UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 27,  2014

 

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from ____ to ____

 

Commission File Number 0-17795

 

 

CIRRUS LOGIC, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (512) 851-4000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  YES ☑    NO ☐ 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES    ☑    NO  ☐ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES ☐    NO ☑

 

The number of shares of the registrant's common stock, $0.001 par value, outstanding as of October 24,  2014 was 63,163,170. 

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CIRRUS LOGIC, INC.

 

FORM 10-Q QUARTERLY REPORT

 

QUARTERLY PERIOD ENDED SEPTEMBER 27,  2014

 

TABLE OF CONTENTS

 

 

 

 

 

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Part I. FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

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The accompanying notes are an integral part of these consolidated condensed financial statements.

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The accompanying notes are an integral part of these consolidated condensed financial statements.

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The accompanying notes are an integral part of these consolidated condensed financial statements.

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CIRRUS LOGIC, INC.

NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

1.     Basis of Presentation

 

The consolidated condensed financial statements have been prepared by Cirrus Logic, Inc. (“Cirrus Logic,” “we,” “us,” “our,” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”).  The accompanying unaudited consolidated condensed financial statements do not include complete footnotes and financial presentations.  As a result, these financial statements should be read along with the audited consolidated financial statements and notes thereto for the year ended March 29, 2014, included in our Annual Report on Form 10-K filed with the Commission on May 28, 2014.  In our opinion, the financial statements reflect all adjustments, including normal recurring adjustments, necessary for a fair presentation of the financial position, operating results and cash flows for those periods presented.  The preparation of financial statements in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect reported assets, liabilities, revenues and expenses, as well as disclosure of contingent assets and liabilities.  Actual results could differ from those estimates and assumptions.  Moreover, the results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the entire year.  Additionally, prior period amounts have been adjusted to conform to current year presentation.   

 

2.     Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606).  The purpose of the ASU is to converge revenue recognition requirements per GAAP and International Financial Reporting Standards (IFRS).  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The amendments in this ASU are effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption not permitted by the FASB.  The Company is currently evaluating the impact of this ASU on its consolidated financial position, results of operations and cash flows.

 

3.     Marketable 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 27, 2014 (in thousands): 

 

 

The Company’s specifically identified gross unrealized losses of $43 thousand relates to 15 different securities with total amortized cost of approximately $63.1 million at September 27, 2014.  Because the Company does not intend to sell the investments at a loss and the Company will not be required to sell the investments before recovery of its amortized cost basis, it did not consider the investment in these securities to be other-than-temporarily impaired at September 27, 2014.  Further, the securities with gross unrealized losses had been in a continuous unrealized loss position for less than 12 months as of September 27, 2014. 

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The following table is a summary of available-for-sale securities at March 29, 2014 (in thousands): 

 

 

The Company’s specifically identified gross unrealized losses of $253 thousand relates to 74 different securities with total amortized cost of approximately $207.8 million at March 29, 2014.  Because the Company does not intend to sell the investments at a loss and the Company will not be required to sell the investments before recovery of its amortized cost basis, it did not consider the investment in these securities to be other-than-temporarily impaired at March 29, 2014.  Further, the securities with gross unrealized losses had been in a continuous unrealized loss position for less than 12 months as of March 29, 2014.  

 

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

 

 

 

 

 

4.     Derivative Financial Instruments

 

Our primary objective for holding derivative financial instruments is to manage currency exchange rate risk and interest rate risk.

 

Currency Exchange Rate Risk

 

We are exposed to currency exchange rate risk and generally hedge our exposures with currency forward contracts.  Substantially all of our revenue is transacted in U.S. dollars.  However, a portion of our operating expenditures are incurred in or exposed to other currencies, primarily the British pound.  We have established a  forecasted transaction currency risk management program to protect against fluctuations in the volatility of the functional currency equivalent of future cash flows caused by changes in exchange rates.  This program may reduce, but not eliminate, the impact of currency exchange movements. 

 

Fair Value of Derivative Instruments in the Consolidated Condensed Balance Sheets

 

The fair value of our derivative instruments at the end of each period were as follows (in thousands):

 

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5.     Fair Value of Financial Instruments

 

The Company has determined that the only assets and liabilities in the Company’s financial statements that are required to be measured at fair value on a recurring basis are the Company’s cash equivalents, investment portfolio, and foreign currency derivative assets/liabilities.  The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement.    The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

 

 

The Company’s investment portfolio assets consist of corporate debt securities, money market funds, U.S. Treasury securities, obligations of certain U.S. government-sponsored enterprises,  commercial paper, and certificates of deposit and are reflected on our consolidated condensed balance sheets under the headings cash and cash equivalents, marketable securities, and long-term marketable securities.  The Company determines the fair value of its investment portfolio assets by obtaining non-binding market prices from its third-party portfolio managers on the last day of the quarter, whose sources may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value.    

 

The fair value of the foreign currency derivatives is included in “Other accrued liabilities”  on the consolidated condensed balance sheet.       

 

The Company’s long-term revolving facility, described in Note 9, bears interest at a base rate plus applicable margin or LIBOR plus applicable margin.  As of September 27, 2014, the fair value of the Company’s long-term revolving facility approximates carrying value based on estimated margin.

 

As of September 27,  2014, the Company classified its investment portfolio assets and foreign currency derivative liabilities as Level 1 or Level 2 inputs.  The Company has no Level 3 assets.  There were no transfers between Level 1, Level 2, or Level 3 measurements for the three month period ending September 27, 2014.

 

The fair value of our financial assets and liabilities at September 27, 2014, was determined using the following inputs (in thousands):

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The fair value of our financial assets at March 29, 2014, was determined using the following inputs (in thousands):

 

 

6.     Accounts Receivable, net

 

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

 

 

7.     Inventories

 

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Inventories are comprised of the following (in thousands):

 

 

8.    Acquisition

On August 21, 2014, Cirrus Logic completed the acquisition of Wolfson Microelectronics plc (the “Acquisition”), a public limited company incorporated in Scotland (“Wolfson”).  Upon completion of the acquisition, Wolfson was re-registered as a private limited company.  Wolfson is a supplier of high performance, mixed-signal audio solutions for the consumer electronics market.  The Acquisition accelerates Cirrus Logic’s strategic roadmap, further strengthens our technology portfolio with the addition of MEMS microphones and extensive software capabilities, while significantly expanding our development capacity.  

The enterprise value for Wolfson in connection with the Acquisition was approximately £283 million (approximately $469 million based on a U.S. dollar to pound sterling exchange rate of 1.659), and was based on the agreed upon offer of £2.35 per share (the “Offer”) for the entire issued and to be issued share capital of Wolfson.  Cirrus Logic financed the Acquisition through a combination of existing cash on Cirrus Logic’s balance sheet and $225 million in debt funding from Wells Fargo Bank, National Association, as discussed below in Note 9.    Upon completion of the Acquisition, the Company recorded approximately $12.0 million, in the current fiscal quarter, of realized losses on foreign currency fluctuations in the initial valuation exchange rate of 1.682 (U.S. dollar to pound sterling) and the actual exchange rate at Acquisition date of 1.659.  The loss is included in the consolidated condensed statements of income under the caption “Other income (expense)”. 

The Acquisition was accounted for as a business purchase pursuant to ASC Topic 805, Business Combinations, and the operations of Wolfson have been included in the Company’s consolidated financial statements since August 21, 2014, the date of acquisition. The following table presents the initial allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition (in thousands):

 

 

The goodwill of $249.0 million arising from the Acquisition is attributable primarily to expected synergies and the product and customer base of Wolfson.  None of the goodwill is expected to be

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deductible for income tax purposes.  As of September 27, 2014, there were no changes in the recognized amounts of goodwill resulting from the Acquisition.

 

The components of the acquired intangible assets and related weighted average amortization periods are detailed below (in thousands):

 

 

The initial allocation of the purchase price is preliminary and subject to completion, including the areas of taxation, inventory, real property, intangible assets, other assets, deferred revenue, and other liabilities, where valuation assessments are in progress.  The adjustments arising from the completion of the outstanding matters may materially affect the preliminary purchase accounting and would be retroactively reflected in the financial statements as of September 27, 2014 and for the interim periods then ended.

 

The Company recognized $14.9 million of acquisition related costs that were expensed in the current period.  These costs are included in the consolidated condensed statements of income in the line item entitled “Acquisition related costs.”  

 

The Company’s consolidated condensed statements of income for the period ending September 27, 2014 included $13.0 million of revenue attributable to Wolfson, which reflects revenues from the acquisition date to the end of the period.  The earnings related to Wolfson included in the Company’s consolidated condensed statements of income for the period ending September 27, 2014, are excluded as it would be impracticable to allocate costs and services shared across product lines for the Company as to not be misleading. 

 

Giving pro forma effect to the Acquisition as if it had occurred as of March 30, 2014, the beginning of the Company’s fiscal year, and after applying the Company’s accounting policies and adjusting the results to reflect these changes since March 30, 2014, $57.2 million of pro forma revenue would have been attributable to Wolfson.  Pro forma earnings attributable to Wolfson is excluded as it would be impracticable.  Costs and services shared across product lines for the Company cannot appropriately be allocated as to not be misleading. 

 

 

9.     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 Interim Credit Facility described below, and may be used for general corporate purposes.  The Credit Facility matures on August 29, 2017.

 

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 .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).

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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 Subsidiary to, among other things, incur debt, grant liens, make investments, effect certain fundamental changes, make certain asset dispositions, and make certain restricted payments.  The Credit Facility also contains certain financial covenants providing that (a) the ratio of consolidated funded indebtedness to consolidated EBITDA for the prior four consecutive quarters must not be greater than 2.00 to 1.00 (the “Leverage Ratio”) and (b) the sum of cash and Cash Equivalents of Cirrus Logic and its Subsidiaries on a consolidated basis must not be less than $100 million.  At September  27, 2014, the Company was in compliance with all covenants under the Credit Agreement.   The Company had borrowed $226.4 million under this facility as of September  27, 2014, which is included in long-term liabilities on the consolidated condensed balance sheets.  The borrowings were primarily used for financing Acquisition.

Cirrus Logic entered into a credit agreement (the “Interim Credit Agreement”) with Wells Fargo Bank, National Association as administrative agent and lender, on April 29, 2014, in connection with the Acquisition.  The Interim Credit Agreement provided for a $225 million senior secured revolving credit facility (the “Interim Facility”).  The Interim Facility was to be used for, among other things, payment of the offer consideration in connection with the Acquisition.  The Interim Facility would have matured on the earliest to occur of (a) January 23, 2015, (b) the date of termination of the Commitments as a result of a permanent reduction of all of the Commitments (as defined in the Interim Credit Agreement) by Cirrus Logic or (c) the date of termination of the Commitments as a result of an event of default.  The Interim Facility actually matured under scenario (b) above with no outstanding borrowings or accrued interest on the maturity date. 

The Company maintained an unsecured revolving credit facility until early fiscal year 2014.  The aggregate borrowing limit under this facility was $100 million, with a $15 million letter of credit sublimit and was intended to provide the Company with short-term borrowings for working capital and other general corporate purposes.  The Company had no outstanding amounts under the facility prior to its expiration on April 19, 2013.

 

10.   Income Taxes

 

Our provision for income taxes is based on estimated effective tax rates derived from an estimate of annual consolidated earnings before taxes, adjusted for nondeductible expenses, other permanent items and any applicable credits. Our income tax expense is primarily a non-cash charge due to the utilization of U.S. net operating losses.

 

The following table presents the provision for income taxes and the effective tax rates (in thousands):

 

 

Our income tax expense for the second quarter and first six months of fiscal year 2015 was above the federal statutory rate primarily due to the inclusion of foreign losses in the period from the close of the Acquisition to the end of the quarter at foreign statutory rates below the U.S. federal statutory rate.  Our income tax expense for the second quarter and first six months of fiscal year 2014 was slightly below the federal statutory rate primarily due to the effect of the federal research and development credit which was

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extended through December 31, 2013 by the American Taxpayer Relief Act of 2012, which was enacted on January 2, 2013.

 

We had no unrecognized tax benefits as of September 27, 2014.  The Company does not believe that its unrecognized tax benefits will significantly increase or decrease during the next 12 months.    

 

We accrue interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes.  As of September 27, 2014, the balance of accrued interest and penalties was zero.  No interest or penalties were incurred during the first six months of fiscal year 2015 or 2014.

 

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions.  Fiscal years 2011 through 2014 remain open to examination by the major taxing jurisdictions to which we are subject.

 

11.   Pension Plan

 

As a result of the Acquisition, the Company now fully funds a defined benefit pension scheme (“the Plan”) maintained by Wolfson, for non-U.S. employees, which was closed to new participants as of July 2, 2002.  As of April 30, 2011, the participants in the Plan no longer accrue benefits and therefore the Company will not be required to pay contributions in respect to future accrual.

Prior to the acquisition, Wolfson paid deficit contributions of approximately $1.65 million in April 2014.  The Company will be obligated to pay approximately $1.65 million by April 30, 2015 and approximately $0.6 million by April 30, 2016.  The Company expects to completely close the Plan over the next ten years.

 

The components of the Company’s net periodic pension expense (income) for the three and six months ended September 27, 2014 and September 28, 2013 are as follows (in thousands):

 

The following weighted-average assumptions were used to determine net periodic benefit costs for the three months ended September 27, 2014:

The following tables set forth the benefit obligation, the fair value of plan assets, and the funded status of the Company’s plan (in thousands):

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Based on an actuarial study performed as of September 27, 2014, the plan is overfunded and a long-term asset is reflected in the Company’s consolidated condensed balance sheet under the caption “Other assets”.   The weighted-average discount rate assumption used to determine benefit obligations as of September 27, 2014 was 3.9%.

 

12.   Net Income Per Share

 

Basic net income per share is based on the weighted effect of common shares issued and outstanding and is calculated by dividing net income by the basic weighted average shares outstanding during the period.  Diluted net income per share is calculated by dividing net income by the weighted average number of common shares used in the basic net income per share calculation, plus the equivalent number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares outstanding.  These potentially dilutive items consist primarily of outstanding stock options and restricted stock awards.

 

The following table details the calculation of basic and diluted earnings per share for the three and six months ended September 27, 2014 and September 28, 2013 (in thousands, except per share amounts):