NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1.
Basis of Presentation
The consolidated condensed financial statements have been prepared by Cirrus Logic, Inc. (“Cirrus Logic,” “we,” “us,” “our,” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (
the
“Commission”). The accompanying unaudited consolidated condensed financial statements do not include complete footnotes and financial presentations. As a result, these financial statements should be read along with the audited consolidated financial statements and notes thereto for the year ended March
26
, 201
6
, included in our Annual Report on Form 10-K filed with the Commission on
May 2
5
, 201
6
. In our opinion, the financial statements reflect all
material
adjustments, including normal recurring adjustments, necessary for a fair presentation of the financial position, operating results and cash flows for those periods presented. The preparation of financial statements in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect reported assets, liabilities, revenues and expenses, as well as disclosure of contingent assets and liabilities. Actual results could differ from those estimates and assumptions. Moreover, the results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the entire year.
Additionally, prior period amounts have been adjusted to conform to current year presentation.
2. Recently Issued Accounting Pronouncements
In May 2014, the
Financial Accounting Standards Board (
FASB
)
issued
Accounting Standards Update (“
ASU
”)
No. 2014-09,
Revenue from Contracts with Customers (ASC Topic 606)
. The purpose of this ASU is to converge revenue recognition requirements per 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.
I
n A
ugust
2015
,
the FASB issued
ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
after
public comment
respondents
support
ed
a proposal to delay the effective date of this ASU to annual reporting periods beginning after December 15, 2017
, including interim reporting periods within that reporting period
. The Company is currently evaluating the impact of this ASU on its
financial statements
and expects no material modifications
.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
. The amendments in this ASU provide guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company is currently evaluating this ASU and expects no material modifications to its financial statements.
In April 2015, the FASB issued ASU No. 2015-03,
Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
. The amendments in this update require that debt issuance costs related to a recognized debt liability
are
presented in the balance sheet as a direct deduction from the carrying amount of that debt liability
and that the amortization of debt issuance costs is reported as interest expense.
ASU 2015-03 is to be applied retrospectively and represents a change in accounting principle.
In August 2015, the FASB issued FASB ASU No. 2015-15,
Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
. ASU 2015-15 clarified the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. Debt issuance costs related to a line-of-credit arrangement may be presented in the balance sheet as an asset and subsequently amortized ratably over the term of the arrangement regardless of whether there are any outstanding borrowings. Both
ASU
2015-03 and ASU 2015-15 are
effective for fiscal years beginning after December 15, 2015, including interim
periods within
those fiscal years. Earlier adoption is permitted for financial statements that have not been previously issued. The Company adopt
ed
these
ASU
s
in the current fiscal quarter
.
In April 2015, the FASB issued ASU No. 2015-04,
Compensation – Retirement Benefits (Topic 715): Practical
Expedient for the Measure
ment Date of an Employer’s Defined Benefit Obligation and Plan Assets.
The ASU
is part of the
FASB’s “
Simplification Initiative
”
to reduce complexity
in accounting standards.
The
FASB
decided to
permit
entities to measure defined benefit plan assets and obligations as of the month-end that is closest to their fiscal year-end. An entity is required to disclose the accounting policy election and the date used to measure defined benefit plan assets and obligations in accordance with the amendments in this
u
pdate.
The
amendments in this
u
pdate are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with earlier application permitted.
The Company
adopted
this ASU
in the current fiscal quarter, with no modifications to its financial statements. The Company’s
plan assets and obligations are measured as of
the
fiscal year-end
.
In July 2015, ASU No. 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
was issued. This ASU requires companies to subsequently measure inventory at the lower of cost and net realizable value versus the previous lower of cost or market. The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, to be applied prospectively. Early application is permitted. The Company is currently evaluating this ASU and expects no material modifications to its financial statements as a result.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842).
The FASB issued this
u
pdate 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 payment
s
recognized as a liability, measured at present value, and the right-of-use asset recognized for the lease term. A single lease cost would be recognized over the lease term.
For terms less than twelve months, a lessee would be permitted to make an accounting policy election to recognize lease expense for such leases generally on a straight-line basis over the lease term.
This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
Early adoption is permitted.
The Company is currently evaluating the impact of this ASU.
In March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. This ASU requires all excess tax benefits and deficiencies to be recognized as income tax expense / benefit in the income statement and presented as an operating activity in the statement of cash flows
. F
orfeitures can be calculated based on either the estimated number of awards that are expected to vest
, as required by
current guidance
,
or when forfeitures actually occur
.
This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted, but all of the described amendments must be adopted in the same period and any adjustments should be reflected as of the beginning of the fiscal year if adopted in an interim period. The Company is currently evaluating the impact of this ASU.
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
2
5
, 201
6
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
Gross
|
|
Gross
|
|
Fair Value
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
(Net Carrying
|
As of June 25, 2016
|
Cost
|
|
Gains
|
|
Losses
|
|
Amount)
|
Corporate debt securities
|
$
|
58,235
|
|
$
|
10
|
|
$
|
(20)
|
|
$
|
58,225
|
Commercial paper
|
|
36,808
|
|
|
-
|
|
|
(20)
|
|
|
36,788
|
Total securities
|
$
|
95,043
|
|
$
|
10
|
|
$
|
(40)
|
|
$
|
95,013
|
The Company’s specifically identified gross unrealized losses of $
40
thousand relate to
13
different securities with total amortized cost of approximately $
63.0
million at
June
2
5
, 201
6
.
Six securities had been in a continuous unrealized loss position for more than 12 months as of June 25, 2016. The gross unrealized loss on the
se securities was less than one-tenth
of one percent of the position value.
Because the Company does not intend to sell the investments at a loss and
it is
not
more likely than not that
the Company will be required to sell the investments before recovery of its amortized cost basis, it did not consider the investment in these securities to be other-than
-temporarily impaired at
June 25, 2016
.
The following table is a summary of availabl
e
-for-sale securities at March 2
6
, 201
6
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Gross
|
|
Gross
|
|
Fair Value
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
(Net Carrying
|
As of March 26, 2016
|
Cost
|
|
Gains
|
|
Losses
|
|
Amount)
|
Corporate debt securities
|
$
|
81,310
|
|
$
|
3
|
|
$
|
(100)
|
|
$
|
81,213
|
The Company’s specifically identified gross unrealized losses of $
100
thousand relate to
21
different securities with total amortized cost of approximately $
64.7
million at
March 2
6
, 201
6
.
Two securities had been in a continuous loss position for more than 12 months as of March 26, 2016.
One of these securities matured in the current fiscal quarter, with the other maturing in the second quarter of fiscal year 2017.
Because the Company
did
not intend to sell the investments at a loss and
it was not more likely than not that
the Company
would
be required to sell the investments before recovery of its amortized cost basis, it did not consider the investment in these securities to be other-than-
temporarily impaired at
March 26, 2016
.
The cost and estimated fair value of available-for-sale
securities
by contractual maturities were as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25, 2016
|
|
March 26, 2016
|
|
|
Amortized
|
|
Estimated
|
|
Amortized
|
|
Estimated
|
|
|
Cost
|
|
Fair Value
|
|
Cost
|
|
Fair Value
|
Within 1 year
|
|
$
|
91,109
|
|
$
|
91,090
|
|
$
|
60,603
|
|
$
|
60,582
|
After 1 year
|
|
|
3,934
|
|
|
3,923
|
|
|
20,707
|
|
|
20,631
|
Total
|
|
$
|
95,043
|
|
$
|
95,013
|
|
$
|
81,310
|
|
$
|
81,213
|
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
,
pension plan assets / liabilities
and contingent consideration
.
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
|
|
|
|
|
|
|
•
|
Level 1 - Quoted prices in active markets for identical assets or liabilities.
|
|
•
|
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
•
|
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
|
|
|
The Company’s
cash equivalents and
investment portfolio assets consist of
corporate debt securities,
money market funds,
U.S. Treasury securities,
and
commercial paper
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.
In connection with one of the Company’s
second
quarter
fiscal year 2016
acquisitions, the Company re
p
or
t
ed contingent consideration based upon achievement of certain milestones. This liability is classified as Level 3 and valued using a discounted cash flow model. The assumptions used in preparing the discounted cash flow include discount rate estimates
and cash flow amounts.
See additional details below.
The Company’s long-term revolving facility, described in Note
7
, bears interest at a base rate plus applicable margin or LIBOR plus applicable margin. As of
June 25
, 201
6
, the fair value of the Company’s long-term revolving facility approximates carrying value.
As of
June 25
, 201
6
and March 2
6
, 201
6
,
the Company classified
all
of
its
investment portfolio and pension plan
assets
and liabilities
as
Level 1 or Level 2
as
s
ets
and liabilities
. The
only
Level 3
liabilit
y is the contingent consideration described above and below
.
The Company has no Level 3 assets.
There were no transfers between Level 1, Level 2, or Level 3 measurements for the
three
month
s
ending
June 25
, 201
6
.
The
following summarizes the
fair value of our financial
instruments, exclusive of pension plan
assets
and liabilities
,
at
June 25
, 201
6
,
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
in Active
|
|
Significant
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
76,881
|
|
$
|
-
|
|
$
|
-
|
|
$
|
76,881
|
Corporate debt securities
|
|
-
|
|
|
5,010
|
|
|
-
|
|
|
5,010
|
|
$
|
76,881
|
|
$
|
5,010
|
|
$
|
-
|
|
$
|
81,891
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
-
|
|
$
|
58,225
|
|
$
|
-
|
|
$
|
58,225
|
Commercial paper
|
|
-
|
|
|
36,788
|
|
|
-
|
|
|
36,788
|
|
$
|
-
|
|
$
|
95,013
|
|
$
|
-
|
|
$
|
95,013
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
-
|
|
$
|
-
|
|
$
|
4,793
|
|
$
|
4,793
|
Other long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
-
|
|
$
|
-
|
|
$
|
4,441
|
|
$
|
4,441
|
The
following summarized the
fair value of
our financial
instruments
at March 2
6
, 201
6
,
exclusive of pension plan assets and liabilities
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
in Active
|
|
Significant
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
79,256
|
|
$
|
-
|
|
$
|
-
|
|
$
|
79,256
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
-
|
|
$
|
81,213
|
|
$
|
-
|
|
$
|
81,213
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
-
|
|
$
|
-
|
|
$
|
4,709
|
|
$
|
4,709
|
Other long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
-
|
|
$
|
-
|
|
$
|
4,359
|
|
$
|
4,359
|
Contingent consideration
The following summarizes the fair value of the contingent consideration at June 25, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Value if Milestones Achieved (in thousands)
|
|
Estimated Discount Rate (%)
|
|
|
Fair Value (in thousands)
|
Tranche A - 18 month earn out period
|
|
$
|
5,000
|
|
7.3
|
|
$
|
4,793
|
Tranche B - 30 month earn out period
|
|
|
5,000
|
|
7.7
|
|
|
4,441
|
|
|
$
|
10,000
|
|
|
|
$
|
9,234
|
|
|
|
|
Three Months Ended
|
|
June 25,
|
|
2016
|
Beginning balance
|
$
|
9,068
|
Loss recognized in earnings (research and development expense)
|
|
166
|
Ending balance
|
$
|
9,234
|
The valuation of contingent consideration
was initially
based on a weighted-average discounted cash flows model. The fair value is reviewed and estimated on a quarterly basis based on the probability of achieving defined milestones and current interest rates.
Significant changes in any of the unobservable inputs used in the fair value measurement of contingent consideration could result in a significantly lower or higher fair value. A change in projected outcomes if milestones are achieved would be accompanied by a directionally similar change in fair value. A change in discount rate would be accompanied by a directionally opposite change in fair value.
Changes to the fair value due to changes in assumptions would be reported in research and development expense in the
c
onsolidated
c
ondensed
s
tatements of
i
ncome.
No such changes to the observable inputs were noted in the current fiscal
quarter
.
5
.
Accounts Receivable, net
The following are the components of accounts receivable, net (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25,
|
|
March 26,
|
|
2016
|
|
2016
|
Gross accounts receivable
|
$
|
141,457
|
|
$
|
89,007
|
Allowance for doubtful accounts
|
|
(564)
|
|
|
(475)
|
Accounts receivable, net
|
$
|
140,893
|
|
$
|
88,532
|
6
.
Inventories
Inventories are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 25,
|
|
March 26,
|
|
2016
|
|
2016
|
Work in process
|
$
|
84,064
|
|
$
|
67,827
|
Finished goods
|
|
69,979
|
|
|
74,188
|
|
$
|
154,043
|
|
$
|
142,015
|
7
. Revolving
Credit Facilities
On August 29, 2014,
Cirrus Logic
entered into a
credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as Administrative Agent
, and the Lenders party thereto
.
The Credit Agreement
provides
for a
$250
million senior secured revolving credit facility (the “Credit Facility”). The Credit Facility
replaced
Cirrus Logic’s
i
nterim
c
redit
f
acility
,
and may be used for general corporate purposes. The Credit Facility mature
s
on August 29,
201
7.
The Credit Facility is required to be guaranteed by all of Cirrus Logic’s material domestic subsidiaries (the “Subsidiary Guarantors”). The Credit Facility is secured by substantially all of the assets of Cirrus Logic and any Subsidiary Guarantors, except for certain excluded assets. Borrowings under the Credit Facility may, at Cirrus Logic’s election, bear interest at either (a) a Base Rate plus the Applicable Margin (“Base Rate Loans”) or (b) a LIBOR Rate plus the Applicable Margin (“LIBOR Rate Loans”). The Applicable Margin ranges from
0%
to
0
.25%
per annum for Base Rate Loans and
1.50%
to
2.00%
per annum for LIBOR Rate Loans based on Cirrus Logic’s Leverage Ratio (discussed below).
A Commitment Fee accrues at a rate per annum ranging from
0.25%
to
0.35%
(based on the Leverage Ratio) on the average daily unused portion of the Commitment of the Lenders.
The Credit Agreement contains customary affirmative covenants, including, among others, covenants regarding the payment of taxes and other obligations, maintenance of insurance, reporting requirements and compliance with applicable laws and regulations.
Further, the Credit Agreement contains customary negative covenants limiting the ability of Cirrus Logic or any
s
ubsidiary to, among other things, incur debt, grant liens, make investments, effect certain fundamental changes, make certain asset dispositions, and make certain restricted payments. The Credit Facility also contains certain financial covenants providing that (a) the ratio of consolidated funded indebtedness to consolidated EBITDA for the prior four consecutive quarters must not be greater than 2.00 to 1.00 (the “Leverage Ratio”) and (b) the sum of cash and Cash Equivalents of Cirrus Logic and its
s
ubsidiaries on a consolidated basis must not be less than
$100
million.
On June 23, 2015,
Cirrus Logic and Wells Fargo Bank, National Association, as Administrative Agent, entered into a first amendment of
the Credit Agreement
(the “First
Amendment”). The First Amendment primarily provides additional flexibility to the Company for certain intercompany transactions. In particular, the First
Amendment (i) amended the definition of “Permitted Acquisition” to increase the threshold whereby the Company must provide certain financial statements and certifications to the Administrative Agent; (ii) expanded the Company’s ability to make intercompany investments, in
cluding unsecured intercompany i
ndebtedness to fund a Permitted Acquisition; and (iii) provided the Company with the ability, under cert
ain circumstances, to transfer c
apital
s
tock in a
n
on-
g
u
arantor s
ubsidiary to
another w
holly
-owned subsidiary that is not a credit p
arty.
At
June 25
, 201
6
, the Company was in compliance with all covenants under the Credit Agreement.
T
he Company
had
borrowed
$
1
60
.
4
million
under
this f
acility
as of
June
2
5
, 201
6
,
which is
included in long-term liabilities on the
c
onsolidated
c
ondensed
b
alance
s
heets
under the caption “
Debt
.
”
The borrowings were primarily used for
re
financing
an interim credit facility.
On July 12, 2016, the Company entered into an amendment to the Credit Agreement for the purpose of increasing the Credit Facility to $300 million and providing ongoing working capital. See Subsequent Event Note 15 for further details.
8
.
Patent
Agreement
and Other
On May 8, 2015, we entered into a patent purchase agreement
for the sale of certain Company-
owned patents
relating to
our LED lighting
products
. As a result of this agreement, on June 22, 2015, the Company received cash consideration of $12.5 million from the purchaser.
Under the agreement, the Company undertook to no longer be engaged in LED lighting and received a license under the sold patents for all other fields of use.
The proceeds were recorded during
the first quarter of
fiscal year 2016 as a recovery of costs previously incurred and are reflected as a separate line item on the
c
onsolidated
c
ondensed
s
tatements of
i
ncome in operating expenses under the caption
“
Patent
agreement
and other
.”
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.
The following table presents the provision for income taxes (in thousands)
and the effective tax rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 25,
|
|
June 27,
|
|
2016
|
|
2015
|
Income before income taxes
|
$
|
21,669
|
|
$
|
49,498
|
Provision for income taxes
|
$
|
5,805
|
|
$
|
16,144
|
Effective tax rate
|
|
26.8%
|
|
|
32.6%
|
Our income tax expense for the first quarter of fiscal year 2017 was lower than the federal statutory rate primarily due to income in certain foreign jurisdictions taxed below the federal statutory rate and the U.S. R&D tax credit, partially offset by an increase in unrecognized tax benefits. Our income tax expense for the first quarter of fiscal year 2016 was below the federal statutory rate primarily due to income in certain foreign jurisdictions taxed below the federal statutory rate.
The Company
record
s
unrecognized tax benefits for the estimated risk associated
with tax positions taken on tax returns.
At
June
2
5
, 2016
, the Company had unrecognized tax benefits of
$20.1
million, all of which would
impact
the effective tax rate if recognized. The Company’s total unrecognized tax benefits are classified
as either
“
Other long-term liabilities”
in the consolidated condensed balance sheets
or as a reduction to deferred tax assets to the extent that the unrecognized tax benefit relates to deferred tax assets
.
The Company
recognize
s
interest and penalties related to unrecognized tax benefits in the provision for income taxes
.
The Company
recognized an immaterial amount of interest in the provision for income taxes during the first three months of fiscal year 2017. As of
June 25, 2016
, the balance of accrued interest and penalties, net of tax was
immaterial
.
No
interest or penalties were
recognized
during the first
three
months of
fiscal year
201
6
.
The Company believes it is reasonably possible that the gross unrecognized tax benefits could decrease by approximately
$2.3
million in the next 12 months due to the lapse of the statute of limitations applicable to a tax deduction claimed on a prior year tax return.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. Fiscal
years 2013 through 2016 remain
open to examination by the major taxing jurisdictions to which
the Company is
subject
, although carry forward attributes that were generated in tax years prior to fiscal
year 2013 may
be adjusted upon examination by the tax authorities if they have been, or will be, used in a future period. The Company is not currently under an income tax audit in any major taxing jurisdiction.
1
0
.
Pension Plan
The components of the Company’s net periodic pension expense for the three months ended
June 25
, 201
6
and
June 27
, 201
5
are as follows (in
thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
June 25,
|
|
June 27,
|
|
2016
|
|
2015
|
Expenses
|
$
|
-
|
|
$
|
-
|
Interest cost
|
|
-
|
|
|
-
|
Expected return on plan assets
|
|
-
|
|
|
-
|
Amortization of actuarial loss (gain)
|
|
(27)
|
|
|
16
|
|
$
|
(27)
|
|
$
|
16
|
Based on an actuarial study performed a
s of
March
2
6
, 201
6
, the
defined benefit
pension
plan is
currently
appropriately
funded and a
long-term
asset
is
reflected in the Company’s consolidated
condensed balance sheet
under the caption “
Other
assets.
”
1
1
.
Net Income Per Share
Basic net income per share is based on the weighted effect of common shares issued and outstanding and is calculated by dividing net income by the basic weighted average shares outstanding during the period. Diluted net income per share is calculated by dividing net income by the weighted average number of common shares used in the basic net income per share calculation, plus the equivalent number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares outstanding. These potentially dilutive items consist primarily of
the tax affected
outstanding stock options and awards
(including
restricted stock
units and market stock units).
The following table details the calculation of basic and diluted earnings per share for the three months ended
June 25
, 201
6
and
June
27
, 201
5
(in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 25,
|
|
June 27,
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
Net income
|
$
|
15,864
|
|
$
|
33,354
|
Denominator:
|
|
|
|
|
|
Weighted average shares outstanding
|
|
62,450
|
|
|
63,274
|
Effect of dilutive securities
|
|
2,782
|
|
|
3,136
|
Weighted average diluted shares
|
|
65,232
|
|
|
66,410
|
Basic earnings per share
|
$
|
0.25
|
|
$
|
0.53
|
Diluted earnings per share
|
$
|
0.24
|
|
$
|
0.50
|
The weighted outstanding shares excluded from our diluted calculation for the three
months
ended
June 25
, 201
6
and June 27, 2015
were
618
thousand
and
275
thousand
, res
pectively, as the shares were anti-dilutive.
1
2
.
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.
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. While there can be no assurances in light of the inherent uncertainties involved in any potential legal proceedings, some of which are beyond our control, an adverse outcome in any legal proceeding could be material to our results of operations or cash flows for any particular reporting period.
1
3
.
Stockholders’ Equity
Common Stock
The Company issued a
net
0.
3
million and
0
.4
million shares of common stock during the three month periods ending
June 25
, 201
6
and June 27, 2015
, respectively
,
in connection with stock issuances
primarily
pursuant to the Company’s 2006 Stock Incentive Plan.
Share Repurchase Program
Since inception,
$24.2
million of the Company’s common stock has been repurchased under the Company’s
201
5
$200
million
share repurchase program, leaving
$175.8
million available for repurchase under this plan as of
June
2
5
, 201
6
. During the three months ended
June
2
5
, 201
6
, the Company repurchased
0.
5
million shares of its common stock for
$15.4
million, at an average cost of
$32.13
. 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
2
5
,
2016
.
1
4
.
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, which,
currently
are
P
ortable
A
udio and
N
on-
P
ortable
A
udio and
o
ther. 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, no complete, discrete financial information is maintained for these product lines.
Revenues from our product lines are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 25,
|
|
June 27,
|
|
2016
|
|
2015
|
Portable Audio Products
|
$
|
216,068
|
|
$
|
235,866
|
Non-Portable Audio and Other Products
|
|
43,360
|
|
|
46,767
|
|
$
|
259,428
|
|
$
|
282,633
|
15.
Subsequent Event
On July 12, 2016, Cirrus Logic entered into
an
amended
and restated
credit agreement (the “A
mended
Credit Agreement”)
with Wells Fargo Bank, National Association, as
a Lender and
Administrative Agent
, for the purpose of refinanc
ing the previous Credit Facility
and providing ongoing working capital
.
The
Amended Credit Agreement provides for a $300 million revolving credit facility (the “Amended Facility”)
with a
$25
million letter of credit sublimit
.
The
Amended
Facility matures
in
five
years
. Cirrus Logic must repay the outstanding principal amount of all borrowings, together with all accrued but unpaid interest there
on, on the m
aturity
d
ate.
The
Amended
Facility is required to be guaranteed by all of Cirrus Logic’s material domestic subsidiaries (the “Subsidiary Guarantors”). The Credit Facility is secured by substantially all of the assets of Cirrus Logic and any Subsidiary Guarantors, except for certain excluded assets.
Borrowings under the
Amended
Facility may, at our election, bear interest at either (a) a base rate plus the applicable margin (“Base Rate Loans”) or (b) a LIBOR rate plus the applicable margin (“LIBOR Rate Loans”). The applicable margin ranges from 0% to
0
.
50
% per an
num 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.
2
0% to 0.
3
0% (based on the Leverage Ratio) on the average daily unused po
rtion of the Commitment of the l
enders.
T
he
Amended
Credit Agreement
also contains certain
financial covenants
providing that (a)
the ratio of consolidated funded indebtedness to consolidated EBITDA
for the prior four
fiscal
quarter
s
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
.