ITEM
1.
FINANCIAL STATEMENTS
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
|
|
|
|
|
|
|
|
|
|
September 23,
|
|
March 25,
|
|
2017
|
|
2017
|
|
(unaudited)
|
|
|
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
180,198
|
|
|
$
|
351,166
|
|
Marketable securities
|
15,446
|
|
|
99,813
|
|
Accounts receivable, net
|
232,380
|
|
|
119,974
|
|
Inventories
|
210,791
|
|
|
167,895
|
|
Prepaid assets
|
20,923
|
|
|
24,987
|
|
Other current assets
|
10,262
|
|
|
12,093
|
|
Total current assets
|
670,000
|
|
|
775,928
|
|
|
|
|
|
|
|
Long-term marketable securities
|
133,547
|
|
|
—
|
|
Property and equipment, net
|
177,523
|
|
|
168,139
|
|
Intangibles, net
|
131,235
|
|
|
135,188
|
|
Goodwill
|
289,248
|
|
|
286,767
|
|
Deferred tax assets
|
30,511
|
|
|
32,841
|
|
Other assets
|
23,703
|
|
|
14,607
|
|
Total assets
|
$
|
1,455,767
|
|
|
$
|
1,413,470
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
$
|
131,125
|
|
|
$
|
73,811
|
|
Accrued salaries and benefits
|
35,651
|
|
|
40,190
|
|
Software license agreements
|
10,827
|
|
|
14,990
|
|
Other accrued liabilities
|
13,587
|
|
|
15,084
|
|
Total current liabilities
|
191,190
|
|
|
144,075
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
Debt
|
—
|
|
|
60,000
|
|
Software license agreements
|
7,245
|
|
|
3,146
|
|
Other long-term liabilities
|
57,416
|
|
|
54,557
|
|
Total long-term liabilities
|
64,661
|
|
|
117,703
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
Capital stock
|
1,288,669
|
|
|
1,259,279
|
|
Accumulated deficit
|
(92,180
|
)
|
|
(107,014
|
)
|
Accumulated other comprehensive income (loss)
|
3,427
|
|
|
(573
|
)
|
Total stockholders' equity
|
1,199,916
|
|
|
1,151,692
|
|
Total liabilities and stockholders' equity
|
$
|
1,455,767
|
|
|
$
|
1,413,470
|
|
The accompanying notes are an integral part of these consolidated condensed financial statements.
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except per share amounts; unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
September 23,
|
|
September 24,
|
|
September 23,
|
|
September 24,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net sales
|
$
|
425,537
|
|
|
$
|
428,619
|
|
|
$
|
746,272
|
|
|
$
|
688,047
|
|
Cost of sales
|
214,255
|
|
|
216,920
|
|
|
373,274
|
|
|
349,663
|
|
Gross profit
|
211,282
|
|
|
211,699
|
|
|
372,998
|
|
|
338,384
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
90,353
|
|
|
75,673
|
|
|
173,910
|
|
|
149,607
|
|
Selling, general and administrative
|
30,041
|
|
|
32,089
|
|
|
60,900
|
|
|
62,629
|
|
Total operating expenses
|
120,394
|
|
|
107,762
|
|
|
234,810
|
|
|
212,236
|
|
Income from operations
|
90,888
|
|
|
103,937
|
|
|
138,188
|
|
|
126,148
|
|
Interest income
|
1,005
|
|
|
296
|
|
|
1,934
|
|
|
563
|
|
Interest expense
|
(280
|
)
|
|
(1,299
|
)
|
|
(615
|
)
|
|
(2,255
|
)
|
Other expense
|
(1,116
|
)
|
|
(261
|
)
|
|
(1,135
|
)
|
|
(114
|
)
|
Income before income taxes
|
90,497
|
|
|
102,673
|
|
|
138,372
|
|
|
124,342
|
|
Provision for income taxes
|
17,197
|
|
|
16,634
|
|
|
22,160
|
|
|
20,232
|
|
Net income
|
73,300
|
|
|
86,039
|
|
|
116,212
|
|
|
104,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
$
|
1.16
|
|
|
$
|
1.37
|
|
|
$
|
1.82
|
|
|
$
|
1.66
|
|
Diluted earnings per share
|
$
|
1.10
|
|
|
$
|
1.30
|
|
|
$
|
1.74
|
|
|
$
|
1.58
|
|
Basic weighted average common shares outstanding
|
63,431
|
|
|
62,787
|
|
|
63,764
|
|
|
62,618
|
|
Diluted weighted average common shares outstanding
|
66,360
|
|
|
66,410
|
|
|
66,761
|
|
|
66,101
|
|
The accompanying notes are an integral part of these consolidated condensed financial statements.
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands; unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
September 23,
|
|
September 24,
|
|
September 23,
|
|
September 24,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income
|
$
|
73,300
|
|
|
$
|
86,039
|
|
|
$
|
116,212
|
|
|
$
|
104,110
|
|
Other comprehensive income (loss), before tax
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
3,021
|
|
|
65
|
|
|
3,311
|
|
|
253
|
|
Unrealized gain (loss) on marketable securities
|
14
|
|
|
(76
|
)
|
|
48
|
|
|
(9
|
)
|
Actuarial gain on pension plan
|
—
|
|
|
—
|
|
|
792
|
|
|
—
|
|
Reclassification of actuarial gain to net income
|
—
|
|
|
(26
|
)
|
|
—
|
|
|
(53
|
)
|
(Provision) benefit for income taxes
|
(1
|
)
|
|
21
|
|
|
(151
|
)
|
|
20
|
|
Comprehensive income
|
$
|
76,334
|
|
|
$
|
86,023
|
|
|
$
|
120,212
|
|
|
$
|
104,321
|
|
The accompanying notes are an integral part of these consolidated condensed financial statements.
CIRRUS LOGIC, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
September 23,
|
|
September 24,
|
|
2017
|
|
2016
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
$
|
116,212
|
|
|
$
|
104,110
|
|
Adjustments to reconcile net income to net cash generated by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
39,031
|
|
|
32,961
|
|
Stock compensation expense
|
23,695
|
|
|
19,234
|
|
Deferred income taxes
|
346
|
|
|
3,845
|
|
Loss on retirement or write-off of long-lived assets
|
377
|
|
|
251
|
|
Other non-cash adjustments
|
(3,819
|
)
|
|
(2,985
|
)
|
Net change in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable, net
|
(112,406
|
)
|
|
(181,027
|
)
|
Inventories
|
(42,896
|
)
|
|
(19,239
|
)
|
Other assets
|
5,714
|
|
|
4,584
|
|
Accounts payable and other accrued liabilities
|
49,658
|
|
|
64,475
|
|
Income taxes payable
|
4,797
|
|
|
10,638
|
|
Net cash generated by operating activities
|
80,709
|
|
|
36,847
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Maturities and sales of available-for-sale marketable securities
|
109,069
|
|
|
91,531
|
|
Purchases of available-for-sale marketable securities
|
(158,216
|
)
|
|
(128,415
|
)
|
Purchases of property, equipment and software
|
(25,781
|
)
|
|
(18,119
|
)
|
Investments in technology
|
(21,809
|
)
|
|
(5,743
|
)
|
Net cash used in investing activities
|
(96,737
|
)
|
|
(60,746
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Principal payments on long-term revolver
|
(60,000
|
)
|
|
(20,439
|
)
|
Debt issuance costs
|
—
|
|
|
(2,152
|
)
|
Payments on capital lease agreements
|
—
|
|
|
(699
|
)
|
Issuance of common stock, net of shares withheld for taxes
|
5,695
|
|
|
9,131
|
|
Repurchase of stock to satisfy employee tax withholding obligations
|
(5,085
|
)
|
|
(2,031
|
)
|
Repurchase and retirement of common stock
|
(95,550
|
)
|
|
(15,440
|
)
|
Net cash used in financing activities
|
(154,940
|
)
|
|
(31,630
|
)
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
(170,968
|
)
|
|
(55,529
|
)
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
351,166
|
|
|
168,793
|
|
Cash and cash equivalents at end of period
|
$
|
180,198
|
|
|
$
|
113,264
|
|
The accompanying 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 25,
2017
, included in our Annual Report on Form 10-K filed with the Commission on May 24, 2017. In our opinion, the financial statements reflect all material adjustments, including normal recurring adjustments, necessary for a fair presentation of the financial position, operating results and cash flows for those periods presented. The preparation of financial statements in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect reported assets, liabilities, revenues and expenses, as well as disclosure of contingent assets and liabilities. Actual results could differ from those estimates and assumptions. Moreover, the results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the entire year. Additionally, prior period amounts have been adjusted to conform to current year presentation.
2. Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers (ASC Topic 606)
. The purpose of this ASU is to converge revenue recognition requirements per U.S. GAAP and International Financial Reporting Standards (“IFRS”). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
after public comment supported a proposal to delay the effective date of this ASU to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company is currently in the process of reviewing our customers’ contracts in respect of performance obligation identification and satisfaction, pricing, warranties, and return rights, among other considerations. Though we have not completed the process, the Company currently expects no material modifications to its financial statements upon adoption of this ASU. The standard may be adopted by full retrospective method, which applies retrospectively to each prior period presented, or by modified retrospective method with the cumulative effect adjustment recognized in beginning retained earnings as of the date of adoption. We anticipate using the modified retrospective adoption method.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842).
The FASB issued this update to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key leasing arrangement details
.
Lessees would recognize operating leases on the balance sheet under this ASU — with the future lease payments recognized as a liability, measured at present value, and the right-of-use asset recognized for the lease term. A single lease cost would be recognized over the lease term. For terms less than twelve months, a lessee would be permitted to make an accounting policy election to recognize lease expense for such leases generally on a straight-line basis over the lease term. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of this ASU.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. This ASU requires credit losses on available-for-sale debt securities to be presented as an allowance rather than a write-down. Unlike current U.S. GAAP, the credit losses could be reversed with changes in estimates, and recognized in current year earnings. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018, including interim periods. The Company is currently evaluating the impact of the adoption of this ASU on our financial statements.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
. This ASU relates to income tax consequences of non-inventory intercompany asset transfers. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted, as of the beginning of an annual reporting period. The guidance requires companies to apply a modified retrospective approach with a cumulative catch-up adjustment to beginning retained earnings in the period of adoption. The
Company early adopted this ASU in the first quarter of fiscal year 2018 with a
$0.7 million
impact to beginning retained earnings.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. The update states that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business, and should be treated as an asset acquisition instead.
This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted under specific circumstances, including in an interim period, with prospective application. The Company adopted this ASU and applied the related guidance to an asset acquisition in the first quarter of fiscal year 2018.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. This ASU eliminates step two of the goodwill impairment test. An impairment charge is to be recognized for the amount by which the current value exceeds the fair value. This ASU is effective for annual periods beginning after December 15, 2019, including interim periods. Early adoption is permitted, for interim or annual goodwill impairment tests performed after January 1, 2017. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments in this update. The Company is currently evaluating the impact of this ASU, which will be applied prospectively.
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
. This ASU applies to any company that changes the terms or conditions of a share-based award, considered a modification. Modification accounting would be applied unless certain conditions were met related to the fair value of the award, the vesting conditions and the classification of the modified award. This ASU is effective for annual periods beginning after December 15, 2017, with early adoption permitted. The standard should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the financial statement 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
September 23, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 23, 2017
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
(Net Carrying
Amount)
|
Corporate debt securities
|
$
|
135,219
|
|
|
$
|
103
|
|
|
$
|
(89
|
)
|
|
$
|
135,233
|
|
Non-US government securities
|
11,817
|
|
|
—
|
|
|
(14
|
)
|
|
11,803
|
|
US Treasury securities
|
998
|
|
|
—
|
|
|
—
|
|
|
998
|
|
Certificates of deposit
|
500
|
|
|
—
|
|
|
—
|
|
|
500
|
|
Agency discount notes
|
459
|
|
|
—
|
|
|
—
|
|
|
459
|
|
Total securities
|
$
|
148,993
|
|
|
$
|
103
|
|
|
$
|
(103
|
)
|
|
$
|
148,993
|
|
The Company typically invests in highly-rated securities with original maturities generally ranging from
one
to
three
years. The Company's specifically identified gross unrealized loss of
$103 thousand
related
to
securities with total amortized cost of approximately
$78.2 million
at
September 23, 2017
.
No
securities have been in a continuous unrealized loss position for more than 12 months as of
September 23, 2017
. The Company may sell certain of its marketable securities prior to their stated maturities for strategic reasons including, but not limited to, anticipated or actual changes in credit rating and duration management. When evaluating an investment for other-than-temporary impairment, the Company reviews factors including the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, changes in market interest rates and whether it is more likely than not the Company will be required to sell the investment before recovery of the investment’s cost basis. As of
September 23, 2017
, the Company does not consider any of its investments to be other-than-temporarily impaired.
The following table is a summary of available-for-sale securities at
March 25, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 25, 2017
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
(Net Carrying
Amount)
|
Corporate debt securities
|
33,350
|
|
|
$
|
—
|
|
|
$
|
(20
|
)
|
|
$
|
33,330
|
|
Commercial paper
|
66,518
|
|
|
—
|
|
|
(35
|
)
|
|
66,483
|
|
Total securities
|
$
|
99,868
|
|
|
$
|
—
|
|
|
$
|
(55
|
)
|
|
$
|
99,813
|
|
The Company’s specifically identified gross unrealized losses of
$55 thousand
related
to
securities with total amortized cost of approximately
$99.9 million
at
March 25, 2017
.
Four
securities had been in a continuous loss position for more than 12 months as of
March 25, 2017
.
The gross unrealized loss on these securities was less than
one
percent of the position value.
The Company may sell certain of its marketable securities prior to their stated maturities for strategic reasons including, but not limited to, anticipated or actual changes in credit rating and duration management. When evaluating an investment for other-than-temporary impairment, the Company reviews factors including the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, changes in market interest rates and whether it is more likely than not the Company will be required to sell the investment before recovery of the investment’s cost basis. As of
March 25, 2017
, the Company did not consider any of its investments to be other-than-temporarily impaired.
The cost and estimated fair value of available-for-sale
securities
by contractual maturities were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 23, 2017
|
|
March 25, 2017
|
|
Amortized
|
|
Estimated
|
|
Amortized
|
|
Estimated
|
|
Cost
|
|
Fair Value
|
|
Cost
|
|
Fair Value
|
Within 1 year
|
$
|
15,454
|
|
|
$
|
15,446
|
|
|
$
|
99,868
|
|
|
$
|
99,813
|
|
After 1 year
|
133,539
|
|
|
133,547
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
148,993
|
|
|
$
|
148,993
|
|
|
$
|
99,868
|
|
|
$
|
99,813
|
|
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 debt securities, money market funds, and commercial paper and are reflected on our consolidated condensed balance sheets under the headings cash and cash equivalents, marketable securities, and long-term marketable securities. The Company determines the fair value of its investment portfolio assets by obtaining non-binding market prices from its third-party pricing providers on the last day of the quarter, whose sources may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value.
In connection with one of the Company’s prior acquisitions accounted for as a business combination, the Company reported contingent consideration based upon achievement of certain milestones. This liability is classified as Level 3 and
valued using a discounted cash flow model. The assumptions used in preparing the discounted cash flow include discount rate estimates and cash flow amounts. See additional details below.
Prior to paying off the Company’s long-term revolving facility in the prior fiscal quarter, interest was applied at a base rate plus applicable margin or LIBOR plus applicable margin and the fair value of the revolving facility approximated carrying value.
As of
September 23, 2017
and
March 25, 2017
, the Company classified all investment portfolio and pension plan assets and liabilities as Level 1 or Level 2 assets and liabilities. The only Level 3 liability is the contingent consideration described above and below. The Company has no Level 3 assets. There were no transfers between Level 1, Level 2, or Level 3 measurements for the three months ending
September 23, 2017
.
The following summarizes the fair value of our financial instruments at
September 23, 2017
, exclusive of pension plan assets and liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
Level 1
|
|
Significant
Other
Observable
Inputs
Level 2
|
|
Significant
Unobservable
Inputs
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
152,329
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
152,329
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
—
|
|
|
$
|
135,233
|
|
|
$
|
—
|
|
|
$
|
135,233
|
|
Non-US government securities
|
—
|
|
|
11,803
|
|
|
—
|
|
|
11,803
|
|
U.S. Treasury securities
|
998
|
|
|
—
|
|
|
—
|
|
|
998
|
|
Certificates of deposit
|
—
|
|
|
500
|
|
|
—
|
|
|
500
|
|
Agency discount notes
|
—
|
|
|
459
|
|
|
—
|
|
|
459
|
|
|
$
|
998
|
|
|
$
|
147,995
|
|
|
$
|
—
|
|
|
$
|
148,993
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
659
|
|
|
$
|
659
|
|
The following summarizes the fair value of our financial instruments at
March 25, 2017
, exclusive of pension plan assets and liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
Level 1
|
|
Significant
Other
Observable
Inputs
Level 2
|
|
Significant
Unobservable
Inputs
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
313,982
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
313,982
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
—
|
|
|
$
|
33,330
|
|
|
$
|
—
|
|
|
$
|
33,330
|
|
Commercial paper
|
|
|
66,483
|
|
|
—
|
|
|
66,483
|
|
|
$
|
—
|
|
|
$
|
99,813
|
|
|
$
|
—
|
|
|
$
|
99,813
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,695
|
|
|
$
|
4,695
|
|
Contingent consideration
The following summarizes the fair value of the liability for contingent consideration at
September 23, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Value if Milestones Achieved
(in thousands)
|
|
Estimated Discount Rate (%)
|
|
Fair Value
(in thousands)
|
Tranche B - 30 month earn out period
|
$
|
5,000
|
|
|
7.7
|
%
|
|
$
|
659
|
|
The valuation of contingent consideration was initially based on a weighted-average discounted cash flow model. The fair value is reviewed and estimated on a quarterly basis based on the probability of achieving defined milestones and current interest rates. Significant changes in any of the unobservable inputs used in the fair value measurement of contingent consideration could result in a significantly lower or higher fair value. An increase or decrease in the probability of achieving certain milestones within the earn out period would be accompanied by a directionally similar change in the fair value of the recorded liability. A change in discount rate would be accompanied by a directionally opposite change in fair value. Changes in the fair value of the recorded liability are reported in research and development expense in the consolidated condensed statements of income. In the first quarter of the current fiscal year, changes in the probability of achieving certain milestones associated with Tranche B of the earn out were determined following a review of product shipment forecasts within the earn out period. The revised estimates reduced the fair value of the liability as of
September 23, 2017
as shown in the table below.
|
|
|
|
|
|
Six Months Ended
|
|
September 23,
|
|
2017
|
|
(in thousands)
|
Beginning balance
|
$
|
4,695
|
|
Adjustment to estimates (research and development expense)
|
(4,049
|
)
|
Fair value charge recognized in earnings (research and development expense)
|
13
|
|
Ending balance
|
$
|
659
|
|
5.
Accounts Receivable, net
The following are the components of accounts receivable, net (in thousands):
|
|
|
|
|
|
|
|
|
|
September 23,
|
|
March 25,
|
|
2017
|
|
2017
|
Gross accounts receivable
|
$
|
232,824
|
|
|
$
|
120,408
|
|
Allowance for doubtful accounts
|
(444
|
)
|
|
(434
|
)
|
Accounts receivable, net
|
$
|
232,380
|
|
|
$
|
119,974
|
|
6. Inventories
Inventories are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 23,
|
|
March 25,
|
|
2017
|
|
2017
|
Work in process
|
$
|
112,335
|
|
|
$
|
83,332
|
|
Finished goods
|
98,456
|
|
|
84,563
|
|
|
$
|
210,791
|
|
|
$
|
167,895
|
|
7. Revolving
Credit Facilities
On July 12, 2016, Cirrus Logic entered into an amended and restated credit agreement (the “Amended Credit Agreement”) with Wells Fargo Bank, National Association, as Administrative Agent, and the Lenders party thereto, for the purpose of refinancing an existing credit facility and providing ongoing working capital. The Amended Credit Agreement provides for a
$300 million
senior secured revolving credit facility (the “Amended Facility”). The Amended Facility matures on July 12, 2021. The Amended Facility is required to be guaranteed by all of Cirrus Logic’s material domestic subsidiaries (the “Subsidiary Guarantors”). The Amended Credit Facility is secured by substantially all of the assets of Cirrus Logic and any Subsidiary Guarantors, except for certain excluded assets.
Borrowings under the Amended Facility may, at our election, bear interest at either (a) a base rate plus the applicable margin (“Base Rate Loans”) or (b) a LIBOR rate plus the applicable margin (“LIBOR Rate Loans”). The applicable margin ranges from
0%
to
0.50%
per annum for Base Rate Loans and
1.25%
to
2.00%
per annum for LIBOR Rate Loans based on the Leverage Ratio (as defined below). A commitment fee accrues at a rate per annum ranging from
0.20%
to
0.30%
(based on the Leverage Ratio) on the average daily unused portion of the commitment of the lenders. The Amended Credit Agreement contains certain financial covenants providing that (a) the ratio of consolidated funded indebtedness to consolidated EBITDA for the prior four fiscal quarters must not be greater than
3.00
to
1.00
(the “Leverage Ratio”) and (b) the ratio of consolidated EBITDA for the prior four consecutive fiscal quarters to consolidated fixed charges (including amounts paid in cash for consolidated interest expenses, capital expenditures, scheduled principal payments of indebtedness, and income taxes) for the prior four consecutive fiscal quarters must not be less than
1.25
to
1.00
as of the end of each fiscal quarter. The Amended Credit Agreement also contains negative covenants limiting the Company’s or any Subsidiary’s ability to, among other things, incur debt, grant liens, make investments, effect certain fundamental changes, make certain asset dispositions, and make certain restricted payments.
As of
September 23, 2017
, the Company had
no
amounts outstanding under the Amended Facility and was in compliance with all covenants under the Amended Credit Agreement.
8.
Pension Plan
As a result of the fiscal year 2015 acquisition of Wolfson Microelectronics, the Company now fully funds a defined benefit pension scheme (the “Scheme”), formerly maintained by Wolfson, for some of the employees in the United Kingdom. The participants in the Scheme no longer accrue benefits and therefore the Company will not be required to make contributions in respect of future accruals.
The Company elected to make a contribution of
£1.5 million
based on the latest triennial actuarial valuation in the prior fiscal quarter. As of
September 23, 2017
, the Scheme is in a net funded position (included within “
Other assets
” in the consolidated condensed balance sheet).
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
|
Six Months Ended
|
|
September 23,
|
|
September 24,
|
September 23,
|
|
September 24,
|
|
2017
|
|
2016
|
2017
|
|
2016
|
Income before income taxes
|
$
|
90,497
|
|
|
$
|
102,673
|
|
$
|
138,372
|
|
|
$
|
124,342
|
|
Provision for income taxes
|
$
|
17,197
|
|
|
$
|
16,634
|
|
$
|
22,160
|
|
|
$
|
20,232
|
|
Effective tax rate
|
19.0
|
%
|
|
16.2
|
%
|
16.0
|
%
|
|
16.3
|
%
|
Our income tax expense was
$17.2 million
and
$16.6 million
for the
second
quarter of fiscal year
2018
and
2017
, respectively, resulting in effective tax rates of
19.0%
and
16.2%
for the
second
quarter of fiscal year
2018
and
2017
, respectively. Our income tax expense was
$22.2 million
and
$20.2 million
for the first
six
months of fiscal year
2018
and
2017
, respectively, resulting in effective tax rates of
16.0%
and
16.3%
for the first
six
months of fiscal year
2018
and
2017
, respectively. Our effective tax rate for the
second
quarter and first
six
months of fiscal year
2018
was lower than the federal statutory rate primarily due to income earned in certain foreign jurisdictions taxed below the federal statutory rate, excess tax benefits from stock-based compensation, and the U.S. R&D tax credit. Our effective tax rate for the
second
quarter and first
six
months of fiscal year
2017
was below the federal statutory rate primarily due to income earned in certain foreign jurisdictions taxed below the federal statutory rate, excess tax benefits from stock-based compensation, and the U.S. R&D tax credit.
The Company records unrecognized tax benefits for the estimated risk associated with tax positions taken on tax returns. At
September 23, 2017
, the Company had unrecognized tax benefits of
$33.6 million
, all of which would impact the effective tax rate if recognized. The Company recorded a gross decrease of
$2.3 million
due to the lapse of the statute of limitations in the first quarter of fiscal year 2018 applicable to a tax deduction claimed on a prior year tax return, as well as gross increases to its current year unrecognized tax benefits of
$2.2 million
and
$2.8 million
for the first and
second
quarters of fiscal year
2018
, respectively. The Company believes it is reasonably possible that the gross unrecognized tax benefits could decrease by approximately
$1.1 million
in the next 12 months due to the lapse of the statute of limitations applicable to a tax position taken on a prior year tax return. The Company’s total unrecognized tax benefits are classified as “
Other long-term liabilities”
in the consolidated condensed balance sheets.
The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of
September 23, 2017
, the balance of accrued interest and penalties, net of tax, was
$0.5 million
.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. Fiscal years 2014 through 2017 remain open to examination by the major taxing jurisdictions to which the Company is subject, although carry forward attributes that were generated in tax years prior to fiscal year 2014 may be adjusted upon examination by the tax authorities if they have been, or will be, used in a future period. The Company is not currently under an income tax audit in any major taxing jurisdiction.
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 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 and six
months ended
September 23, 2017
and
September 24, 2016
(in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
September 23,
|
|
September 24,
|
|
September 23,
|
|
September 24,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
$
|
73,300
|
|
|
$
|
86,039
|
|
|
$
|
116,212
|
|
|
$
|
104,110
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
63,431
|
|
|
62,787
|
|
|
63,764
|
|
|
62,618
|
|
Effect of dilutive securities
|
2,929
|
|
|
3,623
|
|
|
2,997
|
|
|
3,483
|
|
Weighted average diluted shares
|
66,360
|
|
|
66,410
|
|
|
66,761
|
|
|
66,101
|
|
Basic earnings per share
|
$
|
1.16
|
|
|
$
|
1.37
|
|
|
$
|
1.82
|
|
|
$
|
1.66
|
|
Diluted earnings per share
|
$
|
1.10
|
|
|
$
|
1.30
|
|
|
$
|
1.74
|
|
|
$
|
1.58
|
|
The weighted outstanding shares excluded from our diluted calculation for the
three and six
months ended
September 23, 2017
were
236 thousand
and
222 thousand
, respectively, as the shares were anti-dilutive. The weighted outstanding shares excluded from our diluted calculation for the
three and six
months ended
September 24, 2016
were
4 thousand
and
8 thousand
, respectively, as the shares were anti-dilutive.
11.
Legal Matters
From time to time, we are involved in legal proceedings concerning matters arising in connection with the conduct of our business activities. We regularly evaluate the status of legal proceedings in which we are involved in order to assess whether a loss is probable or there is a reasonable possibility that a loss or additional loss may have been incurred, and to determine if accruals are appropriate. We further evaluate each legal proceeding to assess whether an estimate of possible loss or range of loss can be made.
Based on current knowledge, management does not believe that there are any pending matters that could potentially have a material adverse effect on our business, financial condition, results of operations or cash flows. However, we are engaged in various legal actions in the normal course of business. There can be no assurances in light of the inherent uncertainties involved in any potential legal proceedings, some of which are beyond our control, and an adverse outcome in any legal proceeding could be material to our results of operations or cash flows for any particular reporting period.
12.
Stockholders’ Equity
Common Stock
The Company issued a net
0.2 million
and
0.4 million
shares of common stock during the
three and six
month periods ending
September 23, 2017
, respectively, primarily pursuant to the Company's 2006 Stock Incentive Plan. The Company issued a net
0.8 million
and
1.1 million
shares of common stock during the
three and six
month periods ending
September 24, 2016
, respectively, primarily pursuant to the Company’s 2006 Stock Incentive Plan.
Share Repurchase Program
Since inception,
$119.8 million
of the Company’s common stock has been repurchased under the Company’s 2015
$200 million
share repurchase program, leaving
$80.2 million
available for repurchase under this plan as of
September 23, 2017
. During the
three and six
months ended
September 23, 2017
, respectively, the Company repurchased
0.9 million
shares of its common stock, for
$50.0 million
, at an average cost of
$56.19
per share and
1.6 million
shares of its common stock, for
$95.6 million
, at an average cost of
$59.77
per share. All of these shares were repurchased in the open market and were funded from existing cash. All shares of our common stock that were repurchased were retired as of
September 23, 2017
.
13.
Segment Information
We determine our operating segments in accordance with FASB guidelines. Our Chief Executive Officer (“CEO”) has been identified as the chief operating decision maker under these guidelines.
The Company operates and tracks its results in
one
reportable segment, but reports revenue performance in
two
product lines, Portable Audio and Non-Portable Audio and Other. Our CEO receives and uses enterprise-wide financial information to assess financial performance and allocate resources, rather than detailed information at a product line level. Additionally, our product lines have similar characteristics and customers. They share support functions such as sales, public relations, supply chain management, various research and development and engineering support, in addition to the general and administrative functions of human resources, legal, finance and information technology. Therefore, there is no complete, discrete financial information maintained for these product lines.
Revenues from our product lines are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
September 23,
|
|
September 24,
|
|
September 23,
|
|
September 24,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Portable Audio Products
|
$
|
381,761
|
|
|
$
|
383,410
|
|
|
$
|
662,449
|
|
|
$
|
599,478
|
|
Non-Portable Audio and Other Products
|
43,776
|
|
|
45,209
|
|
|
83,823
|
|
|
88,569
|
|
|
$
|
425,537
|
|
|
$
|
428,619
|
|
|
$
|
746,272
|
|
|
$
|
688,047
|
|
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 25, 2017, contained in our fiscal year 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “Commission”) on May 24, 2017.
We maintain a website 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 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 2017 Annual Report
on Form 10-K filed with the Commission on
May 24, 2017,
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”) is a leader in high-performance, low-power integrated circuits (“ICs”) for audio and voice signal processing applications. Cirrus Logic’s products span the entire audio signal chain, from capture to playback, providing innovative products for the world’s top smartphones, tablets, digital headsets, wearables and emerging smart home applications.
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
six
months of fiscal year 2018 to the information provided under the heading “
Critical Accounting Policies
” included in our fiscal year 2017 Annual Report on Form 10-K for the fiscal year ended March 25, 2017.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers (ASC Topic 606)
. The purpose of this ASU is to converge revenue recognition requirements per U.S. GAAP and International Financial Reporting Standards (“IFRS”). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
after public comment supported a proposal to delay the effective date of this ASU to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company is currently in the process of reviewing our customers’ contracts in respect of performance obligation identification and satisfaction, pricing, warranties, and return rights, among other considerations. Though we have not completed the process, the Company currently expects no material modifications to its financial statements upon adoption of this ASU. The standard may be adopted by full retrospective method, which applies retrospectively to each prior period presented, or by modified retrospective method with the cumulative effect adjustment recognized in beginning retained earnings as of the date of adoption. We anticipate using the modified retrospective adoption method.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842).
The FASB issued this update to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key leasing arrangement details
.
Lessees would recognize operating leases on the balance sheet under this ASU — with the future lease payments recognized as a liability, measured at present value, and the right-of-use asset recognized for the lease term. A single lease cost would be recognized over the lease term. For terms less than twelve months, a lessee would be permitted to make an accounting policy election to recognize lease expense for such leases generally on a straight-line basis over the lease term. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of this ASU.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. This ASU requires credit losses on available-for-sale debt securities to be presented as an allowance rather than a write-down. Unlike current U.S. GAAP, the credit losses could be reversed with changes in estimates, and recognized in current year earnings. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018, including interim periods. The Company is currently evaluating the impact of the adoption of this ASU on our financial statements.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
. This ASU relates to income tax consequences of non-inventory intercompany asset transfers. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted, as of the beginning of an annual reporting period. The guidance requires companies to apply a modified retrospective approach with a cumulative catch-up adjustment to beginning retained earnings in the period of adoption. The Company early adopted this ASU in the first quarter of fiscal year 2018 with a $0.7 million impact to beginning retained earnings.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. The update states that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business, and should be
treated as an asset acquisition instead.
This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted under specific circumstances, including in an interim period, with prospective application. The Company adopted this ASU and applied the related guidance to an asset acquisition in the first quarter of fiscal year 2018.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. This ASU eliminates step two of the goodwill impairment test. An impairment charge is to be recognized for the amount by which the current value exceeds the fair value. This ASU is effective for annual periods beginning after December 15, 2019, including interim periods. Early adoption is permitted, for interim or annual goodwill impairment tests performed after January 1, 2017. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments in this update. The Company is currently evaluating the impact of this ASU, which will be applied prospectively.
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
. This ASU applies to any company that changes the terms or conditions of a share-based award, considered a modification. Modification accounting would be applied unless certain conditions were met related to the fair value of the award, the vesting conditions and the classification of the modified award. This ASU is effective for annual periods beginning after December 15, 2017, with early adoption permitted. The standard should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the financial statement impact of this ASU.
Results of Operations
The following table summarizes the results of our operations for the
first three and
six
months of fiscal years
2018
and
2017
, respectively,
as a
percentage
of net sales. All
percentage
amounts were calculated using the underlying data in thousands, unaudited:
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Three Months Ended
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|
Six Months Ended
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September 23,
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September 24,
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|
September 23,
|
|
September 24,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net sales
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Gross margin
|
50
|
%
|
|
49
|
%
|
|
50
|
%
|
|
49
|
%
|
Research and development
|
22
|
%
|
|
18
|
%
|
|
23
|
%
|
|
22
|
%
|
Selling, general and administrative
|
7
|
%
|
|
7
|
%
|
|
8
|
%
|
|
9
|
%
|
Income from operations
|
21
|
%
|
|
24
|
%
|
|
19
|
%
|
|
18
|
%
|
Interest income
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Interest expense
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Other expense
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Income before income taxes
|
21
|
%
|
|
24
|
%
|
|
19
|
%
|
|
18
|
%
|
Provision for income taxes
|
4
|
%
|
|
4
|
%
|
|
3
|
%
|
|
3
|
%
|
Net income
|
17
|
%
|
|
20
|
%
|
|
16
|
%
|
|
15
|
%
|
Net Sales
Net sales for the
second
quarter of fiscal year
2018
decreased
$3.1 million
, or
1
percent, to
$425.5 million
from
$428.6 million
in the
second
quarter of fiscal year
2017
. Net sales from our portable audio products
decreased
$1.7 million
, primarily due to sales of a lower average selling price ("ASP") component at a key Android original equipment manufacturer ("OEM") and ASP reductions on certain other portable audio products, partially offset by an increase in volumes on a number of other portable audio components. Non-portable audio and other product sales
decreased
$1.4 million
for the quarter versus the comparable period in the prior fiscal year.
Net sales for the first
six
months of fiscal year
2018
increased
$58.3 million
, or
8
percent, to
$746.3 million
from
$688.0 million
for the first
six
months of fiscal year
2017
. Net sales from our portable audio products
increased
$63.0 million
, or
11
percent, primarily due to increases in volumes on a number of portable audio components, partially offset by the ASP reductions, described above. Non-portable audio and other product sales
decreased
$4.7 million
for the first
six
months versus the comparable period in the prior fiscal year due to continued anticipated declines in our legacy products.
Sales outside of the Americas, including sales to U.S.-based customers that manufacture products overseas, either through foreign subsidiaries or third parties principally located in Asia, were approximately 98 percent and 97 percent of net sales during the
second
quarter of fiscal year
2018
and
2017
, respectively and 97 percent for each of the first
six
months of fiscal year
2018
and
2017
. Our sales are denominated primarily in U.S. dollars. No foreign currency hedging contracts were entered into in the first
six
months of fiscal year
2018
or
2017
.
Since the components we produce are largely proprietary, we consider our end customer to be the entity specifying the use of our component in their design. These end customers may 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 each of the
second
quarters of fiscal years
2018
and
2017
, our ten largest end customers represented approximately
93
percent of our net sales.
For the first
six
months of fiscal years
2018
and
2017
, our ten largest customers represented approximately 92 percent and 91 percent of our net sales, respectively.
We had one end customer, Apple Inc., that purchased through multiple contract manufacturers and represented approximately 82 percent and 78 percent of the Company’s total net sales for the
second
quarter of fiscal years
2018
and
2017
, respectively. This same customer represented approximately 80 percent and 74 percent of the Company's total net sales for the first
six
months of fiscal years
2018
and
2017
. Samsung Electronics represented 10 percent of the Company’s total net sales for the first
six
months of fiscal year
2017
.
No other end customer or distributor represented more than 10 percent of net sales for the
three and six
months ending
September 23, 2017
and
September 24, 2016
.
For more information, please see Part II—Item 1A—Risk Factors—
“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
and our profitability.”
Gross Margin
Gross margin was
49.7
percent in the
second
quarter of fiscal year
2018
,
up
from
49.4
percent in the
second
quarter of fiscal year
2017
. The increase was primarily driven by supply chain efficiencies associated with higher production volumes in the current fiscal quarter.
Gross margin was
50.0
percent for the first
six
months of fiscal year
2018
up
from
49.2
percent for the first
six
months of fiscal year
2017
. The increase was primarily due to supply chain efficiencies. In addition, the first quarter of fiscal 2017 included higher manufacturing spend related to product ramps.
Research and Development Expense
Research and development expense for the
second
quarter of fiscal year
2018
was
$90.4 million
, an
increase
of
$14.7 million
, or
19
percent, from
$75.7 million
in the
second
quarter of fiscal year
2017
. The primary drivers were the adjustment in contingent consideration that occurred in the second quarter of fiscal year 2017 that did not occur in the current fiscal quarter, increased salary and employee-related expenses, following a 14 percent increase in headcount, increased amortization of acquisition intangibles, and higher product development costs, including tape outs and contract labor to accelerate certain key projects.
Research and development expense for the first
six
months of fiscal year
2018
was
$173.9 million
, an
increase
of
$24.3 million
, or
16
percent, from
$149.6 million
for the first
six
months of fiscal year
2017
. Driving the increase were higher salary and employee-related expenses following a significant increase in headcount in the current fiscal year, increased amortization of acquisition intangibles, increased product development expenses, including tape outs and contract labor, and higher occupancy costs.
Selling, General and Administrative Expense
Selling, general and administrative expense for the
second
quarter of fiscal year
2018
was
$30.0 million
, a
decrease
of
$2.1 million
, or
6
percent, from
$32.1 million
in the
second
quarter of fiscal year
2017
, primarily due to decreased variable compensation for the period.
Selling, general and administrative expense for the first
six
months of fiscal year
2018
was
$60.9 million
, a
decrease
of
$1.7 million
, or
3
percent, from
$62.6 million
for the first
six
months of fiscal year
2017
. The decrease was primarily due to reduced depreciation and amortization expense,
partially offset by higher employment expenses for the period.
Interest Income
The Company reported interest income of
$1.0 million
and
$1.9 million
for the
three and six
months ended
September 23, 2017
,
respectively,
and
$0.3 million
and
$0.6 million
for the
three and six
months ended
September 24, 2016
, respectively. Interest income increased in the current fiscal year due to
higher average cash, cash equivalents and marketable securities balances for the
periods presented.
Interest Expense
The Company reported interest expense of
$0.3 million
and
$0.6 million
for the
three and six
months ended
September 23, 2017
,
respectively, and
$1.3 million
and
$2.3 million
for the
three and six
months ended
September 24, 2016
, respectively. Interest expense decreased in the current fiscal year due to the repayment of the revolving credit
facility
described in Note
7.
Other Expense
For each of the
three and six
months ended
September 23, 2017
, the Company reported
$1.1 million
in other expense, and
$0.3 million
and
$0.1 million
, respectively, in other expense for the
three and six
months ended
September 24, 2016
, primarily
related to net losses on
foreign currency
denominated monetary assets and liabilities.
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:
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|
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|
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Three Months Ended
|
|
Six Months Ended
|
|
September 23,
|
|
September 24,
|
|
September 23,
|
|
September 24,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Income before income taxes
|
$
|
90,497
|
|
|
$
|
102,673
|
|
|
$
|
138,372
|
|
|
$
|
124,342
|
|
Provision for income taxes
|
$
|
17,197
|
|
|
$
|
16,634
|
|
|
$
|
22,160
|
|
|
$
|
20,232
|
|
Effective tax rate
|
19.0
|
%
|
|
16.2
|
%
|
|
16.0
|
%
|
|
16.3
|
%
|
Our effective tax rate for the
second
quarter and first
six
months of fiscal year
2018
was lower than the federal statutory rate primarily due to income earned in certain foreign jurisdictions taxed below the federal statutory rate, excess tax benefits from stock-based compensation, and the U.S. R&D tax credit. Our effective tax rate for the
second
quarter and first
six
months of fiscal year
2017
was below the federal statutory rate primarily due to income earned in certain foreign jurisdictions taxed below the federal statutory rate, excess tax benefits from stock-based compensation, and the U.S. R&D tax credit.
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 repurchases, 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, and borrowings under our $300 million senior secured revolving credit facility.
Cash generated by operating activities is net income adjusted for certain non-cash items and changes in working capital. Cash
flow from
operations was
$80.7 million
for the first
six
months
of fiscal year
2018
as compared to
$36.8 million
generated
from operations
for the
corresponding period of fiscal year
2017
. The cash
flow from
operations during the
current period of fiscal year
2018
was related to the cash components of our net income, offset by a
$95.1 million
unfavorable change in working capital, primarily as a result of increases in accounts receivable and inventories, offset by an increase in accounts payable.
The cash flow
from
operations during the corresponding period of fiscal year
2017
was related to the cash
components of our net income, partially offset by a
$120.6 million
unfavorable change to working capital, primarily as a result of increases in accounts receivable and inventories, offset by an increase in accounts payable.
Net cash
used in investing activities was
$96.7 million
during the first
six
months of fiscal year
2018
as compared to
$60.7 million
used in investing activities during the first
six
months of fiscal year
2017
. The cash used in investing activities in the current period is primarily related to net purchases of marketable securities of
$49.1 million
, and capital expenditures and technology investments of $27.4 million. In addition, the Company purchased certain tangible and intangible assets for $20.2 million as part of a technology acquisition. The cash used in investing activities in the corresponding period in fiscal year
2017
was primarily related to net purchases of marketable securities of
$36.9 million
, and capital expenditures and technology investments of
$23.9 million
.
Net cash used in financing activities was
$154.9 million
during the first
six
months of fiscal year
2018
. The cash used during the first
six
months of fiscal year
2018
was primarily associated with stock repurchases of
$95.6 million
and
$60.0 million
in payments against the long-term revolver. The cash used in financing activities was
$31.6 million
for the first
six
months of fiscal year
2017
. The use of cash was primarily associated with
$20.4 million
in payments against the Company's Amended Facility described below, stock repurchases during the period of
$15.4 million
, and debt issuance costs of
$2.2 million
, offset by
$7.1 million
for the issuance of common stock, net of shares withheld for taxes.
Our future capital requirements will depend on many factors, including the rate of sales growth, market acceptance of our products, the timing and extent of research and development projects, potential acquisitions of companies or technologies and the expansion of our sales and marketing activities. While we expect our offshore cash to represent a greater portion of our total cash over time, we believe our expected future cash earnings, existing cash, cash equivalents, investment balances, and available borrowings under our Credit Facility will be sufficient to meet our capital requirements both domestically and internationally, through 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 July 12, 2016, Cirrus Logic entered into an amended and restated credit agreement (the “Amended Credit Agreement”) with Wells Fargo Bank, National Association, as Administrative Agent, and the Lenders party thereto, for the purpose of refinancing the Credit Facility and providing ongoing working capital. The Amended Credit Agreement provides for a $300 million senior secured revolving credit facility (the “Amended Facility”). The Amended Facility matures on July 12, 2021. Cirrus Logic must repay the outstanding principal amount of all borrowings, together with all accrued but unpaid interest thereon, on the maturity date. The Amended Facility is required to be guaranteed by all of Cirrus Logic’s material domestic subsidiaries (the “Subsidiary Guarantors”). The Amended Credit Facility is secured by substantially all of the assets of Cirrus Logic and any Subsidiary Guarantors, except for certain excluded assets.
Borrowings under the Amended Facility may, at our election, bear interest at either (a) a base rate plus the applicable margin (“Base Rate Loans”) or (b) a LIBOR rate plus the applicable margin (“LIBOR Rate Loans”). The applicable margin ranges from
0%
to
0.50%
per annum for Base Rate Loans and
1.25%
to
2.00%
per annum for LIBOR Rate Loans based on the Leverage Ratio (as defined below). A commitment fee accrues at a rate per annum ranging from
0.20%
to
0.30%
(based on the Leverage Ratio) on the average daily unused portion of the commitment of the lenders. The Amended Credit Agreement contains certain financial covenants providing that (a) the ratio of consolidated funded indebtedness to consolidated EBITDA for the prior four fiscal quarters must not be greater than
3.00
to
1.00
(the “Leverage Ratio”) and (b) the ratio of consolidated EBITDA for the prior four consecutive fiscal quarters to consolidated fixed charges (including amounts paid in cash for consolidated interest expenses, capital expenditures, scheduled principal payments of indebtedness, and income taxes) for the prior four consecutive fiscal quarters must not be less than
1.25
to
1.00
as of the end of each fiscal quarter. The Amended Credit Agreement also contains negative covenants limiting the Company’s or any Subsidiary’s ability to, among other things, incur debt, grant liens, make investments, effect certain fundamental changes, make certain asset dispositions, and make certain restricted payments.
As of
September 23, 2017
, the Company had
no
amounts outstanding under the Amended Facility and was in compliance with all covenants under the Amended Credit Agreement.