ITEM
1
.
FINANCIAL STATEMENTS
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CIRRUS LOGIC, INC.
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CONSOLIDATED CONDENSED BALANCE SHEETS
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(in thousands)
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June 28,
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March 29,
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2014
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2014
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(unaudited)
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Assets
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Current assets:
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Cash and cash equivalents
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$
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268,544
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$
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31,850
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Marketable securities
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75,198
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263,417
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Accounts receivable, net
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77,219
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63,220
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Inventories
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92,002
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69,743
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Deferred tax assets
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19,921
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22,024
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Other current assets
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40,469
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25,079
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Total current assets
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573,353
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475,333
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Long-term marketable securities
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39,952
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89,243
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Property and equipment, net
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102,765
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103,650
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Goodwill and intangibles, net
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27,708
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28,366
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Deferred tax assets
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25,034
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25,065
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Other assets
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1,007
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3,087
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Total assets
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$
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769,819
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$
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724,744
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Liabilities and Stockholders' Equity
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Current liabilities:
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Accounts payable
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$
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75,695
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$
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51,932
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Accrued salaries and benefits
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11,598
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13,388
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Deferred income
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7,398
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5,631
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Other accrued liabilities
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14,080
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11,572
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Total current liabilities
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108,771
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82,523
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Long-term liabilities
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4,039
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4,863
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Stockholders' equity:
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Capital stock
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1,088,493
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1,078,878
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Accumulated deficit
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(430,663)
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(440,634)
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Accumulated other comprehensive loss
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(821)
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(886)
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Total stockholders' equity
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657,009
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637,358
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Total liabilities and stockholders' equity
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$
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769,819
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$
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724,744
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The ac
company
ing notes are an integral part of these consolidated condensed financial statements.
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CIRRUS LOGIC, INC.
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CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
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(in thousands, except per share amounts; unaudited)
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Three Months Ended
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June 28,
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June 29,
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2014
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2013
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Net sales
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$
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152,565
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$
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155,125
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Cost of sales
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77,190
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75,627
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Gross profit
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75,375
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79,498
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Operating expenses
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Research and development
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39,777
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28,530
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Selling, general and administrative
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19,683
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19,198
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Patent infringement settlements, net
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-
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695
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Restructuring and other
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-
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(430)
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Total operating expenses
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59,460
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47,993
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Income from operations
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15,915
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31,505
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Interest income
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195
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158
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Interest expense
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(662)
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-
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Other income (expense)
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501
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(17)
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Income before income taxes
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15,949
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31,646
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Provision for income taxes
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5,701
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11,004
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Net income
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10,248
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20,642
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Change in unrealized gain (loss) on marketable securities
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100
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(40)
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Tax effect of unrealized (gain) loss on marketable securities
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(35)
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67
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Comprehensive income
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$
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10,313
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$
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20,669
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Basic earnings per share
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$
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0.17
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$
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0.33
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Diluted earnings per share
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$
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0.16
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$
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0.31
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Basic weighted average common shares outstanding
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62,032
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63,363
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Diluted weighted average common shares outstanding
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64,688
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66,188
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The ac
company
ing notes are an integral part of these consolidated condensed financial statements.
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CIRRUS LOGIC, INC.
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
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(in thousands; unaudited)
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Three Months Ended
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June 28,
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June 29,
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2014
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2013
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Cash flows from operating activities:
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Net income
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$
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10,248
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$
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20,642
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization
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4,097
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3,367
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Stock compensation expense
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5,622
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5,862
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Deferred income taxes
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2,134
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10,102
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Loss on retirement or write-off of long-lived assets
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325
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-
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Excess tax benefit related to the exercise of employee stock options
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(3,119)
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-
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Other non-cash charges
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2,125
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1,265
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Net change in operating assets and liabilities:
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Accounts receivable, net
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(13,999)
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5,647
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Inventories
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(22,259)
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8,676
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Other assets
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(698)
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(2,054)
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Accounts payable and other accrued liabilities
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24,010
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(16,979)
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Deferred income
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1,767
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(537)
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Income taxes payable
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2,513
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721
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Net cash provided by operating activities
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12,766
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36,712
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Cash flows from investing activities:
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Proceeds from sale of available for sale marketable securities
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246,865
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4,922
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Purchases of available for sale marketable securities
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(9,290)
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(39,698)
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Purchases of property, equipment and software
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(3,274)
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(1,222)
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Purchase of hedge
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(11,095)
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-
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Investments in technology
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(112)
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(650)
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Decrease (increase) in deposits and other assets
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118
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(16)
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Net cash provided by (used in) investing activities
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223,212
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(36,664)
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Cash flows from financing activities:
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Payments for debt issuance costs
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(2,978)
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-
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Issuance of common stock, net of shares withheld for taxes
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852
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720
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Repurchase of stock to satisfy employee tax withholding obligations
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(277)
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-
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Excess tax benefit related to the exercise of employee stock options
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3,119
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-
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Net cash provided by financing activities
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716
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720
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Net increase in cash and cash equivalents
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236,694
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768
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Cash and cash equivalents at beginning of period
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31,850
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66,402
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Cash and cash equivalents at end of period
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$
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268,544
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$
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67,170
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The ac
company
ing notes are an integral part of these consolidated condensed financial statements
.
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
29
, 20
1
4
, included in
our
Annual Report
on Form
10-K filed with the Commission on
May 2
8
, 20
1
4
.
In our opinion, the financial statements reflect all adjustments, including normal recurring adjustments, necessary for a fair presentation of the financial position, operating results and cash flows for those periods presented. The preparation of financial statements in conformity with United States
(“U.S.”)
generally accepted accounting principles
(“GAAP”)
requires management to make estimates and assumptions that affect reported assets, liabilities, revenues and expenses, as well as disclosure of contingent assets and liabilities. Actual results could differ from those estimates and assumptions. Moreover, the results of operations for the interim
periods presented are not necessarily indicative of the results that may be expected for the entire year.
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 ASU No. 2014-09,
Revenue from Contracts with Customers (ASC Topic 606)
. The purpose of the 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.” The amendments in this ASU are effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption not permitted by the FASB. The Company is currently evaluating the impact of this ASU on its consolidated financial position, results of operations and cash flows.
3
.
Marketable Securit
ies
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. Ma
rketable 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
28
, 201
4
(in thousands):
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Estimated
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Gross
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Gross
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Fair Value
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Amortized
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Unrealized
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Unrealized
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(Net Carrying
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As of June 28, 2014
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Cost
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Gains
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Losses
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Amount)
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Corporate debt securities
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$
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93,759
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$
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9
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$
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(98)
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$
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93,670
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Commercial paper
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16,472
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7
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(5)
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16,474
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Certificates of deposit
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5,005
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1
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-
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|
5,006
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Total securities
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$
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115,236
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$
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17
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$
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(103)
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$
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115,150
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The Company’s specifically identified gross unrealized losses of $
103
thousand relates to
23
different securities with total amortized cost of approximately $
86.6
million at
June 28, 2014
. Because the Company does not intend to sell the investments at a loss and the Company will not be required to sell the investments before recovery of its amortized cost basis, it did not consider the investment in these securities to be other-than
-temporarily impaired at
June 28, 2014
. Further, the securities with gross unrealized losses had been in a continuous unrealized loss position for less than 12
months as of
June 28, 2014
.
The following table is a summary of availabl
e-for-sale securities at March 29
, 201
4
(in thousands):
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Estimated
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Gross
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Gross
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Fair Value
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Amortized
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Unrealized
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Unrealized
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(Net Carrying
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As of March 29, 2014
|
Cost
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Gains
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Losses
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Amount)
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Corporate debt securities
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$
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246,878
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$
|
52
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$
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(245)
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$
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246,685
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U.S. Treasury securities
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|
56,986
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|
10
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(2)
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56,994
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Agency discount notes
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|
2,008
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1
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-
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2,009
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Commercial paper
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41,962
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10
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(2)
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41,970
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Certificates of deposit
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5,006
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-
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(4)
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5,002
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Total securities
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$
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352,840
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$
|
73
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$
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(253)
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$
|
352,660
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The Company’s specifically identified gross unrealized losses of $
253
thousand relates to
74
different securities with total amortized cost of approximately $
207.8
million at March
29, 2014
. Because the Company does not intend to sell the investments at a loss and the Company will not be required to sell the investments before recovery of its amortized cost basis, it did not consider the investment in these securities to be other-than-
temporarily impaired at
March
29, 2014
. Further, the securities with gross unrealized losses had been in a continuous unrealized loss position for less than 12 months as of
March
29, 2014
.
The cost and estimated fair value of available-for-sale
securities
by contractual maturities were as follows
(in thousands)
:
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|
June 28, 2014
|
|
March 29, 2014
|
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Amortized
|
|
Estimated
|
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Amortized
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Estimated
|
|
|
Cost
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Fair Value
|
|
Cost
|
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Fair Value
|
Within 1 year
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|
$
|
75,261
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|
$
|
75,198
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|
$
|
263,418
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$
|
263,417
|
After 1 year
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39,975
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|
|
39,952
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|
|
89,422
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|
|
89,243
|
Total
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|
$
|
115,236
|
|
$
|
115,150
|
|
$
|
352,840
|
|
$
|
352,660
|
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 foreign currency hedge
assets.
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
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•
|
Level 1 - Quoted prices in active markets for identical assets or liabilities.
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•
|
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.
|
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|
The Company’s investment portfolio assets consist of
corporate debt securities,
money market funds,
U.S. Treasury securities, obligations of
certain
U.S. government-sponsored enterprises
,
commercial paper,
and certificates of deposit
and are reflected on our consolidated condensed balance sheet
s
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.
The
fair
value of the foreign currency hedge is included in “
Other current assets
”
on the consolidated condensed balance sheet. Realized gains (losses) related to the hedge are reported under the caption “
Other income (expense)
”
in the consolidated c
ondensed
statements of c
om
prehensive i
ncome.
As o
f
June
28
, 201
4
, t
he Company classif
ied its investment portfolio
and foreign currency hedge
assets as
Level 1
or Level 2
inputs.
The Company has no Level 3 assets.
T
here were no transfers between
L
evel 1,
L
evel 2, or
L
evel 3 measurements for the three month period endi
ng
June
28
,
201
4
.
The fair value of our financial assets a
t
June
28
, 2
01
4
,
was determined using the following inputs (in thousands):
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Quoted Prices
|
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in Active
|
|
Significant
|
|
|
|
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|
Markets for
|
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Other
|
|
Significant
|
|
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
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Assets
|
|
Inputs
|
|
Inputs
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
100,662
|
|
$
|
-
|
|
$
|
-
|
|
$
|
100,662
|
Commercial paper
|
|
-
|
|
|
149,987
|
|
|
-
|
|
|
149,987
|
|
$
|
100,662
|
|
$
|
149,987
|
|
$
|
-
|
|
$
|
250,649
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
-
|
|
$
|
93,670
|
|
$
|
-
|
|
$
|
93,670
|
Commercial paper
|
|
-
|
|
|
16,474
|
|
|
-
|
|
|
16,474
|
Certificates of deposit
|
|
-
|
|
|
5,006
|
|
|
-
|
|
|
5,006
|
|
$
|
-
|
|
$
|
115,150
|
|
$
|
-
|
|
$
|
115,150
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency hedge
|
$
|
-
|
|
$
|
11,645
|
|
$
|
-
|
|
$
|
11,645
|
The fair value of
our financial assets at March 29
, 201
4
,
was determined using the following inputs (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
|
$
|
20,456
|
|
$
|
-
|
|
$
|
-
|
|
$
|
20,456
|
Commercial paper
|
|
-
|
|
|
1,878
|
|
|
-
|
|
|
1,878
|
|
$
|
20,456
|
|
$
|
1,878
|
|
$
|
-
|
|
$
|
22,334
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
-
|
|
$
|
246,685
|
|
$
|
-
|
|
$
|
246,685
|
U.S. Treasury securities
|
|
56,994
|
|
|
-
|
|
|
-
|
|
|
56,994
|
Agency discount notes
|
|
-
|
|
|
2,009
|
|
|
-
|
|
|
2,009
|
Commercial paper
|
|
-
|
|
|
41,970
|
|
|
-
|
|
|
41,970
|
Certificates of deposit
|
|
-
|
|
|
5,002
|
|
|
-
|
|
|
5,002
|
|
$
|
56,994
|
|
$
|
295,666
|
|
$
|
-
|
|
$
|
352,660
|
5
.
Accounts Receivable, net
The following are the components of accounts receivable
, net
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28,
|
|
March 29,
|
|
2014
|
|
2014
|
Gross accounts receivable
|
$
|
77,448
|
|
$
|
63,449
|
Allowance for doubtful accounts
|
|
(229)
|
|
|
(229)
|
Accounts receivable, net
|
$
|
77,219
|
|
$
|
63,220
|
6
.
Inventories
Inventories are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28,
|
|
March 29,
|
|
2014
|
|
2014
|
Work in process
|
$
|
53,849
|
|
$
|
37,967
|
Finished goods
|
|
38,153
|
|
|
31,776
|
|
$
|
92,002
|
|
$
|
69,743
|
7
.
Acquisition
On April 29, 2014, Cirrus Logic announced that Cirrus Logic and
the
board of directors of Wolfson Microelectronics plc, a public limited company incorporated in Scotland (“Wolfson”), agreed on the terms of a recommended cash offer of
£2.35
per share (the “Offer”) to be made by Cirrus Logic for the acquisition of the entire issued and to be issued share capital of Wolfson (the “Acquisition”). The Offer values the entire issued and to be issued share capital of Wolfson at approximately
£291
million (approximately
$488
million based on a U.S. dollar to pound sterling exchange rate of 1.68) (the “Offer Consideration”), and implies an enterprise value of Wolfson of approximately
£278
million (approximately $467 million based on a U.S. dollar to pound sterling exchange rate of 1.68).
The Acquisition will be effected by means of a court-sanctioned scheme of arrangement under the laws of the United Kingdom (the “Scheme”). On June 23, 2014, Wolfson announced that Wolfson shareholders approved the Acquisition. Completion of the Acquisition remains subject to the satisfaction or waiver of certain conditions, including
the sanction of the Scheme by the Court of Session in Edinburgh, Scotland. In connection with the Acquisition
, we entered into a nine-month foreign currency hedging contract, which is expected to mitigate the risks of foreign currency fluctuation related to this transaction. The Acquisition, if
completed
, is expected to strengthen Cirrus Logic’s ability to expand its customer base with highly differentiated, end-to-end audio solutions for portable audio applications. The Acquisition will be financed by a combination of existing cash on Cirrus Logic’s balance sheet and $225 million in debt funding from Wells Fargo Bank, Nati
onal Association
, as discussed below
.
The Acquisition is expected to close in the second
quarter
of
fiscal year
201
5
.
8. Revolving Line of Credit
Cirrus Logic entered into a credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association as administrative agent and lender, on April 29, 2014, in connection with the Acquisition. The Credit Agreement provides for a
$225
million senior secured revolving credit facility (the “Credit Facility”). The Credit Facility may be used for, among other things, payment of the Offer Consideration in connection with the
Acquisition
. The Credit Facility matures on the earliest to occur of (a) January 23, 2015, (b) the date of termination of the Commitments as a result of a permanent reduction of all of the Commitments (as defined
in the Credit Agreement
) by Cirrus Logic or (c) the date of termination of the Commitments as a result of an event of default (such date, the “Maturity Date”). Cirrus Logic must repay the outstanding principal amount of all borrowings, together with all accrued but unpaid interest thereon, on the Maturity Date. 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 .25% per annum for Base Rate Loans and 1.75% to 2.25% per annum for LIBOR Rate Loans based on the Leverage Ratio (as defined below). A
c
ommitment
f
ee accrues at a rate per annum ranging from 0.30% to 0.40% (based on the Leverage Ratio) on the average daily unused portion of the Commitment
s
. Certain representations and warranties are required under the Credit Agreement, and the Company must be in compliance with specified financial covenants, including
(a)
the ratio of consolidated funded indebtedness to consolidated EBITDA for the prior four consecutive quarters must not be greater than
1.75
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 $75 million. At June 28, 2014, the Company was in compliance with
all
covenants
under the Credit Facility
. There were no borrowings under this facility as of June 28, 2014.
The Company maintained a
n unsecured
revolving credit
facility
(the “Expired Credit
Facility
”) until early fiscal year 2014. The aggregate borrowing limit under the
Expired C
redit
F
acility was
$100
million
,
with a $15 million letter of credit sublimit and was intended to provide the Company with short-term borrowings for working capital and other general corporate purposes. The Company had no outstanding amounts under the facility prior to its expiration on April 19, 2013.
9
.
Income Taxes
Our provision for income taxes is based on estimated effective tax rates derived from an estimate of annual consolidated earnings before taxes, adjusted for nondeductible expenses, other permanent items and any applicable credits. Our income tax expense is primarily a non-cash charge due to the utilization of U.S. net operating losses.
The following table presents the provision for income taxes and the effective tax rates (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 28,
|
|
June 29,
|
|
2014
|
|
2013
|
Income before income taxes
|
$
|
15,949
|
|
$
|
31,646
|
Provision for income taxes
|
$
|
5,701
|
|
$
|
11,004
|
Effective tax rate
|
|
35.7%
|
|
|
34.8%
|
Our income tax expense for the
first
quarter of fiscal year 201
5
was
slightly above
the federal statutory rate primarily due to
the effect of permanent differences that are nondeductible for tax purposes. Our income tax expense for the first quarter of fiscal year 2014 was slightly below the federal statutory rate primarily due to the effect of the federal research and development credit which was extended through December 31, 2013 by the American Taxpayer Relief Act of 2012, which was enacted on January 2, 2013.
We had
no
unrecognized tax benefits as of
June
2
8
, 201
4
. The Company does not believe that its
unrecognized tax benefits
will significantly increase or decrease
during
the next 12 months.
We accrue interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes. As of
June
28, 2014
, the balance of accrued interest and penalties was
zero
.
No
interest or penalties were incurred during the first
three
months of fiscal year 201
5
or 201
4
.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. Fiscal years
2011
through 20
1
4
remain open to examination by the major taxing jurisdictions to which we are subject.
10
.
Net Income Per Share
Basic net income per share is based on the weighted effect of common shares issued and outstanding and is calculated by dividing net income by the basic weighted average shares outstanding during the period. Diluted net income per share is calculated by dividing net income by the weighted average number of common shares used in the basic net income per share calculation, plus the equivalent number of common shares that would be issued assuming exercise or conversion of all potentially dilutive
common shares
outstanding.
These potentially dilutive items consist primarily of outstanding stock options and restricted stock awards.
The following table details the calculation of basic and diluted earnings per share for the three months ended
June
28, 2014 and
June
29, 2013 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 28,
|
|
June 29,
|
|
2014
|
|
2013
|
Numerator:
|
|
|
|
|
|
Net income
|
$
|
10,248
|
|
$
|
20,642
|
Denominator:
|
|
|
|
|
|
Weighted average shares outstanding
|
|
62,032
|
|
|
63,363
|
Effect of dilutive securities
|
|
2,656
|
|
|
2,825
|
Weighted average diluted shares
|
|
64,688
|
|
|
66,188
|
Basic earnings per share
|
$
|
0.17
|
|
$
|
0.33
|
Diluted earnings per share
|
$
|
0.16
|
|
$
|
0.31
|
The weighted
outstanding
shares
excluded from
our diluted calculation for the
three months
ended
June 28, 2014 and June 29, 2013
were
640 thousand
and
1,068 thousand,
respectively
, as the
shares were anti-dilutive.
1
1
.
Legal Matters
From time to time, we are involved in legal proceedings concerning matters arising in connection with the conduct of our business activities. We regularly evaluate the status of legal proceedings in which we are involved
in order
to assess whether a loss is probable or there is a reasonable possibility that a loss or additional loss may have been incurred and determine if accruals are appropriate. We further evaluate each legal proceeding to assess whether an estimate of possible loss or range of loss can be made.
On June 4, 2012, U.S. Ethernet Innovations, LLC (the “Plaintiff”) filed suit against Cirrus Logic and two other defendants in the U.S. District Court, Eastern District of Texas. The Plaintiff alleges that Cirrus Logic infringed four U.S. patents relating to Ethernet technology. In its complaint, the Plaintiff indicated that it is seeking unspecified monetary damages, including up to treble damages for willful infringement. We answered the complaint on June 29, 2012
,
denying the allegations of infringement and seeking a declaratory judgment that the patents in suit were invalid and not infringed. The
parties entered into a settlement agreement on May 30, 2013. In exchange for a full release of claims as it relates to the asserted patent, we paid the Plaintiff
$0.7 million
. This amount
is recorded as a separate line item on the consolidated condensed statements of comprehensive income
under the caption “Patent infringement settlements, net
.
”
For the case described below, management is unable to provide a meaningful estimate of the possible loss or range of possible loss because, among other reasons, (i) the proceedings are in various stages; (ii) damages have not been sought
or specified
; (iii) damages are unsupported and/or exaggerated; (iv) there is uncertainty as to the outcome of pending appeals or motions; (v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories to be presented or a large number of parties.
For th
is
case, however, management does not believe, based on currently available information, that the outcome of th
is
proceeding will have a material adverse effect on our financial condition. However, the ultimate resolutions of th
is
proceeding and matters are inherently difficult to predict; as such, our operating results could be materially affected by the unfavorable resolution of th
is
proceeding or matters for any particular period, depending, in part, upon the operating results for such period.
We intend to vigorously defend ourselves against the allegations made in the legal case described below.
On June 17, 2014, Enterprise Systems Technologies S.a.r.l. (the “Plaintiff”) filed suit against Cirrus Logic, Inc. in the U.S. District Court, District of Delaware. The Plaintiff alleges that Cirrus Logic indirectly infringes two U.S. patents through the manufacture and sale of digital signal processors, audio codecs, audio processors, and other components included in communications and consumer electronic devices such as smartphones and computers. The Plaintiff is seeking unspecified monetary damages.
1
2
.
Stockholders’ Equity
Common Stock
The Company issued
a net
0.
2
million and
0.1
million shares of common stock
during
the three month
periods
ending
June
28, 201
4
,
and June 29, 2013,
respectively, in connection with stock issuances pursuant to
the Company’s
2006 Stock Incentive Plan.
1
3
.
Segment Information
We determine our operating segments in accordance with
Financial Accounting Standards Board
guidelines.
Our Chief Executive Officer (“CEO”)
has been identified as the chief operating decision maker
under these guidelines
.
The Company operates and tracks its results in one reportable segment
, but reports revenue performance in
two product lines
, which currently are audio and energy
.
Our CEO receives and uses enterprise-wide financial information to assess financial performance and allocate resources, rather than detailed information at a product line level. Additionally, our product lines have similar characteristics and customers. They share operations support functions such as sales, public relations, supply chain
management, various research and development and engineering support, in addition to the general and administrative functions of human resources, legal, finance and information technology. Therefore, there is no complete, discrete financial information maintained for these product lines.
Revenue
s
from our product lines are as follows (in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 28,
|
|
June 29,
|
|
2014
|
|
2013
|
Audio Products
|
$
|
141,161
|
|
$
|
143,666
|
Energy Products
|
|
11,404
|
|
|
11,459
|
|
$
|
152,565
|
|
$
|
155,125
|
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read along with the unaudited consolidated condensed financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended March 29, 2014, contained in our fiscal year 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “Commission”) on May 28, 2014.
We maintain a web site at
investor.cirrus.com
,
which makes available
free of charge our
most
recent annual report and
all
other filings
we have made
with the
Commission
.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and certain information incorporated herein by reference contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations, estimates, forecasts and projections and the beliefs and assumptions of our management. In some cases, forward-looking statements are identified by words such as “expect,” “anticipate,” “target,” “project,” “believe,” “goals,” “estimates,” “intend,” and variations of these types of words and similar expressions which are intended to identify these forward-looking statements. In addition, any statements that refer to our plans, expectations, strategies or other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statement for any reason.
For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see
“Item 1A – Risk Factors”
in our 2014 Annual Report on Form 10-K filed with the Commission on May 28, 2014, and in Part II, Item 1A “
Risk Factors
” within this quarterly report on Form 10-Q. Readers should carefully review these risk factors, as well as those identified in other documents filed by us with the Commission.
Overview
Cirrus Logic, Inc. (“Cirrus Logic,” “We,” “Us,” “Our,” or the “Company”) develops high-precision, analog and mixed-signal integrated circuits (“ICs”) for a broad range of
audio and energy
markets.
Building on our diverse
analog
mixed-signal patent portfolio, Cirrus Logic delivers highly optim
ized products for consumer and professional
audio, automotive entertainment
,
and targeted industrial
applications including energy control, energy management, light emitting diode (“LED”) lighting and energy exploration
.
Critical Accounting Policies
Our discussion and analysis of the Company’s financial condition and results of operations are based upon the
unaudited
consolidated
condensed
financial statements included in this report, which have been prepared in accordance with U. S.
GAAP
. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts. We evaluate the estimates on an on-going basis. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.
There were no material changes in the
first three months
of fiscal
year
201
5
to the information provided under the heading “
Critical Accounting Policies
” included in our Annual Report on Form 10-K for the fiscal year ended
March 29, 2014
.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09,
Revenue from Contracts with Customers (ASC Topic 606)
. The purpose of the 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.” The amendments in this ASU are effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption not permitted by the FASB. The Company is currently evaluating the impact of this ASU on its consolidated financial position, results of operations and cash flows.
Results of Operations
The following table summarizes the results of our operations for the
first three months o
f
fiscal years
2015
and
2014
as a
percentage
of net sales. All
percentage
amounts were calculated using the underlying data in thousands
, unaudite
d:
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 28,
|
|
June 29,
|
|
2014
|
|
2013
|
Net sales
|
100%
|
|
100%
|
Gross margin
|
49%
|
|
51%
|
Research and development
|
26%
|
|
18%
|
Selling, general and administrative
|
13%
|
|
12%
|
Patent infringement settlements, net
|
0%
|
|
1%
|
Restructuring and other
|
0%
|
|
0%
|
Income from operations
|
10%
|
|
20%
|
Interest income
|
0%
|
|
0%
|
Interest expense
|
0%
|
|
0%
|
Other income (expense)
|
0%
|
|
0%
|
Income before income taxes
|
10%
|
|
20%
|
Provision for income taxes
|
3%
|
|
7%
|
Net income
|
7%
|
|
13%
|
Net Sales
Net sales for the first quarter of fiscal year 2015 decreased $2.
5
million, or 2 percent, to $152.6 million from $155.1 million in the first quarter of fiscal year 201
4
. Net sales from our audio products decreased $2
.5 million, or 2 percent, primarily due to lower average selling prices (“ASPs”) in portable audio in the current quarter versus the same time period in the prior fiscal year. Energy product sales decreased $0.1
million, or less than 1 percent, during the first quarter of fiscal year 2015 versus the comparable quarter of the prior fiscal year
.
Export sales, principally to Asia, including sales to U.S.-based customers with manufacturing plants overseas, were 93 percent of net sales during the first quarter of each of fiscal years 2015 and 2014. Our sales are denominated primar
ily in U.S. dollars. As a result, we have not entered into foreign currency hedging contracts, other than the hedge entered into in connection with the
pending
Wolfson acquisition.
Since the components we produce are largely proprietary and generally not available from second sources, we consider our end customer to be the entity specifying the use of our component in their design. These end customers may then purchase our products directly from us, from an external sales representative or distributor, or through a third party manufacturer contracted to produce their designs. For the first quarter of fiscal years 2015 and 2014, our ten largest end customers represented approximately 85 percent and 87 percent of our net sales, respectively.
We had one end customer, Apple Inc. that purchased through multiple contract manufacturers and represented approximately
73 percent and 77
percent of the Company’s total
net
sales for the
first
quarter of fiscal years 201
5
and 201
4
, respectively.
None of our
distributor
s
represented
more than
1
0
percent of our sales for the three month periods ending
June 28, 2014 and
June 29, 2013.
For more information, please see Part II
—
Item 1A
—
“We depend on a limited number of customers and distributors for a substantial portion of our sales, and the loss of, or a significant reduction in orders from,
or pricing on products sold to,
any key customer or distributor could significantly reduce our sales
or profitability
.
”
No other end customer or distributor represented more than 10 percent of net sales for the three
month periods ending June 28, 2014 and June 29, 2013
.
Gross Margin
Gross margin was 49.4 percent in the first quarter of fiscal year 2015, down from 51.2 percent in the first quarter of fiscal year 2014. The year-over-year decrease in gross margin was primarily du
e to
a shift in product mix toward products with lower ASPs. Offsetting the decrease was an increase in shipments of
certain higher margin
general market audio products, as well as a decrease in inventory reserve charges
compared to the first quarter of fiscal year 2014.
Research and Development Expense
Research and development expense for the
first
quarter of fiscal year 201
5
was $
39.8
million, an increase of $
11.3
million, or
39
percent, from $
28.5
million in the
first
quarter of fisca
l year 201
4
. This increase was primarily due to
increased expenses in product development, inclu
ding tape outs, an 18 percent increase in research and development headcount and associated salary, employee-related expenses and facilities costs, as well as increased expenses related to CAD software investments.
Selling, General and Administrative Expense
Selling, general and ad
ministrative (“SG&A”) expense for
the
first
quarter of fiscal year 201
5
was $
19.7
million, a
n
in
crease of $
0.5
million, or
3
pe
rcent, from $19.2 million in the first quarter of fiscal year 2014. The increase was primarily attributable to
higher professional expenses
for the
first
quarter
of fiscal year 2015 as the Company experienced
a 5 percent increase in SG&A headcount
for the quarter.
Patent Infringement Settlements, net
The Company recorded a $0.7 million expense in the first q
uarter of fiscal year 2014 in connection with the settlement of the U.S. Ethernet Innovations, LLC case discussed in Note 1
1
– Legal Matters. This
item is presented as a separate line item within operating expenses in the consolidated condensed statements of comprehensive income.
Income Taxes
Our provision for income taxes is based on estimated effective tax rates derived from an estimate of annual consolidated earnings before taxes, adjusted for nondeductible expenses, other permanent items and any applicable credits. Our income tax expense is primarily a non-cash charge due to the utilization of U.S. net operating losses.
The following table presents the provision for income taxes and the effective tax rates (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 28,
|
|
June 29,
|
|
2014
|
|
2013
|
Income before income taxes
|
$
|
15,949
|
|
$
|
31,646
|
Provision for income taxes
|
$
|
5,701
|
|
$
|
11,004
|
Effective tax rate
|
|
35.7%
|
|
|
34.8%
|
Our income tax expense for the first quarter of fiscal year 2015 was slightly above the federal statutory rate primarily due to the effect of permanent differences that are nondeductible for tax purposes. Our income tax expense for the first quarter of fiscal year 2014 was slightly below the federal statutory rate primarily due to the effect of the federal research and development credit which was extended through December 31, 2013 by the American Taxpayer Relief Act of 2012 which was enacted on January 2, 2013.
Liquidity and Capital Resources
We require cash to fund our operating expenses and working capital requirements, including outlays for research and development, capital expenditures,
share
repurchase
s
, investments in marketable securities, and strategic acquisitions.
Our principal sources of liquidity are cash on hand, cash generated from operations, cash generated from the sale and maturity of marketable securities, funds from equity issuances
and borrowings under our new $225 million senior secured revolving credit facility
.
Cash provided by operating activities is net income adjusted for certain non-cash items and changes in certain current assets and current liabilities. Our operational cash flows are affected by the ability of our operations to generate cash, and our management of our assets and liabilities, including both working capital and long-term assets and liabilities. Net cash
provided by operating activities was $12.8
million for the first
quarter of
fiscal year 201
5 as compared to $36.7
million
in
operating activities for the
c
orresponding period of fiscal year 201
4. The source
of cash in operations during the
first quarter of fiscal year 2015 was primarily related to the cash components of our net income, offset by an $8.7 million decrease in working capital
. The primary
source
of cash
in
operations during the corresponding period of fiscal year 201
4
was
primarily
related to
the cash components of our net income.
Net cash
provided by investing activities was $223.2
million during the
first quarter of
fiscal year 201
5
as compared to $
36.7
million
used in investing activities
during the
first quarter
of fiscal year 201
4. The in
crease i
s primarily related to movements in the current quarter toward more liquid investments in anticipation of financing the closing of the Wolfson acquisition, expected to occur in the second quarter of fiscal year 2015. See Note 7 – Acquisition and Note 8 – Revolving Line of Credit for additional details. Proceeds from the sale of marketable securities of $246.9
million
made up the majority of the movement toward more liquid assets during the current quarter, offset by the $11.1 million foreign currency hedge purchased in conjunction with the acquisition discussed in Note 7, purchases of marketable securities of $9.3 million and the purchase of proper
ty, equipment and software
of $3.3 million
. For the cor
responding period in fiscal year 201
4, the Company had
net purchases of marketable securities of $3
4.8
million and
paid
$1.
2
million for the purchase of property, equipment and software.
Net cash
provided by
financing activities was $
0.7
million during
the
first
quarter of
both
fiscal year
s
201
5 and 2014
. The cash
provided
during the first
quarter
of fiscal year 201
5
was
primarily
associated with
the
excess tax benefit related to employee stock option exercises of $3.1 million and $0.9 million for the issuance of common stock, net of shares withheld for taxes
, partially offset by
payments for debt issuance costs related to the Wolfson acquisition of $3.0 million.
The cash
provided
during the first
quarter
of fisc
al year
2014
was
due to the
net issuance of common stock, net of shares withheld for taxes.
The Company continued expansion of operations in fiscal year 2015
with continued work on
additional facilities in Austin. We anticipate future costs related to the current expansion to range from $
18 million to $20 million over the next year. We anticipate these cash uses to be funded from current cash sources.
We have not paid cash dividends on our common stock and currently intend to continue our policy of retaining any earnings for reinvestment in our business. Although we cannot
give
assur
ance
that we will be able to generate cash in the future, we anticipate that our
future cash earnings,
existing
cash, cash equivalents, investments and credit under our Credit Facility are sufficient to meet our
capital
requirements
for at least the next 12 months
, although we could be required, or could elect, to seek additional funding prior to that time
.
Revolving Credit Facilities
On April 29, 2014,
we announced that we and the board of directors of Wolfson Microelectronics plc, a public limited company incorporated in Scotland (“Wolfson”) agreed on the terms of a recommended cash offer of £2.35 per share (the “Offer”) to be made by us for the acquisition of the entire issued and to be issued share capital of Wolfson (the “Acquisition”). The Offer values the entire issued and to be issued share capital of Wolfson at approximately £291 million (approximately $488 million based on a U.S. dollar-to-pound sterling exchange rate of 1.68) (the “Offer Consideration”), and implies an enterprise value of Wolfson of approximately £278 million (approximately $467 million based on a U.S. dollar to pound sterling exchange rate of 1.68). The Acquisition will be effected by means of a court-sanctioned scheme of arrangement under the laws of the United Kingdom (the “Scheme”). On June 23, 2014, Wolfson announced that Wolfson shareholders approved the Acquisition. Completion of the Acquisition remains subject to the satisfaction or waiver of certain conditions, including the sanction of the Scheme by the Court of Session in Edinburgh, Scotland. The Acquisition is expected to close in the second quarter of fiscal year 2015.
On April 29, 2014, in connection with the Acquisition, we entered into the Credit Agreement with Wells Fargo Bank, National Association as administrative agent and lender. The Credit Agreement provides for a $225 million senior secured revolving credit facility. The Credit Facility may be used for, among other things, payment of the Offer Consideration in connection with the Acquisition.
The Credit Facility matures on the earliest to occur of (a) January 23, 2015, (b) the date of termination of the Commitments as a result of a permanent reduction of all of the Commitments (as defined in the Credit Agreement) by Cirrus Logic or (c) the date of termination of the Commitments as a result of an event of default (such date, the “Maturity Date”). We must repay the outstanding principal amount of all borrowings, together with all accrued but unpaid interest thereon, on the Maturity Date. 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 .25% per annum for Base Rate Loans and 1.75% to 2.25% per annum for LIBOR Rate Loans based on Cirrus Logic’s Leverage Ratio (as defined below). A commitment fee accrues at a rate per annum ranging from 0.30% to 0.40% (based on the Leverage Ratio) on the average daily unused portion of the Commitments.
We are entitled to borrow only in U.S. dollars under the Credit Facility. The Offer Consideration in connection with the Acquisition is payable in Great Britain pounds sterling; therefore, we entered into a separate nine-month foreign currency hedging contract with Wells Fargo Bank, National Association, which is expected to mitigate the risk of fluctuations in the dollar/pounds sterling exchange rates in relation to the payment of the Offer Consideration in connection with the Acquisition. There were no borrowings under the facility as of June 28, 2014.
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 certain 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 1.75 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 $75 million. The Company was in compliance with all covenants under the Credit Facility as of June 28, 2014.
The Credit Facility provides for a “Certain Funds Period” during which limited borrowing conditions apply and only breaches of certain major representations and major defaults or illegality may prevent funding the Offer Consideration in order to comply with the certain funds requirements of the United Kingdom City Code on Takeover and Mergers. Following the Certain Funds Period, the Credit Facility provides for a clean-up period to permit us to cure certain technical breaches.
The Company maintained an unsecured revolving credit facility (the “Expired Credit Facility”) until early fiscal year 2014. The aggregate borrowing limit under the Expired Credit Facility was $100 million, with a $15 million letter of credit sublimit and was intended to provide the Company with short-term borrowings for working capital and other general corporate purposes.
There were no outstanding amounts under the facility prior to its expiration on April 19, 2013. See also Note 8 — Revolving Line of Credit.