March 26, 2016

 

Cost

 

Gains

 

Losses

 

Amount)

Corporate debt securities

$

 

81,310 

 

$

 

$

(100)

 

$

81,213 



The Company’s specifically identified gross unrealized losses of $100 thousand related to 21 different securities with total amortized cost of approximately $64.7 million at March 26, 2016Two securities had been in a continuous loss position for more than 12 months as of March 26, 2016, both of which have matured in the current fiscal year.  Because the Company did not intend to sell the investments at a loss and it was not more likely than not that the Company would 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 26, 2016.  



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





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

December 24, 2016

 

March 26, 2016



 

Amortized

 

Estimated

 

Amortized

 

Estimated



 

Cost

 

Fair Value

 

Cost

 

Fair Value

Within 1 year

 

$

72,406 

 

$

72,342 

 

$

60,603 

 

$

60,582 

After 1 year

 

 

 -

 

 

 -

 

 

20,707 

 

 

20,631 

Total

 

$

72,406 

 

$

72,342 

 

$

81,310 

 

$

81,213 





10

 


 



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.



 

 



The Company’s cash equivalents and investment portfolio assets consist of corporate debt securities, money market funds, 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 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 7, bears interest at a base rate plus applicable margin or LIBOR plus applicable margin.  As of December 24, 2016, the fair value of the Company’s long-term revolving facility approximates carrying value.



As of December 24, 2016 and March 26, 2016,  the Company classified all of its investment portfolio and pension plan assets and liabilities as Level 1 or Level 2 assets and liabilities.  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 24, 2016. 



The following summarizes the fair value of our financial instruments at December  24, 2016, exclusive of pension plan assets and liabilities (in thousands):

11

 


 

The following summarizes the fair value of our financial instruments, exclusive of pension plan assets and liabilities, at December 24, 2016, (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

$

224,094 

 

$

 -

 

$

 -

 

$

224,094 



 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

$

 -

 

$

36,016 

 

$

 -

 

$

36,016 

Commercial paper

 

 -

 

 

36,326 

 

 

 -

 

 

36,326 



$

 -

 

$

72,342 

 

$

 -

 

$

72,342 



 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Other accrued liabilities

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

$

 -

 

$

 -

 

$

1,239 

 

$

1,239 

Other long-term liabilities

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

$

 -

 

$

 -

 

$

4,608 

 

$

4,608 





The following summarizes the fair value of our financial instruments at March 26, 2016, exclusive of pension plan assets and liabilities (in thousands):



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Quoted Prices

 

 

 

 

 

 



in Active

 

Significant

 

 

 

 



Markets for

 

Other

 

Significant

 

 



Identical

 

Observable

 

Unobservable

 

 



Assets

 

Inputs

 

Inputs

 

 



Level 1

 

Level 2

 

Level 3

 

Total

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

79,256 

 

$

 -

 

$

 -

 

$

79,256 



 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

$

 -

 

$

81,213 

 

$

 -

 

$

81,213 



 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Other accrued liabilities

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

$

 -

 

$

 -

 

$

4,709 

 

$

4,709 

Other long-term liabilities

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

$

 -

 

$

 -

 

$

4,359 

 

$

4,359 



12

 


 

Contingent consideration

The following summarizes the fair value of the liability for contingent consideration at December 24, 2016:





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

Maximum Value if Milestones Achieved
(in thousands)

 

Estimated Discount Rate (%)

 

 

Fair Value
(in thousands)

Tranche A - 18 month earn out period

 

$

5,000 

 

7.0 

 

$

1,239 

Tranche B - 30 month earn out period

 

 

5,000 

 

7.7 

 

 

4,608 



 

$

10,000 

 

 

 

$

5,847 





The valuation of contingent consideration was initially based on a weighted-average discounted cash flow 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.  An increase or decrease in the probability of achieving certain milestones within the earn out period would be accompanied by a directionally similar change in the fair value of the recorded liability.  A change in discount rate would be accompanied by a directionally opposite change in fair value.  Changes in the fair value of the recorded liability are reported in research and development expense in the consolidated condensed statements of income.    In the current fiscal year, changes in milestone estimates in Tranche A above occurred following the review of product shipment forecasts within the earn out period.  The revised estimates reduced the fair value of the liability as of December 24, 2016 as shown in the table below. 







 

 



Nine Months Ended



December 24,



2016



(in thousands)

Beginning balance

$

9,068 

Adjustment to estimates (research and development expense)

 

(3,554)

Fair value charge recognized in earnings (research and development expense)

 

333 

Ending balance

$

5,847 









5.     Accounts Receivable, net



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



 

 

 

 

 



 

 

 

 

 



December 24,

 

March 26,



2016

 

2016

Gross accounts receivable

$

247,081 

 

$

89,007 

Allowance for doubtful accounts

 

(451)

 

 

(475)

Accounts receivable, net

$

246,630 

 

$

88,532 



The significant increase in accounts receivable is due primarily to the volume and timing of shipments in the current fiscal year.





13

 


 

6.     Inventories



Inventories are comprised of the following (in thousands):



 

 

 

 

 



 

 

 

 

 



December 24,

 

March 26,



2016

 

2016

Work in process

$

118,513 

 

$

67,827 

Finished goods

 

35,615 

 

 

74,188 



$

154,128 

 

$

142,015 













7.     Revolving Credit Facilities



On August 29, 2014, Cirrus Logic entered into a credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as Administrative Agent, and the Lenders party thereto.    The Credit Agreement provided for a $250 million senior secured revolving credit facility (the “Credit Facility”).  Borrowings under the Credit Facility were used for general corporate purposes.



On July 12, 2016, Cirrus Logic entered into an amended and restated credit agreement (the “Amended Credit Agreement”) with Wells Fargo Bank, National Association, as Administrative Agent, and the Lender party thereto, for the purpose of refinancing the Credit Facility and providing ongoing working capital.  The Amended Credit Agreement provides for a $300 million senior secured revolving credit facility (the “Amended Facility”) with a $25 million letter of credit sublimit.  The Amended Facility matures on July 12, 2021.  Cirrus Logic must repay the outstanding principal amount of all borrowings, together with all accrued but unpaid interest thereon, on the maturity date.  The Amended 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 Amended Facility may, at our 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 0.50% per annum for Base Rate Loans and 1.25% to 2.00% per annum for LIBOR Rate Loans based on the Leverage Ratio (as defined below).  A commitment fee accrues at a rate per annum ranging from 0.20% to 0.30% (based on the Leverage Ratio) on the average daily unused portion of the commitment of the lenders.  The Amended Credit Agreement contains certain financial covenants providing that (a) the ratio of consolidated funded indebtedness to consolidated EBITDA for the prior four fiscal quarters must not be greater than 3.00 to 1.00 (the “Leverage Ratio”) and (b) the ratio of consolidated EBITDA for the prior four consecutive fiscal quarters to consolidated fixed charges (including amounts paid in cash for consolidated interest expenses, capital expenditures, scheduled principal payments of indebtedness, and income taxes) for the prior four consecutive fiscal quarters must not be less than 1.25 to 1.00 as of the end of each fiscal quarter.  The Amended Credit Agreement also contains negative covenants limiting the Company’s or any Subsidiary’s ability to, among other things, incur debt, grant liens, make investments, effect certain fundamental changes, make certain asset dispositions, and make certain restricted payments. 

   

At December 24, 2016, the Company was in compliance with all covenants under the Amended Credit Agreement.  The Company had borrowed $100.0 million under this facility as of December 24, 2016, which is included in long-term liabilities on the consolidated condensed balance sheets under the caption “Debt.”



8.   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

14

 


 

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, which is reflected under the same caption.



9.   Pension Plan



As a result of the fiscal year 2015 acquisition of Wolfson Microelectronics, the Company fully funds a defined benefit pension scheme (“the Scheme”) for certain current and former employees in the United Kingdom, which was closed to new participants as of July 2, 2002.  The participants in the Scheme no longer accrue benefits and therefore the Company will not be required to make contributions in respect of future accruals



The Company initiated an Enhanced Transfer Value (ETV) offer to 49 Scheme participants in the current fiscal quarter.  The ETV offer expired on December 23, 2016, and nine participants accepted.  As a result, the Company accrued the required ETV contribution of $0.5 million (included within the caption “Other accrued liabilities”  in the consolidated condensed balance sheet) and recorded the associated pension expense of $0.4 million.  As of December 24, 2016, the Scheme was in an underfunded position of $1.1 million (included within “Other long-term liabilities” in the consolidated condensed balance sheet).  See additional details related to the Scheme within Note 10 of the Company’s fiscal year 2016 Annual Report as amended on Form 10-K/A on February 1, 2017.



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 24,

 

December 26,

 

December 24,

 

December 26,



2016

 

2015

 

2016

 

2015

Income before income taxes

$

145,792 

 

$

62,395 

 

$

270,134 

 

$

154,876 

Provision for income taxes

$

23,751 

 

$

21,011 

 

$

43,983 

 

$

45,258 

Effective tax rate

 

16.3% 

 

 

33.7% 

 

 

16.3% 

 

 

29.2% 



Our income tax expense was $23.8 million and $44.0 million for the third quarter and first nine months of fiscal year 2017, respectively.  Our effective tax rate was 16.3% for both the third quarter and first nine months of fiscal year 2017.  Our income tax expense was $21.0 million and $45.3 million for the third quarter and first nine months of fiscal year 2016, respectively.  Our effective tax rate was 33.7% and 29.2% for the third quarter and first nine months of fiscal year 2016, respectively.  Our income tax expense includes $2.2  million,  $8.0 million, and $10.8 million of tax benefit for the first, second, and third quarters of fiscal year 2017, respectively, from the early adoption of the ASU 2016-09 accounting standard.  Please refer to Note 2 for further information.



Our effective tax rate for the third quarter and first nine months of fiscal year 2017 was lower than the federal statutory rate primarily due to income earned in certain foreign jurisdictions taxed below the federal statutory rate and the recognition of tax benefits in the period in which they occur for early adoption of the ASU 2016-09 accounting standard.  Our effective tax rate 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 in the third quarter of fiscal 2016.  Our effective tax rate for the first nine months of fiscal 2016 was further reduced by a one-time tax benefit associated with deferred taxes related to U.S. R&D credit carryforwards recorded in the second quarter of fiscal year 2016.



15

 


 

The Company records unrecognized tax benefits for the estimated risk associated with tax positions taken on tax returns.  At December 24, 2016, the Company had unrecognized tax benefits of $29.0 million, all of which would impact the effective tax rate if recognized.  The Company’s total unrecognized tax benefits are classified as either Other long-term liabilities” in the consolidated condensed balance sheets or as a reduction to deferred tax assets to the extent that the unrecognized tax benefit relates to deferred tax assets.



 The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxesThe Company recognized $0.2 million of interest in the provision for income taxes during the first nine months of fiscal year 2017.  As of December 24, 2016, the balance of accrued interest and penalties, net of tax was $0.2 million.  No interest or penalties were recognized during the first nine months of fiscal year 2016.



The Company believes it is reasonably possible that the gross unrecognized tax benefits could decrease by approximately $2.3 million in the next 12 months due to the lapse of the statute of limitations applicable to a tax deduction claimed on a prior year tax return.



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 2014 through 2016 remain open to examination by the major taxing jurisdictions to which the Company is subject, although carry forward attributes that were generated in tax years prior to fiscal year 2014 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.   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.  Prior to fiscal year 2017, these potentially dilutive items consisted primarily of the tax affected outstanding stock options and awards (including restricted stock units and market stock units).  As mentioned previously, the Company adopted ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting in the current fiscal quarter.  All adjustments related to the adoption are shown as of the beginning of the fiscal year.  Therefore, in the current fiscal year, these potentially dilutive items consist primarily of outstanding stock options and awards (including restricted stock units and market stock units), without any estimated excess tax benefits and deficiencies in the calculation of assumed proceeds under the Treasury Stock Method, as such amounts are now recognized in the income statement. 



The following table details the calculation of basic and diluted earnings per share for the three and nine months ended December 24, 2016 and December 26, 2015 (in thousands, except per share amounts):







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Nine Months Ended



December 24,

 

December 26,

 

December 24,

 

December 26,



2016

 

2015

 

2016

 

2015

Numerator:

 

 

 

 

 

 

 

 

 

 

 

Net income

$

122,041 

 

$

41,384 

 

$

226,151 

 

$

109,618 

Denominator: