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 31,
2018
, included in our Annual Report on Form 10-K filed with the Commission on May 30, 2018. 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, certain prior period amounts have been reclassified to conform to current year presentation, with no impact to earnings.
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 completed the process of reviewing our customers’ contracts in respect of performance obligation identification and satisfaction, pricing, warranties, and return rights, among other considerations, in the first quarter of fiscal year 2019. According to the standard, the Company may adopt by full retrospective method, which applies retrospectively to each prior period presented, or by modified retrospective method with the cumulative effect adjustment recognized in beginning retained earnings as of the date of adoption. The Company adopted this standard using the modified retrospective adoption method in the first quarter of fiscal year 2019 with no income statement impact, and therefore no beginning retained earnings impact. See Note 8 - Revenues for additional details.
The effects of the changes made to our balance sheet at adoption were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2018
|
|
Impact from ASU 2014-09 Adoption
|
|
Balance at April 1, 2018
|
Financial statement line item:
|
|
|
|
|
|
Accounts receivable
|
$
|
100,801
|
|
|
$
|
5,539
|
|
|
$
|
106,340
|
|
Inventories
|
205,760
|
|
|
(391
|
)
|
|
205,369
|
|
Other current assets
|
13,877
|
|
|
391
|
|
|
14,268
|
|
Other accrued liabilities
|
$
|
(12,657
|
)
|
|
$
|
(5,539
|
)
|
|
$
|
(18,196
|
)
|
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 modified retrospective approach is the only allowed adoption method. We currently expect that most of our operating lease commitments will be subject to the new standard and recognized as right-of-use assets and
operating lease liabilities upon adoption, which will materially increase our total assets and total liabilities that we report relative to such amounts prior to adoption of this ASU.
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 January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. This ASU eliminates step two of the goodwill impairment test. An impairment charge is to be recognized for the amount by which the current value exceeds the fair value. This ASU is effective for annual periods beginning after December 15, 2019, including interim periods. Early adoption is permitted, for interim or annual goodwill impairment tests performed after January 1, 2017, and should be applied prospectively. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments in this update. The Company is currently evaluating the impact of this ASU with no expected material impact.
In March 2017, the FASB issued ASU 2017-07,
Compensation - Retirement Benefits (Topic 715): Improving the presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
This ASU requires an employer to disaggregate the service cost component from the other components of net benefit cost. It also provides guidance on income statement presentation for service cost and other components of net benefit cost. This ASU is effective for annual periods beginning after December 15, 2017, including interim periods. The Company adopted this ASU in the first quarter of fiscal year 2019. The expected impact of adoption is discussed in Note 9, to be recorded upon the buy-out settlement of the defined benefit pension plan.
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
. This ASU applies to any company that changes the terms or conditions of a share-based award, considered a modification. Modification accounting would be applied unless certain conditions were met related to the fair value of the award, the vesting conditions and the classification of the modified award. This ASU is effective for annual periods beginning after December 15, 2017, with early adoption permitted. The standard should be applied prospectively to an award modified on or after the adoption date. The Company adopted this ASU in the first quarter of fiscal year 2019 with no financial statement impact as no awards were modified in the current period.
In February 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. This ASU allows for the classification of stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) from accumulated other comprehensive income to retained earnings. This ASU is effective for annual periods beginning after December 15, 2018, with early adoption permitted. The standard should be applied in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in tax rate is recognized. The Company is currently evaluating the potential financial statement impact of this ASU.
In June 2018, the FASB issued ASU 2018-07,
Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
. This ASU expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees and will apply to all share-based payment transactions in which the grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year, with early adoption permitted. The Company is currently evaluating the impact of this ASU, but does not expect a material impact to 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
June 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
(Net Carrying
Amount)
|
Corporate debt securities
|
$
|
187,446
|
|
|
$
|
12
|
|
|
$
|
(2,259
|
)
|
|
$
|
185,199
|
|
Non-US government securities
|
13,693
|
|
|
—
|
|
|
(137
|
)
|
|
13,556
|
|
Agency discount notes
|
460
|
|
|
—
|
|
|
(4
|
)
|
|
456
|
|
Total securities
|
$
|
201,599
|
|
|
$
|
12
|
|
|
$
|
(2,400
|
)
|
|
$
|
199,211
|
|
The Company typically invests in highly-rated securities with original maturities generally ranging from
one
to
three
years. The Company's specifically identified gross unrealized loss of
$2.4 million
related
to
securities with total amortized cost of approximately
$193.5 million
at
June 30, 2018
.
Fifteen
securities, representing less than
3%
of the portfolio's total amortized cost, have been in a continuous unrealized loss position for more than 12 months as of
June 30, 2018
. The Company may sell certain of its marketable securities prior to their stated maturities for strategic reasons including, but not limited to, anticipated or actual changes in credit rating and duration management. When evaluating an investment for other-than-temporary impairment, the Company reviews factors including the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, changes in market interest rates and whether it is more likely than not the Company will be required to sell the investment before recovery of the investment’s cost basis. As of
June 30, 2018
, the Company does not consider any of its investments to be other-than-temporarily impaired.
The following table is a summary of available-for-sale securities at
March 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
(Net Carrying
Amount)
|
Corporate debt securities
|
$
|
185,636
|
|
|
$
|
4
|
|
|
$
|
(2,318
|
)
|
|
$
|
183,322
|
|
Non-US government securities
|
14,730
|
|
|
—
|
|
|
(111
|
)
|
|
14,619
|
|
Certificates of deposit
|
500
|
|
|
—
|
|
|
—
|
|
|
500
|
|
Agency discount notes
|
459
|
|
|
—
|
|
|
(4
|
)
|
|
455
|
|
Total securities
|
$
|
201,325
|
|
|
$
|
4
|
|
|
$
|
(2,433
|
)
|
|
$
|
198,896
|
|
The Company’s specifically identified gross unrealized losses of
$2.4 million
related
to
securities with total amortized cost of approximately
$198.2 million
at
March 31, 2018
.
No
securities had been in a continuous loss position for more than 12 months as of
March 31, 2018
.
The Company may sell certain of its marketable securities prior to their stated maturities for strategic reasons including, but not limited to, anticipated or actual changes in credit rating and duration management. When evaluating an investment for other-than-temporary impairment, the Company reviews factors including the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, changes in market interest rates and whether it is more likely than not the Company will be required to sell the investment before recovery of the investment’s cost basis. As of
March 31, 2018
, the Company did not consider any of its investments to be other-than-temporarily impaired.
The cost and estimated fair value of available-for-sale
securities
by contractual maturities were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
March 31, 2018
|
|
Amortized
|
|
Estimated
|
|
Amortized
|
|
Estimated
|
|
Cost
|
|
Fair Value
|
|
Cost
|
|
Fair Value
|
Within 1 year
|
$
|
40,152
|
|
|
$
|
39,877
|
|
|
$
|
26,560
|
|
|
$
|
26,397
|
|
After 1 year
|
161,447
|
|
|
159,334
|
|
|
174,765
|
|
|
172,499
|
|
Total
|
$
|
201,599
|
|
|
$
|
199,211
|
|
|
$
|
201,325
|
|
|
$
|
198,896
|
|
4.
Fair Value of Financial Instruments
The Company has determined that the only assets and liabilities in the Company’s financial statements that are required to be measured at fair value on a recurring basis are the Company’s cash equivalents, investment portfolio and pension plan assets / liabilities. 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 debt securities, money market funds, non-U.S. government securities, securities of U.S. government-sponsored enterprises, and certificates of deposit 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 pricing providers on the last day of the quarter, whose sources may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value.
As of
June 30, 2018
and
March 31, 2018
, the Company classified all investment portfolio and pension plan assets and liabilities as Level 1 or Level 2 assets and liabilities. The Company has no Level 3 assets. There were no transfers between Level 1, Level 2, or Level 3 measurements for the three months ending
June 30, 2018
.
The following summarizes the fair value of our financial instruments at
June 30, 2018
, exclusive of pension plan assets and liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
Level 1
|
|
Significant
Other
Observable
Inputs
Level 2
|
|
Significant
Unobservable
Inputs
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
151,017
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
151,017
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
—
|
|
|
$
|
185,199
|
|
|
$
|
—
|
|
|
$
|
185,199
|
|
Non-US government securities
|
—
|
|
|
13,556
|
|
|
—
|
|
|
13,556
|
|
Agency discount notes
|
—
|
|
|
456
|
|
|
—
|
|
|
456
|
|
|
$
|
—
|
|
|
$
|
199,211
|
|
|
$
|
—
|
|
|
$
|
199,211
|
|
The following summarizes the fair value of our financial instruments at
March 31, 2018
, exclusive of pension plan assets and liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
Level 1
|
|
Significant
Other
Observable
Inputs
Level 2
|
|
Significant
Unobservable
Inputs
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
211,891
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
211,891
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
—
|
|
|
$
|
183,322
|
|
|
$
|
—
|
|
|
$
|
183,322
|
|
Non-US government securities
|
—
|
|
|
14,619
|
|
|
—
|
|
|
14,619
|
|
Certificates of deposit
|
—
|
|
|
500
|
|
|
—
|
|
|
500
|
|
Agency discount notes
|
—
|
|
|
455
|
|
|
—
|
|
|
455
|
|
|
$
|
—
|
|
|
$
|
198,896
|
|
|
$
|
—
|
|
|
$
|
198,896
|
|
5.
Accounts Receivable, net
The following are the components of accounts receivable, net (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
March 31,
|
|
2018
|
|
2018
|
Gross accounts receivable
|
$
|
126,807
|
|
|
$
|
101,004
|
|
Allowance for doubtful accounts
|
(203
|
)
|
|
(203
|
)
|
Accounts receivable, net
|
$
|
126,604
|
|
|
$
|
100,801
|
|
6. Inventories
Inventories are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
March 31,
|
|
2018
|
|
2018
|
Work in process
|
$
|
85,858
|
|
|
$
|
97,138
|
|
Finished goods
|
87,205
|
|
|
108,622
|
|
|
$
|
173,063
|
|
|
$
|
205,760
|
|
7. Revolving
Credit Facility
On July 12, 2016, Cirrus Logic entered into an amended and restated credit agreement (the “ Credit Agreement”) with Wells Fargo Bank, National Association, as Administrative Agent, and the Lenders party thereto, for the purpose of refinancing an existing credit facility and providing ongoing working capital. The Credit Agreement provides for a
$300 million
senior secured revolving credit facility (the “Credit Facility”). The Credit Facility matures on July 12, 2021. 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 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 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 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.
As of
June 30, 2018
, the Company had
no
amounts outstanding under the Credit Facility and was in compliance with all covenants under the Credit Agreement.
8.
Revenues
Disaggregation of revenue
We disaggregate revenue from contracts with customers based on the ship to location of the customer. The geographic regions that are reviewed are the United States and countries outside of the United States (primarily located in Asia).
Total net sales based on the disaggregation criteria described above are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 30,
|
|
June 24,
|
|
2018
|
|
2017
|
Non-United States
|
$
|
246,076
|
|
|
$
|
312,887
|
|
United States
|
8,407
|
|
|
7,848
|
|
|
$
|
254,483
|
|
|
$
|
320,735
|
|
Performance obligations
The Company's single performance obligation is delivering the promised goods to the customer. Performance obligations are satisfied upon transfer of product control to the customer, as defined per the shipping terms within the customer's contract. As allowed by ASC 606, disclosure of the value of unsatisfied performance obligations for contracts with an original expected length of one year or less is not required. This term exists in the vast majority of the Company's contracts.
As of June 30, 2018, the Company had no unsatisfied performance obligations.
The Company’s products primarily include a standard
one
-year warranty. Warranties qualify as assurance-type warranties, as goods can be returned for product non-conformance and defect only. As such, they are not considered a separate performance obligation.
Contract balances
The Company's standard terms do not include significant financing components or noncash consideration. There have been no material impairment losses on accounts receivable. There are no material contract assets or contract liabilities recorded on the consolidated condensed balance sheets.
Transaction price
Pricing is established and agreed upon by the customer prior to an order being placed. Variable pricing currently includes rebates, rights of returns, warranties, price protection and stock rotation. Rebates are granted as a customer account credit, based on agreed-upon sales thresholds. Rights of return and warranty costs are estimated using the "most likely amount" method by reviewing historical returns to determine the most likely customer return rate and applying materiality thresholds. Price protection includes price adjustments available to certain distributors based upon established book price and a stated adjustment period. Stock rotation is also available to certain distributors based on a stated maximum of prior billings.
9.
Pension Plan
As a result of our acquisition of Wolfson in fiscal year 2015, the Company has a defined benefit pension scheme (the “Scheme”), for some individuals in the United Kingdom. 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.
During fiscal year 2018, the Company authorized the termination of the Scheme under which
60
participants had accrued benefits. On March 16, 2018, the Scheme completed a buy-in transaction whereby the assets of the Scheme, together with a final contribution from the Company of
$11.0 million
, were invested in a bulk purchase annuity contract that fully insured the benefits payable to the members of the Scheme at that time. As the buy-in transaction resulted in the defined benefit obligations being fully insured, the Company expects no further material contributions.
The bulk purchase annuity contract is structured to enable the Scheme to move to full buy-out (following which the insurance company would become directly responsible for the pension payments) and the intention is to proceed on this basis. When the buy-out is complete, a settlement loss will be recognized within other non-operating expense and will include any unamortized loss recorded within Other Comprehensive Income, which is approximately
$11.2 million
at June 30, 2018.
10.
Income Taxes
Our provision (benefit) 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 (benefit) for income taxes (in thousands) and the effective tax rates:
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|
|
|
|
|
|
|
|
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Three Months Ended
|
|
June 30,
|
|
June 24,
|
|
2018
|
|
2017
|
Income (loss) before income taxes
|
$
|
(4,500
|
)
|
|
$
|
47,875
|
|
Provision (benefit) for income taxes
|
$
|
(228
|
)
|
|
$
|
4,963
|
|
Effective tax rate
|
5.1
|
%
|
|
10.4
|
%
|
Our income tax benefit for the
first
quarter of fiscal year
2019
was
$0.2 million
compared to
$5.0 million
in income tax expense for the
first
quarter of fiscal year
2018
, resulting in effective tax rates of
5.1%
and
10.4%
for the
first
quarter of fiscal year
2019
and
2018
, respectively. Our effective tax rate for the
first
quarter of fiscal year
2019
was lower than the federal statutory rate primarily due to the effect of income earned in certain foreign jurisdictions that is taxed below the federal statutory rate and the U.S. federal research and development tax credit. Our effective tax rate for the
first
quarter of fiscal year
2018
was lower than the federal statutory rate primarily due to income earned in certain foreign jurisdictions taxed below the federal statutory rate, excess tax benefits from stock-based compensation, and the release of prior year unrecognized tax benefits that were determined to be effectively settled in the first quarter of fiscal year 2018.
The Tax Act was enacted on December 22, 2017. The Tax Act reduced the U.S. federal corporate income tax rate from
35.0%
to
21.0%
, restricts the deductibility of certain business expenses, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiar
ies that were previously tax-deferred and creates new taxes on certain foreign sourced earnings, among other provisions.
We are applying the guidance in SEC Staff Accounting Bulletin No. 118 when accounting for the enactment-date effects of the Tax Act.
At
June 30, 2018
, we have not completed our accounting for the income tax effects of the Tax Act. We have made a reasonable estimate of the income tax effects on our existing deferred tax balances and the one-time transition tax. During the
first
quarter of fiscal year
2019
, we did not recognize adjustments to provisional amounts recorded at March 31, 2018. We are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of deferred tax balances or give rise to new deferred tax amounts. In addition, we have not yet finalized the calculation of foreign earnings & profits ("E&P") and the amounts held in cash or other specified assets on the applicable measurement date. We will continue to make and refine calculations as additional analysis is completed.
Under a provision commonly known as global intangible low taxed income ("GILTI"), the Tax Act subjects a U.S. shareholder to current tax on certain earnings of foreign subsidiaries. Under US GAAP, an accounting policy election can be made to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years, or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Given the complexity of the GILTI provisions, we are still evaluating the effects of the GILTI provisions and have not yet made an accounting policy
election. At
June 30, 2018
, because we are still evaluating the GILTI provisions, we have included GILTI related to current-year operations only in our estimated annual effective tax rate and have not provided additional GILTI on deferred items.
The Company records unrecognized tax benefits for the estimated risk associated with tax positions taken on tax returns. At
June 30, 2018
, the Company had unrecognized tax benefits of
$55.8 million
, all of which would impact the effective tax rate if recognized. The Company recorded gross increases to its current year unrecognized tax benefits of
$0.7 million
for the first quarter of fiscal year
2019
. The Company’s total unrecognized tax benefits are classified as “
Non-current income taxes"
in the consolidated condensed balance sheets.
The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of
June 30, 2018
, the balance of accrued interest and penalties, net of tax, was
$1.3 million
.
Fiscal years 2015 through 2018 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 2015 may be adjusted upon examination by the tax authorities if they have been, or will be, used in a future period. The Company's United Kingdom subsidiaries are currently under a limited scope tax audit for certain income tax matters related to fiscal year 2016. The Company believes it has accrued adequate reserves related to the matters under examination. The Company is not under an income tax audit in any other major taxing jurisdiction.
11.
Net Income (Loss) Per Share
Basic net income (loss) per share is based on the weighted effect of common shares issued and outstanding and is calculated by dividing net income (loss) by the basic weighted average shares outstanding during the period. Diluted net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares used in the basic net income per share calculation, plus the equivalent number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares outstanding. These potentially dilutive items consist primarily of outstanding stock options.
The following table details the calculation of basic and diluted earnings (loss) per share for the
three
months ended
June 30, 2018
and
June 24, 2017
(in thousands, except per share amounts):
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Three Months Ended
|
|
June 30,
|
|
June 24,
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
Net income (loss)
|
$
|
(4,272
|
)
|
|
$
|
42,912
|
|
Denominator:
|
|
|
|
|
|
Weighted average shares outstanding
|
61,462
|
|
|
64,097
|
|
Effect of dilutive securities
|
—
|
|
|
3,063
|
|
Weighted average diluted shares
|
61,462
|
|
|
67,160
|
|
Basic earnings (loss) per share
|
$
|
(0.07
|
)
|
|
$
|
0.67
|
|
Diluted earnings (loss) per share
|
$
|
(0.07
|
)
|
|
$
|
0.64
|
|
All potential shares of common stock are anti-dilutive in periods of net loss, and therefore excluded for the
three
months ended
June 30, 2018
. The weighted outstanding shares excluded from our diluted calculation for the
three
months ended
June 24, 2017
were
218 thousand
, as the shares were anti-dilutive.
12.
Legal Matters
From time to time, we are involved in legal proceedings concerning matters arising in connection with the conduct of our business activities. We regularly evaluate the status of legal proceedings in which we are involved in order to assess whether a loss is probable or there is a reasonable possibility that a loss or additional loss may have been incurred, and to determine if accruals are appropriate. We further evaluate each legal proceeding to assess whether an estimate of possible loss or range of loss can be made.
Based on current knowledge, management does not believe that there are any pending matters that could potentially have a material adverse effect on our business, financial condition, results of operations or cash flows. However, we are
engaged in various legal actions in the normal course of business. There can be no assurances in light of the inherent uncertainties involved in any potential legal proceedings, some of which are beyond our control, and an adverse outcome in any legal proceeding could be material to our results of operations or cash flows for any particular reporting period.
13.
Stockholders’ Equity
Common Stock
The Company issued a net
0.1 million
and
0.2 million
shares of common stock during the
three
months ending
June 30, 2018
and
June 24, 2017
, respectively, primarily pursuant to the Company's 2006 Stock Incentive Plan.
Share Repurchase Program
Since inception,
$40.0 million
of the Company’s common stock has been repurchased under the Company’s 2018
$200 million
share repurchase program, all in the first quarter of fiscal year 2019, leaving
$160.0 million
available for repurchase under this plan as of
June 30, 2018
. During the
three
months ended
June 30, 2018
, the Company repurchased
1.0 million
shares of its common stock, for
$40.0 million
, at an average cost of
$38.87
per share. All of these shares were repurchased in the open market and were funded from existing cash. All shares of our common stock that were repurchased were retired as of
June 30, 2018
.
14.
Segment Information
We determine our operating segments in accordance with FASB guidelines. Our Chief Executive Officer (“CEO”) has been identified as the chief operating decision maker under these guidelines.
The Company operates and tracks its results in
one
reportable segment, but reports revenue performance in
two
product lines, Portable Audio and Non-Portable Audio and Other. Our CEO receives and uses enterprise-wide financial information to assess financial performance and allocate resources, rather than detailed information at a product line level. Additionally, our product lines have similar characteristics and customers. They share support functions such as sales, public relations, supply chain management, various research and development and engineering support, in addition to the general and administrative functions of human resources, legal, finance and information technology. Therefore, there is no complete, discrete financial information maintained for these product lines.
Revenues from our product lines are as follows (in thousands):
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Three Months Ended
|
|
June 30,
|
|
June 24,
|
|
2018
|
|
2017
|
Portable Audio Products
|
$
|
212,260
|
|
|
$
|
280,688
|
|
Non-Portable Audio and Other Products
|
42,223
|
|
|
40,047
|
|
|
$
|
254,483
|
|
|
$
|
320,735
|
|
15.
Subsequent Event
On July 24, 2018, the U.S. Court of Appeals for the Ninth Circuit reversed the decision of the U.S. Tax Court in Altera Corp. v. Commissioner related to the treatment of stock based compensation in an intercompany cost sharing arrangement. We are currently evaluating the impact of this decision. The effect this decision may have on our financial statements, if any, could be material.