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1. Description of Business
Description of Business
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.
We were incorporated in California in 1984, became a public company in 1989, and were reincorporated in the State of Delaware in February 1999. Our primary facility housing engineering, sales and marketing, and administration functions is located in Austin, Texas. We also have offices in various other locations in the United States, United Kingdom, Sweden, Spain, Australia and Asia, including the People’s Republic of China, Hong Kong, South Korea, Japan, Singapore, and Taiwan. Our common stock, which has been publicly traded since 1989, is listed on the NASDAQ Global Select Market under the symbol CRUS.
Basis of Presentation
We prepare financial statements on a 52- or 53-week year that ends on the last Saturday in March. Fiscal years 2017, 2016, and 2015 were 52-week years. The next 53-week year will be fiscal year 2018.
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles (U.S. GAAP) and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
Reclassifications
Certain reclassifications have been made to prior year balances in order to conform to the current year’s presentation of financial information.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires the use of management estimates. These estimates are subjective in nature and involve judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at fiscal year-end and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.
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2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of money market funds, commercial paper, and U.S. Government Treasury and Agency instruments with original maturities of three months or less at the date of purchase.
Inventories
We use the lower of cost or net realizable value to value our inventories, following the adoption of ASU 2015-11, with cost being determined on a first-in, first-out basis. One of the factors we consistently evaluate in the application of this method is the extent to which products are accepted into the marketplace. By policy, we evaluate market acceptance based on known business factors and conditions by comparing forecasted customer unit demand for our products over a specific future period, or demand horizon, to quantities on hand at the end of each accounting period.
On a quarterly and annual basis, we analyze inventories on a part-by-part basis. Product life cycles and the competitive nature of the industry are factors considered in the evaluation of customer unit demand at the end of each quarterly accounting period. Inventory quantities on-hand in excess of forecasted demand is considered to have reduced market value and, therefore, the cost basis is adjusted to the lower of cost or net realizable value. Typically, market values for excess or obsolete inventories are considered to be zero. Inventory charges recorded for excess and obsolete inventory, including scrapped inventory, represented $6.7 million and $4.8 million, in fiscal year 2017 and 2016, respectively. Inventory charges in fiscal year 2017 and 2016 related to a combination of quality issues and inventory exceeding demand.
Inventories were comprised of the following (in thousands):
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March 25, |
March 26, |
|||
|
2017 |
2016 |
|||
Work in process |
$ |
83,332 |
$ |
67,827 | |
Finished goods |
84,563 | 74,188 | |||
|
$ |
167,895 |
$ |
142,015 |
Property, Plant and Equipment, net
Property, plant and equipment is recorded at cost, net of depreciation and amortization. Depreciation and amortization is calculated on a straight-line basis over estimated economic lives, ranging from three to 39 years. Leasehold improvements are depreciated over the shorter of the term of the lease or the estimated useful life. Furniture, fixtures, machinery, and equipment are all depreciated over a useful life of three to 10 years, while buildings are depreciated over a period of up to 39 years. In general, our capitalized software is amortized over a useful life of three years, with capitalized enterprise resource planning software being amortized over a useful life of 10 years. Gains or losses related to retirements or dispositions of fixed assets are recognized in the period incurred. Additionally, if impairment indicators exist, the Company will assess the carrying value of the associated asset. In the fourth quarter of fiscal year 2017, the Company reassessed the carrying value of the property located in Edinburgh, Scotland, resulting in an asset impairment charge of $9.8 million.
Property, plant and equipment was comprised of the following (in thousands):
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March 25, |
March 26, |
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2017 |
2016 |
|||
Land |
$ |
26,379 |
$ |
26,379 | |
Buildings |
74,266 | 73,513 | |||
Furniture and fixtures |
14,231 | 13,226 | |||
Leasehold improvements |
4,355 | 2,637 | |||
Machinery and equipment |
123,054 | 105,880 | |||
Capitalized software |
24,839 | 25,127 | |||
Construction in progress |
22,972 | 5,411 | |||
Total property, plant and equipment |
290,096 | 252,173 | |||
Less: Accumulated depreciation and amortization |
(121,957) | (89,517) | |||
Property, plant and equipment, net |
$ |
168,139 |
$ |
162,656 |
Depreciation and amortization expense on property, plant, and equipment for fiscal years 2017, 2016, and 2015 was $26.1 million, $22.3 million, and $15.4 million, respectively.
Goodwill and Intangibles, net
Intangible assets include purchased technology licenses and patents that are reported at cost and are amortized on a straight-line basis over their useful lives, generally ranging from one to ten years. Acquired intangibles include existing technology, core technology or patents, license agreements, in-process research & development, trademarks, tradenames, customer relationships, non-compete agreements, and backlog. These assets are amortized on a straight-line basis over lives ranging from one to fifteen years.
Goodwill is recorded at the time of an acquisition and is calculated as the difference between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. The Company tests goodwill and indefinite lived intangibles for impairment on an annual basis or more frequently if the Company believes indicators of impairment exist. Impairment evaluations involve management’s assessment of qualitative factors to determine whether it is more likely than not that goodwill and other intangible assets are impaired. If management concludes from its assessment of qualitative factors that it is more likely than not that impairment exists, then a quantitative impairment test will be performed involving management estimates of asset useful lives and future cash flows. Significant management judgment is required in the forecasts of future operating results that are used in these evaluations. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges in a future period. The Company has recorded no goodwill impairments in fiscal years 2017, 2016, and 2015. There were no material intangible asset impairments in fiscal years 2017, 2016, or 2015.
Long-Lived Assets
We test for impairment losses on long-lived assets and definite-lived intangibles used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. We measure any impairment loss by comparing the fair value of the asset to its carrying amount. We estimate fair value based on discounted future cash flows, quoted market prices, or independent appraisals.
Foreign Currency Translation
Prior to the fiscal year 2015 acquisition of Wolfson Microelectronics (“Wolfson,” the “Acquisition”), each Cirrus Logic legal entity was US dollar functional. Additionally, each of the acquired Wolfson legal entities were also designated as US dollar functional. These designations were determined individually by Cirrus Logic and Wolfson prior to the Acquisition. Subsequent to the integration of Wolfson, the Company reassessed the functional currencies of each legal entity based on the relevant facts and circumstances, as well as in accordance with the applicable accounting guidance contained in Accounting Standards Codification (“ASC”) 830-10, “Foreign Currency Matters.” Based on its analysis and on the change in operating structure brought about by the Acquisition, the Company determined that the functional currency of some of its subsidiaries had changed from the US dollar to the local currency. The Company’s main entities, including the entities that generate the majority of sales and employ the majority of employees, remain US dollar functional. The change was effective beginning in fiscal year 2016 and had an immaterial effect on the financial statements. Beginning in fiscal year 2016 foreign currency translation gains and losses are reported as a component of Accumulated Other Comprehensive Gain / (Loss).
Pension
Defined benefit pension plans are accounted for based upon the provisions of ASC Topic 715, “Compensation – Retirement Benefits.”
The funded status of the plan is recognized in the Consolidated Balance Sheet. Subsequent re-measurement of plan assets and benefit obligations, if deemed necessary, would be reflected in the Consolidated Balance Sheet in the subsequent interim period to reflect the overfunded or underfunded status of the plan.
The Company engages external actuaries on at least an annual basis to provide a valuation of the plan’s assets and projected benefit obligation and to record the net periodic pension cost. On a quarterly basis, the Company will evaluate current information available to us to determine whether the plan’s assets and projected benefit obligation should be re-measured.
Concentration of Credit Risk
Financial instruments that potentially subject us to material concentrations of credit risk consist primarily of cash equivalents, marketable securities, long-term marketable securities, and trade accounts receivable. We are exposed to credit risk to the extent of the amounts recorded on the balance sheet. By policy, our cash equivalents, marketable securities, and long-term marketable securities are subject to certain nationally recognized credit standards, issuer concentrations, sovereign risk, and marketability or liquidity considerations.
In evaluating our trade receivables, we perform credit evaluations of our major customers’ financial condition and monitor closely all of our receivables to limit our financial exposure by limiting the length of time and amount of credit extended. In certain situations, we may require payment in advance or utilize letters of credit to reduce credit risk. By policy, we establish a reserve for trade accounts receivable based on the type of business in which a customer is engaged, the length of time a trade account receivable is outstanding, and other knowledge that we may possess relating to the probability that a trade receivable is at risk for non-payment.
We had three contract manufacturers, Hongfujin Precision, Protek, and Jabil Circuits who represented 20 percent, 15 percent, and 13 percent, respectively of our consolidated gross trade accounts receivable as of the end of fiscal year 2017. Hongfujin Precision and Protek represented 23 percent and 11 percent, respectively, and Samsung Electronics, a direct customer, represented 23 percent of our consolidated gross trade accounts receivable as of the end of fiscal year 2016. No other distributor or customer had receivable balances that represented more than 10 percent of consolidated gross trade accounts receivable as of the end of fiscal year 2017 and 2016.
Since the components we produce are largely proprietary and generally not available from second sources, we consider our end customer to be the entity specifying the use of our component in their design. These end customers may then purchase our products directly from us, from a distributor, or through a third party manufacturer contracted to produce their end product. For fiscal years 2017, 2016, and 2015, our ten largest end customers represented approximately 92 percent, 89 percent, and 87 percent, of our sales, respectively. For fiscal years 2017, 2016, and 2015, we had one end customer, Apple Inc., who purchased through multiple contract manufacturers and represented approximately 79 percent, 66 percent, and 72 percent, of the Company’s total sales, respectively. Samsung Electronics represented 15 percent of the Company’s total sales in fiscal year 2016. No other customer or distributor represented more than 10 percent of net sales in fiscal years 2017, 2016, or 2015.
Revenue Recognition
We recognize revenue when all of the following criteria are met: persuasive evidence that an arrangement exists, delivery of goods has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Prior to the fourth quarter of fiscal year 2016, we had a number of arrangements with distributors whereby we deferred revenue at the time of shipment of our products to those distributors. As part of those arrangements, when a distributor resold those products to an end customer, the Company would credit the distributor the difference between (1) the original distributor price and the distributor’s agreed upon margin and (2) the final sales price to the end customer (known as the “Ship and Debit Arrangement”). For those transactions, revenue was deferred until the product was resold by the distributor and we determined that the final sales price to the distributor was fixed or determinable. For certain of our smaller distributors, we did not have similar Ship and Debit Arrangements and the distributors were billed at a fixed upfront price. For those transactions, revenue was recognized upon delivery to the distributor based upon the distributor’s individual shipping terms, less an allowance for estimated returns, as the Company determined that the revenue recognition criteria were met.
In light of the fact that the distributor program had been declining as a portion of the overall business for several years, in fiscal year 2016 the Company performed a review of all distributor arrangements in an effort to streamline our distribution program and reduce overhead costs. Based upon this review, the Company terminated its Ship and Debit Arrangements with Distributors during the fourth quarter of fiscal year 2016. Subsequent to the termination of the Ship and Debit Arrangements, the Company began recognizing revenue for all distributors upon delivery to the distributor based upon the distributor’s individual shipping terms, less an allowance for estimated returns, as the Company’s final sales price to the distributor was fixed and determinable and the Company determined that all four criteria for revenue recognition were met.
Although the Company terminated its Ship and Debit Arrangements with all distributors along with certain ancillary agreements related to the Ship and Debit Arrangements, the Company continues to grant varying levels of stock rotation and price protection rights based on individual distributor agreements. To the extent these rights are implicated in any transaction with a distributor, we continue to evaluate their effect on when the revenue recognition criteria have been met.
Warranty Expense
We warrant our products and maintain a provision for warranty repair or replacement of shipped products. The accrual represents management’s estimate of probable returns. Our estimate is based on an analysis of our overall sales volume and historical claims experience. The estimate is re-evaluated periodically for accuracy.
Shipping Costs
Our shipping and handling costs are included in cost of sales for all periods presented in the Consolidated Statements of Income.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs were $1.7 million, $1.6 million, and $1.1 million, in fiscal years 2017, 2016, and 2015, respectively.
Stock-Based Compensation
Stock-based compensation is measured at the grant date based on the grant-date fair value of the awards and is recognized as an expense, on a ratable basis, over the vesting period, which is generally between zero and four years. Determining the amount of stock-based compensation to be recorded requires the Company to develop estimates used in calculating the grant-date fair value of stock options and performance awards (also called market stock units). The Company calculates the grant-date fair value for stock options and market stock units using the Black-Scholes valuation model and the Monte Carlo simulation, respectively. The use of valuation models requires the Company to make estimates of assumptions such as expected volatility, expected term, risk-free interest rate, expected dividend yield, correlation of the Company’s stock price with the Philadelphia Semiconductor Index (“the Index”) and forfeiture rates. The grant-date fair value of restricted stock units is the market value at grant date multiplied by the number of units.
Income Taxes
We are required to calculate income taxes in each of the jurisdictions in which we operate. This process involves calculating the actual current tax liability as well as assessing temporary differences in the recognition of income or loss for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheet. We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company evaluates the ability to realize its deferred tax assets based on all the facts and circumstances, including projections of future taxable income and expiration dates of carryover tax attributes.
The calculation of our tax liabilities involves assessing uncertainties with respect to the application of complex tax rules and the potential for future adjustment of our uncertain tax positions by the Internal Revenue Service or other taxing jurisdiction. We recognize liabilities for uncertain tax positions based on the required two-step process. The first step requires us to determine if the weight of available evidence indicates that the tax position has met the threshold for recognition; therefore, we must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50 percent likely of being realized upon ultimate settlement. We reevaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, expirations of statutes of limitation, effectively settled issues under audit, and new audit activity. A change in the recognition step or measurement step would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.
Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, we cannot assure that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If additional taxes are assessed as a result of an audit or litigation, it could have a material effect on our income tax provision and net income in the period or periods for which that determination is made. We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues which may require an extended period of time to resolve and could result in additional assessments of income tax. We believe adequate provisions for income taxes have been made for all periods.
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 grants.
The following table details the calculation of basic and diluted earnings per share for fiscal years 2017, 2016, and 2015, (in thousands, except per share amounts):
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Fiscal Years Ended |
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March 25, |
March 26, |
March 28, |
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2017 |
2016 |
2015 |
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Numerator: |
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Net income |
$ |
261,209 |
$ |
123,630 |
$ |
55,178 | ||
Denominator: |
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Weighted average shares outstanding |
63,329 | 63,197 | 62,503 | |||||
Effect of dilutive securities |
3,232 | 2,796 | 2,732 | |||||
Weighted average diluted shares |
66,561 | 65,993 | 65,235 | |||||
Basic earnings per share |
$ |
4.12 |
$ |
1.96 |
$ |
0.88 | ||
Diluted earnings per share |
$ |
3.92 |
$ |
1.87 |
$ |
0.85 |
The weighted outstanding options excluded from our diluted calculation for the years ended March 25, 2017, March 26, 2016, and March 28, 2015 were 389 thousand, 468 thousand, and 718 thousand, respectively, as the exercise price exceeded the average market price during the period.
Accumulated Other Comprehensive Income (Loss)
Our accumulated other comprehensive income (loss) is comprised of foreign currency translation adjustments, unrealized gains and losses on investments classified as available-for-sale and actuarial gains and losses on our pension plan assets. See Note 14 – Accumulated Other Comprehensive Income (Loss) for additional discussion.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606). The purpose of this ASU is to converge revenue recognition requirements per GAAP and International Financial Reporting Standards (IFRS). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. 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. Through this process, the Company currently expects no material modifications to its financial statements upon adoption of this ASU.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The amendments in this ASU provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company adopted this ASU in the fourth quarter of fiscal year 2017 with no material modifications to the Company’s financial statements as a result.
In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this update require that debt issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the carrying amount of that debt liability and that the amortization of debt issuance costs is reported as interest expense. ASU 2015-03 is to be applied retrospectively and represents a change in accounting principle. In August 2015, the FASB issued FASB ASU No. 2015-15, Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 clarified the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. Debt issuance costs related to a line-of-credit arrangement may be presented in the balance sheet as an asset and subsequently amortized ratably over the term of the arrangement regardless of whether there are any outstanding borrowings. Both ASU 2015-03 and ASU 2015-15 are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Earlier adoption is permitted for financial statements that have not been previously issued. The Company adopted these ASUs in fiscal year 2017 with no material impact to its financial statements.
In April 2015, the FASB issued ASU No. 2015-04, Compensation – Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets. The ASU is part of the FASB’s “Simplification Initiative” to reduce complexity in accounting standards. The FASB decided to permit entities to measure defined benefit plan assets and obligations as of the month-end that is closest to their fiscal year-end. An entity is required to disclose the accounting policy election and the date used to measure defined benefit plan assets and obligations in accordance with the amendments in this update. The amendments in this update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with earlier application permitted. The Company adopted this ASU in the first quarter of fiscal year 2017, with no material impact to its financial statements.
In July 2015, ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory was issued. This ASU requires companies to subsequently measure inventory at the lower of cost and net realizable value versus the previous lower of cost or market. The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, to be applied prospectively. Early application is permitted. The Company early adopted this ASU in fiscal year 2017 with no material modifications to its financial statements as a result.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The FASB issued this 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 March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU requires all excess tax benefits and deficiencies to be recognized as income tax benefit / expense in the income statement and presented as an operating activity in the statement of cash flows. Forfeitures can be calculated based on either the estimated number of awards that are expected to vest, as required by current guidance, or when forfeitures actually occur. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted, but all amendments must be adopted in the same period and any adjustments should be reflected as of the beginning of the fiscal year if adopted in an interim period. The Company early adopted in the third quarter of fiscal year 2017, which resulted in the following:
· |
We recorded excess tax benefits within income tax expense, rather than in additional paid-in capital (“APIC”), of $2.2 million, $8.0 million, $10.8 million and $1.9 million for the first, second, third and fourth quarters of fiscal year 2017, respectively. |
· |
We recorded a cumulative-effect adjustment as of March 27, 2016 to increase retained earnings by $5.6 million, with a corresponding increase to deferred tax assets, to recognize net operating loss and tax credit carryforwards attributable to excess tax benefits on stock-based compensation that had not been previously recognized. |
· |
We now include the excess tax benefits in net operating cash rather than net financing cash in our Consolidated Statements of Cash Flows. |
We applied this change in presentation prospectively and thus prior years have not been adjusted.
We elected not to change our policy on accounting for forfeitures and continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period.
The adoption of this new guidance impacted our previously reported quarterly results for fiscal year 2017 as follows:
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Three Months Ended |
Six Months Ended |
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June 25, 2016 |
September 24, 2016 |
September 24, 2016 |
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As reported |
As adjusted |
As reported |
As adjusted |
As reported |
As adjusted |
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(in thousands, except per share data) |
||||||||||||
Consolidated Condensed Statements of Income: |
|||||||||||||
Income tax expense |
$ |
5,805 |
$ |
3,598 |
$ |
24,608 |
$ |
16,634 |
$ |
30,413 |
$ |
20,232 | |
Net income |
$ |
15,864 |
$ |
18,071 |
$ |
78,065 |
$ |
86,039 |
$ |
93,929 |
$ |
104,110 | |
Basic net income per share |
$ |
0.25 |
$ |
0.29 |
$ |
1.24 |
$ |
1.37 |
$ |
1.50 |
$ |
1.66 | |
Diluted net income per share |
$ |
0.24 |
$ |
0.27 |
$ |
1.19 |
$ |
1.30 |
$ |
1.43 |
$ |
1.58 | |
Weighted average shares used in diluted net income per share computation |
65,232 | 65,723 | 65,717 | 66,410 | 65,521 | 66,101 | |||||||
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Consolidated Condensed Statements of Cash Flows: |
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Net cash provided by operating activities |
$ |
12,226 |
$ |
12,756 |
$ |
19,990 |
$ |
24,091 |
$ |
32,216 |
$ |
36,847 | |
Net cash used in financing activities |
$ |
(13,140) |
$ |
(13,670) |
$ |
(13,859) |
$ |
(17,960) |
$ |
(26,999) |
$ |
(31,630) |
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires credit losses on available-for-sale debt securities to be presented as an allowance rather than a write-down. Unlike current U.S. GAAP, the credit losses could be reversed with changes in estimates, and recognized in current year earnings. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018, including interim periods. The Company is currently evaluating the impact of this ASU with no expected material impact.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU covers several cash flow issues, including the presentation of contingent consideration payments made after a business combination. Cash payments up to the amount of the liability recognized at the acquisition date (including measurement-period adjustments) should be classified as financing activities. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted, including in an interim period, with a required retrospective transition method applied to each period presented. The Company early adopted in the fourth quarter of fiscal year 2017. See Statement of Cash Flows for presentation of contingent consideration payment.
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 is currently evaluating the impact of this ASU.
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, including interim periods within those annual periods. Early adoption is permitted under specific circumstances, including in an interim period, with prospective application on or after the effective date. The Company is currently evaluating the financial statement impact of this ASU, which is dependent upon the specific terms of any applicable future acquisitions or dispositions.
In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323). This ASU amends the disclosure requirements for ASU 2014-09, Revenue from Contracts with Customers (Topic 606), ASU 2016-02, Leases (Topic 842) and ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU states that if a registrant does not know or cannot reasonably estimate the impact that the adoption of the above ASUs is expected to have on the financial statements, then in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. This ASU was effective upon issuance. The adoption did not have a material impact on the Company’s financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates step two of the goodwill impairment test. An impairment charge is to be recognized for the amount by which the current value exceeds the fair value. This ASU is effective for annual periods beginning after December 15, 2019, including interim periods. Early adoption is permitted, for interim or annual goodwill impairment tests performed after January 1, 2017, and should be applied prospectively. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments in this update. The Company is currently evaluating the impact of this ASU.
|
3. Marketable Securities
The Company’s investments have been classified as available-for-sale securities in accordance with U.S. GAAP. Marketable securities are categorized on the Consolidated Balance Sheet as “Marketable securities” within the short-term or long-term classification, as appropriate.
The following table is a summary of available-for-sale securities (in thousands):
|
|||||||||||
|
Estimated |
||||||||||
|
Gross |
Gross |
Fair Value |
||||||||
|
Amortized |
Unrealized |
Unrealized |
(Net Carrying |
|||||||
As of March 25, 2017 |
Cost |
Gains |
Losses |
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 relates to 18 different securities with a total amortized cost of approximately $99.9 million at March 25, 2017. Four securities had been in a continuous unrealized loss position for more than 12 months as of March 25, 2017. The gross unrealized loss on these securities was less than one tenth of one percent of the position value. Because the Company does not intend to sell the investments at a loss and it is not more likely than not that the Company will be required to sell the investments before recovery of its amortized cost basis, the Company did not consider the investment in these securities to be other-than-temporarily impaired at March 25, 2017.
|
|||||||||||
|
Estimated |
||||||||||
|
Gross |
Gross |
Fair Value |
||||||||
|
Amortized |
Unrealized |
Unrealized |
(Net Carrying |
|||||||
As of March 26, 2016 |
Cost |
Gains |
Losses |
Amount) |
|||||||
Corporate debt securities |
$ |
81,310 |
$ |
3 |
$ |
(100) |
$ |
81,213 |
The Company’s specifically identified gross unrealized losses of $100 thousand relates to 21 different securities with a total amortized cost of approximately $64.7 million at March 26, 2016. Two securities had been in a continuous unrealized loss position for more than 12 months as of March 26, 2016, both of which matured in fiscal year 2017. Because the Company did not intend to sell the investments at a loss and it was not more likely than not that the Company would be required to sell the investments before recovery of its amortized cost basis, the Company did not consider the investment to be other-than-temporarily impaired at March 26, 2016.
The cost and estimated fair value of available-for-sale investments by contractual maturity were as follows:
|
||||||||||||
|
March 25, 2017 |
March 26, 2016 |
||||||||||
|
Amortized |
Estimated |
Amortized |
Estimated |
||||||||
|
Cost |
Fair Value |
Cost |
Fair Value |
||||||||
Within 1 year |
$ |
99,868 |
$ |
99,813 |
$ |
60,603 |
$ |
60,582 | ||||
After 1 year |
- |
- |
20,707 | 20,631 | ||||||||
Total |
$ |
99,868 |
$ |
99,813 |
$ |
81,310 |
$ |
81,213 |
|
4. Fair Value of Financial Instruments
The Company has determined that the only assets and liabilities in the Company’s financial statements that are required to be measured at fair value on a recurring basis are the Company’s cash equivalents, investment portfolio, pension plan assets/liabilities and contingent consideration. The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
|
|
|
|
|
• |
|
Level 1 — Quoted prices in active markets for identical assets or liabilities. |
|
|
|
|
|
• |
|
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
|
|
|
|
|
• |
|
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The Company’s cash equivalents and investment portfolio assets consist of corporate debt securities, money market funds, U.S. Treasury securities, and commercial paper and are reflected on our Consolidated Balance Sheet under the headings cash and cash equivalents, marketable securities, and long-term marketable securities. The Company determines the fair value of its investment portfolio assets by obtaining non-binding market prices from its third-party portfolio managers on the last day of the quarter, whose sources may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value.
In connection with one of the Company’s second quarter fiscal year 2016 acquisitions, the Company reports contingent consideration based upon achievement of certain milestones. This liability is classified as Level 3 and is valued using a discounted cash flow model. The assumptions used in preparing the discounted cash flow include discount rate estimates and cash flow amounts.
The Company’s long-term revolving facility, described in Note 7, bears interest at a base rate plus applicable margin or LIBOR plus applicable margin. As of March 25, 2017, the fair value of the Company’s long-term revolving facility approximates carrying value based on estimated margin.
As of March 25, 2017 and March 26, 2016, the Company classified all investment portfolio assets and pension plan assets (discussed in Note 9) 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 years ending March 25, 2017 and March 26, 2016.
The following summarizes the fair value of our financial instruments, exclusive of pension plan assets detailed in Note 9, at March 25, 2017 (in thousands):
|
|||||||||||
|
Quoted Prices |
||||||||||
|
in Active |
Significant |
|||||||||
|
Markets for |
Other |
Significant |
||||||||
|
Identical |
Observable |
Unobservable |
||||||||
|
Assets |
Inputs |
Inputs |
||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||
Assets: |
|||||||||||
Cash equivalents |
|||||||||||
Money market funds |
$ |
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 - short-term |
$ |
- |
$ |
- |
$ |
4,695 |
$ |
4,695 |
The following summarizes the fair value of our financial instruments at March 26, 2016 (in thousands):
|
|||||||||||
|
Quoted Prices |
||||||||||
|
in Active |
Significant |
|||||||||
|
Markets for |
Other |
Significant |
||||||||
|
Identical |
Observable |
Unobservable |
||||||||
|
Assets |
Inputs |
Inputs |
||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||
Cash equivalents |
|||||||||||
Money market funds |
$ |
79,256 |
$ |
- |
$ |
- |
$ |
79,256 | |||
|
|||||||||||
Available-for-sale securities |
|||||||||||
Corporate debt securities |
$ |
- |
$ |
81,213 |
$ |
- |
$ |
81,213 | |||
|
|||||||||||
Liabilities: |
|||||||||||
Other accrued liabilities |
|||||||||||
Contingent consideration - short-term |
$ |
- |
$ |
- |
$ |
4,709 |
$ |
4,709 | |||
Other long-term liabilities |
|||||||||||
Contingent consideration - long-term |
$ |
- |
$ |
- |
$ |
4,359 |
$ |
4,359 |
Contingent consideration
The following summarizes the fair value of the contingent consideration at March 25, 2017:
|
||||||||
|
Maximum Value if Milestones Achieved |
Estimated Discount Rate (%) |
Fair Value |
|||||
Tranche A - 18 month earn out period |
$ |
5,000 | 7.0 |
$ |
- |
|||
Tranche B - 30 month earn out period |
5,000 | 7.7 | 4,695 | |||||
|
$ |
10,000 |
$ |
4,695 |
|
Fiscal year ended |
|
|
March 25, |
|
|
2017 |
|
|
(in thousands) |
|
Beginning balance |
$ |
9,068 |
Adjustment to estimates (research and development expense) |
(3,579) | |
Payout of Tranche A contingent consideration |
(1,213) | |
Fair value charge recognized in earnings (research and development expense) |
419 | |
Ending balance |
$ |
4,695 |
The valuation of contingent consideration is based on a weighted-average discounted cash flows model. The fair value is reviewed and estimated on a quarterly basis based on the probability of achieving defined milestones and current interest rates. Significant changes in any of the unobservable inputs used in the fair value measurement of contingent consideration could result in a significantly lower or higher fair value. A change in projected outcomes if milestones are achieved would be accompanied by a directionally similar change in fair value. A change in discount rate would be accompanied by a directionally opposite change in fair value. Changes to the fair value due to changes in assumptions would be reported in research and development expense in the Consolidated Statements of Income. In the second quarter of fiscal year 2017, changes in milestone estimates of Tranche A occurred following a review of product shipment forecasts within the earn out period. The revised estimates reduced the fair value of the liability prior to the pay out in the fourth quarter of fiscal year 2017.
|
5. Accounts Receivable, net
The following are the components of accounts receivable, net (in thousands):
|
|||||
|
March 25, |
March 26, |
|||
|
2017 |
2016 |
|||
Gross accounts receivable |
$ |
120,408 |
$ |
89,007 | |
Allowance for doubtful accounts |
(434) | (475) | |||
Accounts receivable, net |
$ |
119,974 |
$ |
88,532 |
The following table summarizes the changes in the allowance for doubtful accounts (in thousands):
|
||
Balance, March 29, 2014 |
$ |
(229) |
Bad debt expense, net of recoveries |
(127) | |
Balance, March 28, 2015 |
(356) | |
Bad debt expense, net of recoveries |
(119) | |
Balance, March 26, 2016 |
(475) | |
Bad debt expense, net of recoveries |
41 | |
Balance, March 25, 2017 |
$ |
(434) |
Recoveries on bad debt were immaterial for the three years presented above.
|
6. Intangibles, net and Goodwill
The intangibles, net balance included on the Consolidated Balance Sheet was $135.2 million and $162.8 million at March 25, 2017 and March 26, 2016, respectively.
The following information details the gross carrying amount and accumulated amortization of our intangible assets (in thousands):
|
|||||||||||
|
March 25, 2017 |
March 26, 2016 |
|||||||||
Intangible Category / Weighted-Average Amortization period (in years) |
Gross Amount |
Accumulated Amortization |
Gross Amount |
Accumulated Amortization |
|||||||
Core technology (a) |
$ |
1,390 |
$ |
(1,390) |
$ |
1,390 |
$ |
(1,390) | |||
License agreement (a) |
440 | (440) | 440 | (440) | |||||||
Existing technology (6.1) |
117,975 | (53,960) | 117,975 | (32,873) | |||||||
In-process research & development ("IPR&D") (7.3) |
72,750 | (24,245) | 72,750 | (14,082) | |||||||
Trademarks and tradename (10.0) |
3,037 | (2,208) | 3,037 | (2,076) | |||||||
Customer relationships (10.0) |
15,381 | (4,191) | 15,381 | (2,655) | |||||||
Backlog (a) |
220 | (220) | 220 | (147) | |||||||
Non-compete agreements (a) |
470 | (470) | 470 | (209) | |||||||
Technology licenses (3.1) |
24,540 | (13,891) | 16,661 | (11,620) | |||||||
Total |
$ |
236,203 |
$ |
(101,015) |
$ |
228,324 |
$ |
(65,492) |
(a) |
Intangible assets are fully amortized. |
Amortization expense for intangibles in fiscal years 2017, 2016, and 2015 was $37.4 million, $35.7 million, and $18.2 million, respectively. The following table details the estimated aggregate amortization expense for all intangibles owned as of March 25, 2017, for each of the five succeeding fiscal years and in the aggregate thereafter (in thousands):
|
||
For the year ended March 31, 2018 |
$ |
37,563 |
For the year ended March 30, 2019 |
$ |
35,660 |
For the year ended March 28, 2020 |
$ |
26,499 |
For the year ended March 27, 2021 |
$ |
15,895 |
For the year ended March 26, 2022 |
$ |
12,145 |
Thereafter |
$ |
8,523 |
The goodwill balance included on the Consolidated Balance Sheet is $286.8 million and $287.5 million at March 25, 2017 and March 26, 2016, respectively.
|
7. Revolving Line of Credit
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 provided for a $250 million senior secured revolving credit facility (the “Credit Facility”). Borrowings under the Credit Facility were used for general corporate purposes.
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 amending the Credit Agreement 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”) and 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 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 .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 consecutive 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.
At March 25, 2017, the Company was in compliance with all covenants under the Amended Credit Agreement. The Company had borrowed $60.0 million under the Amended Facility as of March 25, 2017, which is included in long-term liabilities on the Consolidated Balance Sheet under the caption “Debt.”
|
8. Restructuring and Other, net
The fiscal year 2015 restructuring costs incurred relate to the Wolfson acquisition and consisted primarily of bank and legal fees, as well as certain expenses for stock compensation. The related charges are shown as a separate line item captioned “Restructuring and other, net” in the Consolidated Statements of Income.
As of March 25, 2017 and March 26, 2016, we have no remaining restructuring accrual on the Consolidated Balance Sheet.
|
9. Postretirement Benefit Plans
Pension Plan
As a result of the Acquisition in fiscal year 2015, 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 Scheme was closed to new participants as of July 2, 2002. As of April 30, 2011, the participants in the Scheme no longer accrue benefits and therefore the Company will not be required to pay contributions in respect of future accrual.
The Scheme is a trustee-administered fund that is legally separate from Wolfson, which holds the pension plan assets to meet long-term pension liabilities. The pension fund trustees comprise one employee and one employer representative and an independent chairman. The trustees are required by law to act in the best interests of the Scheme’s beneficiaries and the trustees are responsible, in consultation with Wolfson and the Company, for setting certain policies (including the investment policies and strategies) of the fund.
As of March 26, 2016, the Company was obligated to contribute approximately $0.5 million to the Scheme, which was recorded on the fiscal year 2016 Consolidated Balance Sheet in “Accrued salaries and benefits”. On April 25, 2016, the Company paid the $0.5 million, which was previously accrued. No further obligations are accrued as of March 25, 2017.
The Company initiated an Enhanced Transfer Value (ETV) offer to 49 Scheme participants in fiscal year 2017. The ETV offer expired on December 23, 2016, and nine participants accepted. As a result, the Company paid the required ETV contribution of $0.5 million and recorded the associated pension expense of $0.4 million. The Company expects to completely close the Scheme over the next ten years.
The following tables set forth the benefit obligation, the fair value of plan assets, and the funded status of the Scheme (in thousands):
|
|||||
|
March 25, |
March 26, |
|||
|
2017 |
2016 |
|||
Change in benefit obligation: |
|||||
Beginning balance |
$ |
23,968 |
$ |
27,091 | |
Expenses |
- |
15 | |||
Interest cost |
759 | 821 | |||
Plan settlements |
(4,517) |
- |
|||
Benefits paid and expenses |
(264) | (1,095) | |||
Change in foreign currency exchange rate |
(2,763) | (1,221) | |||
Actuarial (gain) / loss |
3,940 | (1,643) | |||
Total benefit obligation ending balance |
21,123 | 23,968 | |||
|
|||||
Change in plan assets: |
|||||
Beginning balance |
25,688 | 26,735 | |||
Actual return on plan assets |
3,933 | (155) | |||
Employer contributions |
990 | 1,409 | |||
Plan settlements |
(5,243) |
- |
|||
Change in foreign currency exchange rate |
(2,961) | (1,206) | |||
Benefits paid and expenses |
(264) | (1,095) | |||
Fair value of plan assets ending balance |
22,143 | 25,688 | |||
|
|||||
Funded status of Scheme at end of year |
$ |
1,020 |
$ |
1,720 |
The assets and obligations of the Scheme are denominated in British Pound Sterling. Based on an actuarial study performed as of March 25, 2017, the Scheme is overfunded and a long-term asset is reflected in the Company’s Consolidated Balance Sheet under the caption “Other assets”. The Company’s plan assets and obligations are measured as of the fiscal year-end. The weighted-average discount rate assumption used to determine benefit obligations as of March 25, 2017 March 26, 2016 and March 28, 2015 was 2.7%, 3.6%, and 3.2%, respectively.
The components of the Company’s net periodic pension expense (income) are as follows (in thousands):
|
||||||||
|
Fiscal Years Ended |
|||||||
|
March 25, |
March 26, |
March 28, |
|||||
|
2017 |
2016 |
2015 |
|||||
Expenses |
$ |
- |
$ |
15 |
$ |
16 | ||
Interest cost |
759 | 821 | 544 | |||||
Expected return on plan assets |
(1,126) | (1,212) | (792) | |||||
Settlement (gain) loss |
1,063 |
- |
- |
|||||
Amortization of actuarial (gain) loss |
(89) | 49 |
- |
|||||
|
$ |
607 |
$ |
(327) |
$ |
(232) |
The following weighted-average assumptions were used to determine net periodic benefit costs for the year ended March 25, 2017, March 26, 2016, and March 28, 2015:
|
|||||||||
|
2017 |
2016 |
2015 |
||||||
Discount rate |
3.60 |
% |
3.20 |
% |
4.00 |
% |
|||
Expected long-term return on plan assets |
4.93 |
% |
4.65 |
% |
5.36 |
% |
We report and measure the plan assets of our defined benefit pension at fair value. The Company’s pension plan assets consist of cash, equity securities, corporate debt securities, and diversified growth funds. The fair value of the pension plan assets is determined through an external actuarial valuation, following a similar process of obtaining inputs as described above.
The table below sets forth the fair value of our plan assets as of March 25, 2017, using the same three-level hierarchy of fair-value inputs described in Note 4 (in thousands):
|
|||||||||||
|
Quoted Prices |
||||||||||
|
in Active |
Significant |
|||||||||
|
Markets for |
Other |
Significant |
||||||||
|
Identical |
Observable |
Unobservable |
||||||||
|
Assets |
Inputs |
Inputs |
||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||
Plan Assets: |
|||||||||||
Cash |
$ |
160 |
$ |
- |
$ |
- |
$ |
160 | |||
Pension funds |
- |
21,983 |
- |
21,983 | |||||||
|
$ |
160 |
$ |
21,983 |
$ |
- |
$ |
22,143 |
The table below sets forth the fair value of our plan assets as of March 26, 2016, (in thousands):
|
|||||||||||
|
Quoted Prices |
||||||||||
|
in Active |
Significant |
|||||||||
|
Markets for |
Other |
Significant |
||||||||
|
Identical |
Observable |
Unobservable |
||||||||
|
Assets |
Inputs |
Inputs |
||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||
Plan Assets: |
|||||||||||
Cash |
$ |
42 |
$ |
- |
$ |
- |
$ |
42 | |||
Pension funds |
- |
25,646 |
- |
25,646 | |||||||
|
$ |
42 |
$ |
25,646 |
$ |
- |
$ |
25,688 |
Amounts recognized in accumulated other comprehensive income (loss) for the period that have not yet been recognized as components of net periodic benefit cost consist of (in thousands):
|
||
|
Fiscal Year |
|
|
2017 |
|
Net actuarial loss |
$ |
(79) |
|
||
Accumulated other comprehensive income, before tax |
$ |
(79) |
The Company will amortize the actuarial gain over a period of twenty-five years based on actuarial assumptions, including life expectancy. The following table provides the estimated amount that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in fiscal year 2018 (in thousands):
|
||
|
Fiscal Year |
|
|
2018 |
|
Transition (asset) obligation |
$ |
- |
Prior service cost |
- |
|
Actuarial loss (gain) |
(37) |
The Company contributed $0.5 million to the pension plan in fiscal year 2017 as discussed above.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid for the following fiscal years (in thousands):
|
Benefit |
|
|
Payments |
|
2018 |
$ |
266 |
2019 |
411 | |
2020 |
481 | |
2021 |
472 | |
2022 |
415 | |
Thereafter |
2,765 |
The expected long-term return on plan assets is based on historical actual return experience and estimates of future long-term performance with consideration to the expected investment mix of the plan assets. It is the policy of the Trustees and the Company to review the investment strategy periodically. The Trustees’ investment objectives and the processes undertaken to measure and manage the risks inherent in the Scheme investment strategy are illustrated by the current asset allocation. The current mix of the assets is as follows:
|
||||||
|
Actual Allocation |
|||||
|
2017 |
2016 |
||||
Equity securities |
33 |
% |
32 |
% |
||
Corporate bonds |
48 | 47 | ||||
Diversified growth |
19 | 21 | ||||
Cash |
- |
- |
||||
Total |
100 |
% |
100 |
% |
See the related fair value of the assets above.
The Scheme exposes the Company to actuarial risks such as investment (market) risk, interest rate risk, mortality risk, longevity risk and currency risk. A decrease in corporate bond yields, a rise in inflation or an increase in life expectancy would result in an increase to the Scheme liabilities and may give rise to increased benefit expenses in future periods. Caps on inflationary increases are currently in place to protect the Scheme against extreme inflation, however.
The indicative impact on net periodic benefit cost based on defined sensitivities is as follows:
|
||
Change |
Approximate impact on liabilities |
|
Decrease discount rate by 0.1%, per year |
2% increase |
|
Increase inflation linked assumptions by 0.1%, per year |
2% increase (of inflation-linked liabilities) |
|
Increase life expectancy by 1 year |
2% increase |
401(k) Plans
We have 401(k) Profit Sharing Plans (the “401(k) Plans”) covering all of our qualifying employees. Under the 401(k) Plans, employees may elect to contribute any percentage of their annual compensation up to the annual IRS limitations. The Company matches 50 percent of the first 8 percent of the employees’ annual contribution. We made matching employee contributions of $5.5 million, $4.3 million, and $2.5 million during fiscal years 2017, 2016, and 2015, respectively.
|
10. Equity Compensation
The Company is currently granting equity awards from the 2006 Stock Incentive Plan (the “Plan”), which was approved by stockholders in July 2006. The Plan provides for granting of stock options, restricted stock awards, performance awards, phantom stock awards, and bonus stock awards, or any combination of the foregoing. To date, the Company has granted stock options, restricted stock awards, phantom stock awards (also called restricted stock units), and performance awards (also called market stock units) under the Plan. Each stock option granted reduces the total shares available for grant under the Plan by one share. Each full value award granted (including restricted stock awards, restricted stock units and market stock units) reduces the total shares available for grant under the Plan by 1.5 shares. Stock options generally vest between zero and four years, and are exercisable for a period of ten years from the date of grant. Restricted stock units are generally subject to vesting from one to three years, depending upon the terms of the grant. Market stock units are subject to a vesting schedule of three years.
The following table summarizes the activity in total shares available for grant (in thousands):
|
||
|
Shares |
|
|
Available for |
|
|
Grant |
|
Balance, March 29, 2014 |
3,547 | |
Shares added |
3,300 | |
Granted |
(3,181) | |
Forfeited |
230 | |
Balance, March 28, 2015 |
3,896 | |
Shares added |
4,900 | |
Granted |
(2,676) | |
Forfeited |
167 | |
Balance, March 26, 2016 |
6,287 | |
Shares added |
- |
|
Granted |
(1,719) | |
Forfeited |
124 | |
Balance, March 25, 2017 |
4,692 |
As of March 25, 2017, approximately 13.3 million shares of common stock were reserved for issuance under the Plan.
Stock Compensation Expense
The following table summarizes the effects of stock-based compensation on cost of goods sold, research and development, sales, general and administrative, pre-tax income, and net income after taxes for shares granted under the Plan (in thousands, except per share amounts):
|
||||||||
|
Fiscal Year |
|||||||
|
2017 |
2016 |
2015 |
|||||
Cost of sales |
$ |
1,071 |
$ |
1,145 |
$ |
747 | ||
Research and development |
21,186 | 17,173 | 11,222 | |||||
Sales, general and administrative |
17,336 | 15,188 | 25,580 | |||||
Effect on pre-tax income |
39,593 | 33,506 | 37,549 | |||||
Income Tax Benefit |
(12,482) | (10,306) | (11,467) | |||||
Total share-based compensation expense (net of taxes) |
27,111 | 23,200 | 26,082 | |||||
Share-based compensation effects on basic earnings per share |
$ |
0.43 |
$ |
0.37 |
$ |
0.42 | ||
Share-based compensation effects on diluted earnings per share |
0.41 | 0.35 | 0.40 | |||||
|
||||||||
|
The total share based compensation expense included in the table above and which is attributable to restricted stock awards, restricted stock units and market stock units was $35.5 million, $30.3 million, $34.0 million, for fiscal years 2017, 2016, and 2015, respectively. Share based compensation expense recognized is presented within operating activities in the Consolidated Statement of Cash Flows.
As of March 25, 2017, there was $75.2 million of compensation costs related to non-vested stock options, restricted stock units, and market stock units granted under the Company’s equity incentive plans not yet recognized in the Company’s financial statements. The unrecognized compensation cost is expected to be recognized over a weighted average period of 1.29 years for stock options, 1.45 years for restricted stock units, and 1.70 years for market stock units.
In addition to the income tax benefit of share-based compensation expense shown in the table above, the Company recognized excess tax benefits of $22.9 million in fiscal year 2017 as a result of the Company’s early adoption of ASU 2016-09, discussed in Note 2. No excess tax benefits were recognized within income tax expense in fiscal years 2016 or 2015.
Stock Options
We estimated the fair value of each stock option granted on the date of grant using the Black-Scholes option-pricing model using a dividend yield of zero and the following additional assumptions:
|
|||||||||||||
|
|||||||||||||
|
March 25, 2017 |
March 26, 2016 |
March 28, 2015 |
||||||||||
Expected stock price volatility |
47.66 |
% |
40.13 |
- |
45.07 |
% |
38.79 |
- |
42.12 |
% |
|||
Risk-free interest rate |
1.13 |
% |
0.94 |
- |
1.05 |
% |
0.49 |
- |
0.91 |
% |
|||
Expected term (in years) |
2.79 |
2.72 |
- |
2.97 |
2.15 |
- |
2.87 |
The Black-Scholes valuation calculation requires us to estimate key assumptions such as stock price volatility, expected term, risk-free interest rate and dividend yield. The expected stock price volatility is based upon implied volatility from traded options on our stock in the marketplace. The expected term of options granted is derived from an analysis of historical exercises and remaining contractual life of stock options, and represents the period of time that options granted are expected to be outstanding after becoming vested. The risk-free interest rate reflects the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term assumption. Finally, we have never paid cash dividends, do not currently intend to pay cash dividends, and thus have assumed a zero percent dividend yield.
Using the Black-Scholes option valuation model, the weighted average estimated fair values of employee stock options granted in fiscal years 2017, 2016, and 2015, were $22.84, $12.58, and $7.26, respectively.
During fiscal years 2017, 2016, and 2015, we received a net $16.4 million, $6.5 million, $5.2 million, respectively, from the exercise of 1.4 million, 0.8 million, and 0.7 million, respectively, stock options granted under the Company’s Stock Plan.
The total intrinsic value of stock options exercised during fiscal year 2017, 2016, and 2015, was $52.2 million, $19.7 million, and $12.8 million, respectively. Intrinsic value represents the difference between the market value of the Company’s common stock at the time of exercise and the strike price of the stock option.
Additional information with respect to stock option activity is as follows (in thousands, except per share amounts):
|
|||||
|
Outstanding Options |
||||
|
Weighted |
||||
|
Average |
||||
|
Number |
Exercise Price |
|||
Balance, March 29, 2014 |
3,725 |
$ |
12.42 | ||
Options granted |
310 | 21.69 | |||
Options exercised |
(696) | 7.47 | |||
Options forfeited |
(5) | 19.94 | |||
Options expired |
(1) | 4.65 | |||
Balance, March 28, 2015 |
3,333 |
$ |
14.31 | ||
Options granted |
387 | 31.39 | |||
Options exercised |
(773) | 8.46 | |||
Options forfeited |
- |
- |
|||
Options expired |
(22) | 35.41 | |||
Balance, March 26, 2016 |
2,925 |
$ |
17.96 | ||
Options granted |
215 | 54.65 | |||
Options exercised |
(1,382) | 11.87 | |||
Options forfeited |
- |
- |
|||
Options expired |
- |
- |
|||
Balance, March 25, 2017 |
1,758 |
$ |
27.25 |
Additional information with regards to outstanding options that are vesting, expected to vest, or exercisable as of March 25, 2017 is as follows (in thousands, except years and per share amounts):
|
||||||||||
|
Weighted |
Weighted Average |
||||||||
|
Number of |
Average |
Remaining Contractual |
Aggregate |
||||||
|
Options |
Exercise price |
Term (years) |
Intrinsic Value |
||||||
Vested and expected to vest |
1,757 |
$ |
27.24 |
6.40 |
$ |
57,674 |
||||
Exercisable |
1,128 |
$ |
21.77 |
5.18 |
$ |
43,196 |
In accordance with U.S. GAAP, stock options outstanding that are expected to vest are presented net of estimated future option forfeitures, which are estimated as compensation costs are recognized. Options with a fair value of $3.8 million, $3.4 million, and $4.4 million, became vested during fiscal years 2017, 2016, and 2015, respectively.
The following table summarizes information regarding outstanding and exercisable options as of March 25, 2017 (in thousands, except per share amounts):
|
||||||||||||
|
Options Outstanding |
Options Exercisable |
||||||||||
|
Weighted Average |
|||||||||||
|
Remaining |
Weighted |
Weighted |
|||||||||
|
Contractual Life |
Average Exercise |
Number |
Average |
||||||||
Range of Exercise Prices |
Number |
(years) |
Price |
Exercisable |
Exercise Price |
|||||||
$2.90 - $15.41 |
371 | 3.33 |
$ |
11.01 | 371 |
$ |
11.01 | |||||
$16.21 - $20.37 |
328 | 5.81 | 18.63 | 242 | 18.02 | |||||||
$20.40 - $24.14 |
265 | 6.48 | 23.29 | 203 | 23.30 | |||||||
$31.25 - $31.25 |
331 | 8.61 | 31.25 | 91 | 31.25 | |||||||
$32.29 - $38.99 |
248 | 5.97 | 38.00 | 221 | 38.60 | |||||||
$54.65 - $54.65 |
215 | 9.61 | 54.65 |
- |
- |
|||||||
|
1,758 | 6.40 |
$ |
27.25 | 1,128 |
$ |
21.77 |
As of March 25, 2017 and March 26, 2016, the number of options exercisable was 1.1 million and 2.2 million, respectively.
Restricted Stock Awards
The Company periodically grants restricted stock awards (“RSA’s”) to select employees. The grant date for these awards is equal to the measurement date and the awards are valued as of the measurement date and amortized over the requisite vesting period, which is no more than four years.
|
|
There were no RSA’s outstanding as of March 25, 2017. RSA’s with a fair value of $86 thousand became vested during fiscal year 2015. No RSA’s became vested during fiscal year 2016 and 2017.
Restricted Stock Units
Commencing in fiscal year 2011, the Company began granting restricted stock units (“RSU’s”) to select employees. These awards are valued as of the grant date and amortized over the requisite vesting period. Generally, RSU’s vest 100 percent on the first to third anniversary of the grant date depending on the vesting specifications. A summary of the activity for RSU’s in fiscal year 2017, 2016, and 2015 is presented below (in thousands, except year and per share amounts):
|
||||
|
Weighted |
|||
|
Average |
|||
|
Shares |
Fair Value |
||
March 29, 2014 |
2,309 |
$ |
25.26 | |
Granted |
1,887 | 22.04 | ||
Vested |
(1,224) | 19.52 | ||
Forfeited |
(151) | 26.17 | ||
March 28, 2015 |
2,821 | 25.57 | ||
Granted |
1,437 | 31.51 | ||
Vested |
(992) | 32.48 | ||
Forfeited |
(103) | 24.75 | ||
March 26, 2016 |
3,163 | 26.14 | ||
Granted |
947 | 52.40 | ||
Vested |
(1,032) | 24.67 | ||
Forfeited |
(83) | 28.40 | ||
March 25, 2017 |
2,995 |
$ |
34.91 |
The aggregate intrinsic value of RSU’s outstanding as of March 25, 2017 was $179.9 million. Additional information with regards to outstanding restricted stock units that are expected to vest as of March 25, 2017, is as follows (in thousands, except year and per share amounts):
|
|||||||
|
Weighted |
Weighted Average |
|||||
|
Average |
Remaining Contractual |
|||||
|
Shares |
Fair Value |
Term (years) |
||||
Expected to vest |
2,870 |
$ |
34.64 | 1.43 |
RSU’s outstanding that are expected to vest are presented net of estimated future forfeitures, which are estimated as compensation costs are recognized. RSU’s with a fair value of $25.5 million and $32.2 million became vested during fiscal years 2017 and 2016, respectively. The majority of RSUs that vested in 2017 and 2016 were net settled such that the Company withheld a portion of the shares at fair value to satisfy tax withholding requirements. In fiscal years 2017 and 2016, the vesting of RSU’s reduced the authorized and unissued share balance by approximately 1.0 million and 1.0 million, respectively. Total shares withheld and subsequently retired out of the Plan were approximately 0.3 million and 0.2 million, and total payments for the employees’ tax obligations to taxing authorities were $14.1 million and $6.9 million for fiscal years 2017 and 2016, respectively. A portion of RSUs that vested in fiscal year 2017 and 2016 were cash settled such that the Company received cash from employees in lieu of withholding shares to satisfy tax withholding requirements. The total amount received from cash settled shares during fiscal year 2017 and 2016 was $0.1 million and $0.1 million, respectively.
Market Stock Units
In fiscal year 2015, the Company began granting market stock units (“MSU’s”) to select employees. MSU’s vest based upon the relative total shareholder return (“TSR”) of the Company as compared to that of the Index. The requisite service period for these MSU’s is also the vesting period, which is three years. The fair value of each MSU granted was determined on the date of grant using the Monte Carlo simulation, which calculates the present value of the potential outcomes of future stock prices of the Company and the Index over the requisite service period. The projection of the stock prices is based on the risk-free rate of return, the volatilities of the stock price of the Company and the Index, the correlation of the stock price of the Company with the Index, and the dividend yield.
The fair values estimated from the Monte Carlo simulation were calculated using a dividend yield of zero and the following additional assumptions:
|
Year Ended |
|||||
|
March 25, |
March 26, |
||||
|
2017 |
2016 |
||||
Expected stock price volatility |
47.66 |
% |
45.07 |
% |
||
Risk-free interest rate |
0.98 |
% |
1.16 |
% |
||
Expected term (in years) |
3.00 | 3.00 |
Using the Monte Carlo simulation, the weighted average estimated fair value of the MSU’s granted in fiscal year 2017 was $75.58. A summary of the activity for MSU’s in fiscal year 2017, 2016 and 2015 is presented below (in thousands, except year and per share amounts):
|
Weighted |
|||
|
Average |
|||
|
Shares |
Fair Value |
||
March 29, 2014 |
- |
$ |
- |
|
Granted |
35 | 22.00 | ||
Vested |
- |
- |
||
Forfeited |
- |
- |
||
March 28, 2015 |
35 |
$ |
22.00 | |
Granted |
90 | 39.86 | ||
Vested |
- |
- |
||
Forfeited |
- |
- |
||
March 26, 2016 |
125 |
$ |
34.85 | |
Granted |
55 | 75.58 | ||
Vested |
- |
- |
||
Forfeited |
- |
- |
||
March 25, 2017 |
180 |
$ |
47.30 |
The aggregate intrinsic value of MSU’s outstanding as of March 25, 2017 was $10.8 million. Additional information with regard to outstanding MSU’s that are expected to vest as of March 25, 2017 is as follows (in thousands, except year and per share amounts):
|
Weighted |
Weighted Average |
|||||
|
Average |
Remaining Contractual |
|||||
|
Shares |
Fair Value |
Term (years) |
||||
Expected to vest |
171 |
$ |
46.89 | 1.69 |
No MSU’s became vested in 2017, 2016 and 2015.
|
11. Commitments and Contingencies
Facilities and Equipment Under Operating and Capital Lease Agreements
We currently own our corporate headquarters and select surrounding properties, and a UK office. We lease certain of our other facilities and certain equipment under operating lease agreements, some of which have renewal options. Certain of these arrangements provide for lease payment increases based upon future fair market rates. As of March 25, 2017, our principal facilities are located in Austin, Texas and Edinburgh, Scotland, United Kingdom.
Total rent expense under operating leases was approximately $8.2 million, $5.2 million, and $4.0 million, for fiscal years 2017, 2016, and 2015, respectively. Sublease rental income was $0.4 million, $0.3 million, and $0.1 million, for fiscal years 2017, 2016, and 2015, respectively.
As of March 26, 2016, there was equipment held under a capital lease with a cost basis of $1.0 million and accumulated depreciation related to this equipment of $0.3 million, which was paid off in fiscal year 2017, leaving no related future capital lease commitments.
The aggregate minimum future rental commitments under all operating leases, net of sublease income for the following fiscal years are (in thousands):
|
||||||||||||||
|
Facilities |
Subleases |
Net Facilities Commitments |
Equipment and Other Commitments |
Total Commitments |
|||||||||
2018 |
$ |
7,074 |
$ |
386 |
$ |
6,688 |
$ |
67 |
$ |
6,755 | ||||
2019 |
10,354 | 391 | 9,963 | 115 | 10,078 | |||||||||
2020 |
9,811 | 266 | 9,545 | 110 | 9,655 | |||||||||
2021 |
9,580 | 245 | 9,335 | 110 | 9,445 | |||||||||
2022 |
9,313 | 251 | 9,062 | 110 | 9,172 | |||||||||
Thereafter |
39,071 | 859 | 38,212 | 432 | 38,644 | |||||||||
Total minimum lease payment |
$ |
85,203 |
$ |
2,398 |
$ |
82,805 |
$ |
944 |
$ |
83,749 |
Wafer, Assembly, Test and Other Purchase Commitments
We rely primarily on third-party foundries for our wafer manufacturing needs. Generally, our foundry agreements do not have volume purchase commitments and primarily provide for purchase commitments based on purchase orders, with the exception of a few "take or pay" clauses included in vendor contracts that are immaterial at March 25, 2017. Cancellation fees or other charges may apply and are generally dependent upon whether wafers have been started or the stage of the manufacturing process at which the notice of cancellation is given. As of March 25, 2017, we had foundry commitments of $182.3 million.
In addition to our wafer supply arrangements, we contract with third-party assembly vendors to package the wafer die into finished products. Assembly vendors provide fixed-cost-per-unit pricing, as is common in the semiconductor industry. We had non-cancelable assembly purchase orders with numerous vendors totaling $3.6 million at March 25, 2017.
Test vendors provide fixed-cost-per-unit pricing, as is common in the semiconductor industry. Our total non-cancelable commitment for outside test services as of March 25, 2017 was $14.5 million.
Other purchase commitments primarily relate to multi-year tool commitments, and were $21.6 million at March 25, 2017.
|
12. Legal Matters
From time to time, we are involved in legal proceedings concerning matters arising in connection with the conduct of our business activities. We regularly evaluate the status of legal proceedings in which we are involved 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.
|
13. Stockholders’ Equity
Share Repurchase Program
On October 28, 2015, the Company announced that the Board of Directors authorized a share repurchase program of up to $200 million of the Company’s common stock. As of March 25, 2017, the Company had repurchased 0.8 million shares under this plan at a cost of approximately $24.2 million, or an average cost of $31.93 per share. Of this total, 0.5 million shares were purchased in fiscal year 2017 at a cost of $15.4 million, or an average cost of $32.13 per share. Approximately $175.8 million remains available for repurchase under this plan. 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 March 25, 2017.
Preferred Stock
We have 5.0 million shares of Preferred Stock authorized. As of March 25, 2017, we have not issued any of the authorized shares.
|
14. Accumulated Other Comprehensive Income (Loss)
Our accumulated other comprehensive income (loss) is comprised of foreign currency translation adjustments, unrealized gains and losses on investments classified as available-for-sale, and actuarial gains and losses on our pension plan assets.
The following table summarizes the changes in the components of accumulated other comprehensive income (loss), net of tax (in thousands):
|
||||||||||
|
Unrealized Gains |
Actuarial Gains |
||||||||
|
Foreign |
(Losses) on |
(Losses) on |
|||||||
|
Currency |
Securities |
Pension Plan |
Total |
||||||
Balance, March 28, 2015 |
$ |
(770) |
$ |
(47) |
$ |
(1,293) |
$ |
(2,110) | ||
Current period foreign exchange translation |
294 |
- |
- |
294 | ||||||
Current period marketable securities activity |
- |
(24) |
- |
(24) | ||||||
Current period actuarial gain/loss activity |
- |
- |
2,660 | 2,660 | ||||||
Current period amortization of actuarial loss |
- |
- |
49 | 49 | ||||||
Tax effect |
- |
9 | (546) | (537) | ||||||
Balance, March 26, 2016 |
(476) | (62) | 870 | 332 | ||||||
Current period foreign exchange translation |
(826) |
- |
- |
(826) | ||||||
Current period marketable securities activity |
- |
47 |
- |
47 | ||||||
Current period actuarial gain/loss activity |
- |
- |
(79) | (79) | ||||||
Current period amortization of actuarial loss |
- |
- |
(89) | (89) | ||||||
Tax effect |
- |
(16) | 58 | 42 | ||||||
Balance, March 25, 2017 |
$ |
(1,302) |
$ |
(31) |
$ |
760 |
$ |
(573) |
|
15. Income Taxes
Income before income taxes consisted of (in thousands):
|
||||||||
|
Fiscal Years Ended |
|||||||
|
March 25, |
March 26, |
March 28, |
|||||
|
2017 |
2016 |
2015 |
|||||
U.S. |
$ |
137,654 |
$ |
108,133 |
$ |
133,295 | ||
Non-U.S. |
177,393 | 67,856 | (41,746) | |||||
|
$ |
315,047 |
$ |
175,989 |
$ |
91,549 |
The provision (benefit) for income taxes consists of (in thousands):
|
||||||||
|
Fiscal Years Ended |
|||||||
|
March 25, |
March 26, |
March 28, |
|||||
|
2017 |
2016 |
2015 |
|||||
Current: |
||||||||
U.S. |
$ |
28,940 |
$ |
28,313 |
$ |
42,165 | ||
Non-U.S. |
7,234 | 703 | 445 | |||||
Total current tax provision |
$ |
36,174 |
$ |
29,016 |
$ |
42,610 | ||
|
||||||||
Deferred: |
||||||||
U.S. |
2,576 | 18,242 | 2,136 | |||||
Non-U.S. |
15,088 | 5,101 | (8,375) | |||||
Total deferred tax provision (benefit) |
17,664 | 23,343 | (6,239) | |||||
Total tax provision |
$ |
53,838 |
$ |
52,359 |
$ |
36,371 |
The effective income tax rates differ from the rates computed by applying the statutory federal rate to pretax income as follows (in percentages):
|
||||||||
|
Fiscal Years Ended |
|||||||
|
March 25, |
March 26, |
March 28, |
|||||
|
2017 |
2016 |
2015 |
|||||
U.S. federal statutory rate |
35.0 | 35.0 | 35.0 | |||||
Foreign income taxed at different rates |
(8.6) | (0.6) | 7.3 | |||||
Research and development tax credits |
(1.8) | (5.6) | (3.6) | |||||
Stock based compensation |
(7.3) |
- |
- |
|||||
Nondeductible expenses |
- |
0.1 | 2.3 | |||||
Other |
(0.2) | 0.9 | (1.3) | |||||
Effective tax rate |
17.1 | 29.8 | 39.7 |
As disclosed in Note 2 – Summary of Significant Accounting Policies, the Company adopted ASU 2016-09 in the third quarter of fiscal year 2017. The effect of the adoption reduced the provision for income taxes by $22.9 million for the year ended March 25, 2017.
Significant components of our deferred tax assets and liabilities as of March 25, 2017 and March 26, 2016 are (in thousands):
|
|||||
|
March 25, |
March 26, |
|||
|
2017 |
2016 |
|||
Deferred tax assets: |
|||||
Accrued expenses and allowances |
$ |
9,002 |
$ |
3,761 | |
Net operating loss carryforwards |
6,294 | 24,592 | |||
Research and development tax credit carryforwards |
13,977 | 9,649 | |||
Stock based compensation |
17,356 | 16,071 | |||
Other |
9,141 | 9,976 | |||
Total deferred tax assets |
$ |
55,770 |
$ |
64,049 | |
Valuation allowance for deferred tax assets |
(12,570) | (10,773) | |||
Net deferred tax assets |
$ |
43,200 |
$ |
53,276 | |
|
|||||
Deferred tax liabilities: |
|||||
Depreciation and amortization |
$ |
13,837 |
$ |
13,607 | |
Acquisition intangibles |
16,301 | 21,844 | |||
Total deferred tax liabilities |
$ |
30,138 |
$ |
35,451 | |
Total net deferred tax assets |
$ |
13,062 |
$ |
17,825 |
Deferred tax assets and liabilities are recorded for the estimated tax impact of temporary differences between the tax basis and book basis of assets and liabilities. A valuation allowance is established against a deferred tax asset when it is more likely than not that the deferred tax asset will not be realized. The valuation allowance increased by $1.8 million in fiscal year 2017 with no material impact to income tax expense. The Company continued to record a valuation allowance on various state net operating losses and tax credits due to the likelihood that they will expire or go unutilized because the Company does not expect to recognize sufficient income in the jurisdictions in which the tax attributes were created. Management believes that the Company’s results from future operations will generate sufficient taxable income in the appropriate jurisdictions and of the appropriate character such that it is more likely than not that the remaining deferred tax assets will be realized.
At March 25, 2017, the Company had gross federal net operating loss carryforwards of $12.9 million, all of which related to acquired companies and are, therefore, subject to certain limitations under Section 382 of the Internal Revenue Code. The federal net operating loss carryforwards expire in fiscal years 2019 through 2034. The Company had $8.5 million of alternative minimum tax credit carryforwards that may be carried forward indefinitely. The Company also had $4.0 million of federal research and development credit carryforwards which will expire in 2037.
At March 25, 2017, the Company had gross state net operating loss carryforwards of $44.7 million. The state net operating loss carryforwards expire in fiscal years 2018 through 2033. In addition, the Company had $15.4 million of state research and development tax credit carryforwards. Certain of these state tax credits will expire in fiscal years 2022 through 2032. The remaining state tax credit carryforwards do not expire.
At March 25, 2017, the Company does not have any foreign operating loss carryforward.
At March 25, 2017, the undistributed earnings of our foreign subsidiaries of approximately $201.3 million are intended to be indefinitely reinvested outside the U.S. Accordingly, no provision for U.S. federal income and foreign withholding taxes associated with a distribution of these earnings has been made. The amount of unrecognized deferred tax liability related to these undistributed earnings is estimated to be $65.5 million.
The following table summarizes the changes in the unrecognized tax benefits (in thousands):
|
|||||
|
March 25, |
March 26, |
|||
|
2017 |
2016 |
|||
Beginning balance |
$ |
18,796 |
$ |
- |
|
Additions based on tax positions related to the current year |
12,127 | 12,592 | |||
Additions based on tax positions related to prior years |
- |
6,204 | |||
Reductions based on tax positions related to the prior years |
(65) |
- |
|||
Ending balance |
$ |
30,858 |
$ |
18,796 |
The Company records unrecognized tax benefits for the estimated risk associated with tax positions taken on tax returns. At March 25, 2017, the Company had gross unrecognized tax benefits of $30.9 million, all of which would impact the effective tax rate if recognized. The Company believes it is reasonably possible that the gross unrecognized tax benefits could decrease by approximately $2.3 million in the next 12 months due to the lapse of the statute of limitations applicable to a tax deduction claimed on a prior year tax return. During fiscal year 2017, the Company had gross increases of $12.1 million related to current year unrecognized tax benefits, as well as a $0.1 million decrease related to tax positions taken in prior years. The Company’s unrecognized tax benefits are classified as “Other long-term liabilities” in the Consolidated Balance Sheet.
The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. During fiscal year 2017 we recognized interest expense, net of tax, of approximately $0.2 million. No interest or penalties were recognized during fiscal year 2016.
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.
|
16. Segment Information
We determine our operating segments in accordance with Financial Accounting Standards Board (“FASB”) guidelines. Our Chief Executive Officer (“CEO”) has been identified as the chief operating decision maker under these guidelines.
The Company operates and tracks its results in one reportable segment, but reports revenue performance in two product lines, which currently are 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 operations support functions such as sales, public relations, supply chain management, various research and development and engineering support, in addition to the general and administrative functions of human resources, legal, finance and information technology. Therefore, there is no complete, discrete financial information maintained for these product lines. Revenue from our product lines are as follows (in thousands):
|
||||||||
|
Fiscal Years Ended |
|||||||
|
March 25, |
March 26, |
March 28, |
|||||
|
2017 |
2016 |
2015 |
|||||
Portable Audio Products |
$ |
1,373,848 |
$ |
989,101 |
$ |
740,301 | ||
Non-Portable Audio and Other Products |
165,092 | 180,150 | 176,267 | |||||
|
$ |
1,538,940 |
$ |
1,169,251 |
$ |
916,568 |
Geographic Area
The following illustrates sales by geographic locations based on the sales office location (in thousands):
|
||||||||
|
Fiscal Years Ended |
|||||||
|
March 25, |
March 26, |
March 28, |
|||||
|
2017 |
2016 |
2015 |
|||||
United States |
$ |
36,024 |
$ |
73,889 |
$ |
31,977 | ||
European Union (excluding United Kingdom) |
9,809 | 12,745 | 13,629 | |||||
United Kingdom |
5,741 | 5,687 | 2,805 | |||||
China |
1,249,325 | 823,843 | 728,413 | |||||
Hong Kong |
181,283 | 10,647 | 15,087 | |||||
Japan |
11,819 | 27,898 | 14,353 | |||||
South Korea |
2,403 | 193,388 | 69,327 | |||||
Taiwan |
14,426 | 9,249 | 15,272 | |||||
Other Asia |
16,585 | 8,657 | 10,991 | |||||
Other non-U.S. countries |
11,525 | 3,248 | 14,714 | |||||
Total consolidated sales |
$ |
1,538,940 |
$ |
1,169,251 |
$ |
916,568 |
The following illustrates property, plant and equipment, net, by geographic locations, based on physical location (in thousands):
|
|||||
|
Fiscal Years Ended |
||||
|
March 25, |
March 26, |
|||
|
2017 |
2016 |
|||
United States |
$ |
120,212 |
$ |
125,674 | |
European Union (excluding United Kingdom) |
793 | 253 | |||
United Kingdom |
44,981 | 34,632 | |||
China |
565 | 483 | |||
Hong Kong |
5 | 1 | |||
Japan |
243 | 260 | |||
South Korea |
202 | 110 | |||
Taiwan |
231 | 180 | |||
Other Asia |
50 | 29 | |||
Other non-U.S. countries |
857 | 1,034 | |||
Total consolidated property, plant and equipment, net |
$ |
168,139 |
$ |
162,656 |
|
17. Quarterly Results (Unaudited)
The following quarterly results have been derived from our audited annual consolidated financial statements. In the opinion of management, this unaudited quarterly information has been prepared on the same basis as the annual consolidated financial statements and includes all adjustments, including normal recurring adjustments, necessary for a fair presentation of this quarterly information. This information should be read along with the financial statements and related notes. The operating results for any quarter are not necessarily indicative of results to be expected for any future period.
As a result of the early adoption of ASU 2016-09, discussed in more detail in Note 2, the net income and EPS for the first two quarters of fiscal year 2017 have been recast to conform to the new presentation.
The unaudited quarterly statement of operations data for each quarter of fiscal years 2017 and 2016 were as follows (in thousands, except per share data):
|
|||||||||||
|
Fiscal Year 2017 |
||||||||||
|
1st |
2nd |
3rd |
4th |
|||||||
|
Quarter |
Quarter |
Quarter |
Quarter |
|||||||
|
|||||||||||
Net sales |
$ |
259,428 |
$ |
428,619 |
$ |
523,029 |
$ |
327,864 | |||
Gross profit |
126,685 | 211,699 | 255,152 | 164,279 | |||||||
Net income |
18,071 | 86,039 | 122,041 | 35,058 | |||||||
Basic income per share |
$ |
0.29 |
$ |
1.37 |
$ |
1.91 |
$ |
0.55 | |||
Diluted income per share |
0.27 | 1.30 | 1.83 | 0.52 |
|
|||||||||||
|
Fiscal Year 2016 |
||||||||||
|
1st |
2nd |
3rd |
4th |
|||||||
|
Quarter |
Quarter |
Quarter |
Quarter |
|||||||
|
|||||||||||
Net sales |
$ |
282,633 |
$ |
306,756 |
$ |
347,863 |
$ |
231,999 | |||
Gross profit |
132,454 | 142,221 | 164,911 | 115,254 | |||||||
Net income |
33,354 | 34,880 | 41,384 | 14,012 | |||||||
Basic income per share |
$ |
0.53 |
$ |
0.55 |
$ |
0.65 |
$ |
0.22 | |||
Diluted income per share |
0.50 | 0.53 | 0.63 | 0.21 |
|
18. Subsequent Event
On April 14, 2017, the Company purchased a small, privately-held technology group that augments our product offerings in the voice and speech domains. The immaterial purchase was funded with existing cash.
|
Basis of Presentation
We prepare financial statements on a 52- or 53-week year that ends on the last Saturday in March. Fiscal years 2017, 2016, and 2015 were 52-week years. The next 53-week year will be fiscal year 2018.
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles (U.S. GAAP) and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
Reclassifications
Certain reclassifications have been made to prior year balances in order to conform to the current year’s presentation of financial information.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires the use of management estimates. These estimates are subjective in nature and involve judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at fiscal year-end and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates
|
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of money market funds, commercial paper, and U.S. Government Treasury and Agency instruments with original maturities of three months or less at the date of purchase.
Inventories
We use the lower of cost or net realizable value to value our inventories, following the adoption of ASU 2015-11, with cost being determined on a first-in, first-out basis. One of the factors we consistently evaluate in the application of this method is the extent to which products are accepted into the marketplace. By policy, we evaluate market acceptance based on known business factors and conditions by comparing forecasted customer unit demand for our products over a specific future period, or demand horizon, to quantities on hand at the end of each accounting period.
On a quarterly and annual basis, we analyze inventories on a part-by-part basis. Product life cycles and the competitive nature of the industry are factors considered in the evaluation of customer unit demand at the end of each quarterly accounting period. Inventory quantities on-hand in excess of forecasted demand is considered to have reduced market value and, therefore, the cost basis is adjusted to the lower of cost or net realizable value. Typically, market values for excess or obsolete inventories are considered to be zero. Inventory charges recorded for excess and obsolete inventory, including scrapped inventory, represented $6.7 million and $4.8 million, in fiscal year 2017 and 2016, respectively. Inventory charges in fiscal year 2017 and 2016 related to a combination of quality issues and inventory exceeding demand.
Inventories were comprised of the following (in thousands):
|
|||||
|
March 25, |
March 26, |
|||
|
2017 |
2016 |
|||
Work in process |
$ |
83,332 |
$ |
67,827 | |
Finished goods |
84,563 | 74,188 | |||
|
$ |
167,895 |
$ |
142,015 |
Property, Plant and Equipment, net
Property, plant and equipment is recorded at cost, net of depreciation and amortization. Depreciation and amortization is calculated on a straight-line basis over estimated economic lives, ranging from three to 39 years. Leasehold improvements are depreciated over the shorter of the term of the lease or the estimated useful life. Furniture, fixtures, machinery, and equipment are all depreciated over a useful life of three to 10 years, while buildings are depreciated over a period of up to 39 years. In general, our capitalized software is amortized over a useful life of three years, with capitalized enterprise resource planning software being amortized over a useful life of 10 years. Gains or losses related to retirements or dispositions of fixed assets are recognized in the period incurred. Additionally, if impairment indicators exist, the Company will assess the carrying value of the associated asset. In the fourth quarter of fiscal year 2017, the Company reassessed the carrying value of the property located in Edinburgh, Scotland, resulting in an asset impairment charge of $9.8 million.
Property, plant and equipment was comprised of the following (in thousands):
|
|||||
|
March 25, |
March 26, |
|||
|
2017 |
2016 |
|||
Land |
$ |
26,379 |
$ |
26,379 | |
Buildings |
74,266 | 73,513 | |||
Furniture and fixtures |
14,231 | 13,226 | |||
Leasehold improvements |
4,355 | 2,637 | |||
Machinery and equipment |
123,054 | 105,880 | |||
Capitalized software |
24,839 | 25,127 | |||
Construction in progress |
22,972 | 5,411 | |||
Total property, plant and equipment |
290,096 | 252,173 | |||
Less: Accumulated depreciation and amortization |
(121,957) | (89,517) | |||
Property, plant and equipment, net |
$ |
168,139 |
$ |
162,656 |
Depreciation and amortization expense on property, plant, and equipment for fiscal years 2017, 2016, and 2015 was $26.1 million, $22.3 million, and $15.4 million, respectively.
Goodwill and Intangibles, net
Intangible assets include purchased technology licenses and patents that are reported at cost and are amortized on a straight-line basis over their useful lives, generally ranging from one to ten years. Acquired intangibles include existing technology, core technology or patents, license agreements, in-process research & development, trademarks, tradenames, customer relationships, non-compete agreements, and backlog. These assets are amortized on a straight-line basis over lives ranging from one to fifteen years.
Goodwill is recorded at the time of an acquisition and is calculated as the difference between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. The Company tests goodwill and indefinite lived intangibles for impairment on an annual basis or more frequently if the Company believes indicators of impairment exist. Impairment evaluations involve management’s assessment of qualitative factors to determine whether it is more likely than not that goodwill and other intangible assets are impaired. If management concludes from its assessment of qualitative factors that it is more likely than not that impairment exists, then a quantitative impairment test will be performed involving management estimates of asset useful lives and future cash flows. Significant management judgment is required in the forecasts of future operating results that are used in these evaluations. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges in a future period. The Company has recorded no goodwill impairments in fiscal years 2017, 2016, and 2015. There were no material intangible asset impairments in fiscal years 2017, 2016, or 2015.
Long-Lived Assets
We test for impairment losses on long-lived assets and definite-lived intangibles used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. We measure any impairment loss by comparing the fair value of the asset to its carrying amount. We estimate fair value based on discounted future cash flows, quoted market prices, or independent appraisals.
Foreign Currency Translation
Prior to the fiscal year 2015 acquisition of Wolfson Microelectronics (“Wolfson,” the “Acquisition”), each Cirrus Logic legal entity was US dollar functional. Additionally, each of the acquired Wolfson legal entities were also designated as US dollar functional. These designations were determined individually by Cirrus Logic and Wolfson prior to the Acquisition. Subsequent to the integration of Wolfson, the Company reassessed the functional currencies of each legal entity based on the relevant facts and circumstances, as well as in accordance with the applicable accounting guidance contained in Accounting Standards Codification (“ASC”) 830-10, “Foreign Currency Matters.” Based on its analysis and on the change in operating structure brought about by the Acquisition, the Company determined that the functional currency of some of its subsidiaries had changed from the US dollar to the local currency. The Company’s main entities, including the entities that generate the majority of sales and employ the majority of employees, remain US dollar functional. The change was effective beginning in fiscal year 2016 and had an immaterial effect on the financial statements. Beginning in fiscal year 2016 foreign currency translation gains and losses are reported as a component of Accumulated Other Comprehensive Gain / (Loss).
Pension
Defined benefit pension plans are accounted for based upon the provisions of ASC Topic 715, “Compensation – Retirement Benefits.”
The funded status of the plan is recognized in the Consolidated Balance Sheet. Subsequent re-measurement of plan assets and benefit obligations, if deemed necessary, would be reflected in the Consolidated Balance Sheet in the subsequent interim period to reflect the overfunded or underfunded status of the plan.
The Company engages external actuaries on at least an annual basis to provide a valuation of the plan’s assets and projected benefit obligation and to record the net periodic pension cost. On a quarterly basis, the Company will evaluate current information available to us to determine whether the plan’s assets and projected benefit obligation should be re-measured.
Concentration of Credit Risk
Financial instruments that potentially subject us to material concentrations of credit risk consist primarily of cash equivalents, marketable securities, long-term marketable securities, and trade accounts receivable. We are exposed to credit risk to the extent of the amounts recorded on the balance sheet. By policy, our cash equivalents, marketable securities, and long-term marketable securities are subject to certain nationally recognized credit standards, issuer concentrations, sovereign risk, and marketability or liquidity considerations.
In evaluating our trade receivables, we perform credit evaluations of our major customers’ financial condition and monitor closely all of our receivables to limit our financial exposure by limiting the length of time and amount of credit extended. In certain situations, we may require payment in advance or utilize letters of credit to reduce credit risk. By policy, we establish a reserve for trade accounts receivable based on the type of business in which a customer is engaged, the length of time a trade account receivable is outstanding, and other knowledge that we may possess relating to the probability that a trade receivable is at risk for non-payment.
We had three contract manufacturers, Hongfujin Precision, Protek, and Jabil Circuits who represented 20 percent, 15 percent, and 13 percent, respectively of our consolidated gross trade accounts receivable as of the end of fiscal year 2017. Hongfujin Precision and Protek represented 23 percent and 11 percent, respectively, and Samsung Electronics, a direct customer, represented 23 percent of our consolidated gross trade accounts receivable as of the end of fiscal year 2016. No other distributor or customer had receivable balances that represented more than 10 percent of consolidated gross trade accounts receivable as of the end of fiscal year 2017 and 2016.
Since the components we produce are largely proprietary and generally not available from second sources, we consider our end customer to be the entity specifying the use of our component in their design. These end customers may then purchase our products directly from us, from a distributor, or through a third party manufacturer contracted to produce their end product. For fiscal years 2017, 2016, and 2015, our ten largest end customers represented approximately 92 percent, 89 percent, and 87 percent, of our sales, respectively. For fiscal years 2017, 2016, and 2015, we had one end customer, Apple Inc., who purchased through multiple contract manufacturers and represented approximately 79 percent, 66 percent, and 72 percent, of the Company’s total sales, respectively. Samsung Electronics represented 15 percent of the Company’s total sales in fiscal year 2016. No other customer or distributor represented more than 10 percent of net sales in fiscal years 2017, 2016, or 2015.
Revenue Recognition
We recognize revenue when all of the following criteria are met: persuasive evidence that an arrangement exists, delivery of goods has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Prior to the fourth quarter of fiscal year 2016, we had a number of arrangements with distributors whereby we deferred revenue at the time of shipment of our products to those distributors. As part of those arrangements, when a distributor resold those products to an end customer, the Company would credit the distributor the difference between (1) the original distributor price and the distributor’s agreed upon margin and (2) the final sales price to the end customer (known as the “Ship and Debit Arrangement”). For those transactions, revenue was deferred until the product was resold by the distributor and we determined that the final sales price to the distributor was fixed or determinable. For certain of our smaller distributors, we did not have similar Ship and Debit Arrangements and the distributors were billed at a fixed upfront price. For those transactions, revenue was recognized upon delivery to the distributor based upon the distributor’s individual shipping terms, less an allowance for estimated returns, as the Company determined that the revenue recognition criteria were met.
In light of the fact that the distributor program had been declining as a portion of the overall business for several years, in fiscal year 2016 the Company performed a review of all distributor arrangements in an effort to streamline our distribution program and reduce overhead costs. Based upon this review, the Company terminated its Ship and Debit Arrangements with Distributors during the fourth quarter of fiscal year 2016. Subsequent to the termination of the Ship and Debit Arrangements, the Company began recognizing revenue for all distributors upon delivery to the distributor based upon the distributor’s individual shipping terms, less an allowance for estimated returns, as the Company’s final sales price to the distributor was fixed and determinable and the Company determined that all four criteria for revenue recognition were met.
Although the Company terminated its Ship and Debit Arrangements with all distributors along with certain ancillary agreements related to the Ship and Debit Arrangements, the Company continues to grant varying levels of stock rotation and price protection rights based on individual distributor agreements. To the extent these rights are implicated in any transaction with a distributor, we continue to evaluate their effect on when the revenue recognition criteria have been met.
Warranty Expense
We warrant our products and maintain a provision for warranty repair or replacement of shipped products. The accrual represents management’s estimate of probable returns. Our estimate is based on an analysis of our overall sales volume and historical claims experience. The estimate is re-evaluated periodically for accuracy.
Shipping Costs
Our shipping and handling costs are included in cost of sales for all periods presented in the Consolidated Statements of Income.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs were $1.7 million, $1.6 million, and $1.1 million, in fiscal years 2017, 2016, and 2015, respectively.
Stock-Based Compensation
Stock-based compensation is measured at the grant date based on the grant-date fair value of the awards and is recognized as an expense, on a ratable basis, over the vesting period, which is generally between zero and four years. Determining the amount of stock-based compensation to be recorded requires the Company to develop estimates used in calculating the grant-date fair value of stock options and performance awards (also called market stock units). The Company calculates the grant-date fair value for stock options and market stock units using the Black-Scholes valuation model and the Monte Carlo simulation, respectively. The use of valuation models requires the Company to make estimates of assumptions such as expected volatility, expected term, risk-free interest rate, expected dividend yield, correlation of the Company’s stock price with the Philadelphia Semiconductor Index (“the Index”) and forfeiture rates. The grant-date fair value of restricted stock units is the market value at grant date multiplied by the number of units.
Income Taxes
We are required to calculate income taxes in each of the jurisdictions in which we operate. This process involves calculating the actual current tax liability as well as assessing temporary differences in the recognition of income or loss for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheet. We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company evaluates the ability to realize its deferred tax assets based on all the facts and circumstances, including projections of future taxable income and expiration dates of carryover tax attributes.
The calculation of our tax liabilities involves assessing uncertainties with respect to the application of complex tax rules and the potential for future adjustment of our uncertain tax positions by the Internal Revenue Service or other taxing jurisdiction. We recognize liabilities for uncertain tax positions based on the required two-step process. The first step requires us to determine if the weight of available evidence indicates that the tax position has met the threshold for recognition; therefore, we must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50 percent likely of being realized upon ultimate settlement. We reevaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, expirations of statutes of limitation, effectively settled issues under audit, and new audit activity. A change in the recognition step or measurement step would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.
Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, we cannot assure that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If additional taxes are assessed as a result of an audit or litigation, it could have a material effect on our income tax provision and net income in the period or periods for which that determination is made. We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues which may require an extended period of time to resolve and could result in additional assessments of income tax. We believe adequate provisions for income taxes have been made for all periods.
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 grants.
The following table details the calculation of basic and diluted earnings per share for fiscal years 2017, 2016, and 2015, (in thousands, except per share amounts):
|
||||||||
|
Fiscal Years Ended |
|||||||
|
March 25, |
March 26, |
March 28, |
|||||
|
2017 |
2016 |
2015 |
|||||
Numerator: |
||||||||
Net income |
$ |
261,209 |
$ |
123,630 |
$ |
55,178 | ||
Denominator: |
||||||||
Weighted average shares outstanding |
63,329 | 63,197 | 62,503 | |||||
Effect of dilutive securities |
3,232 | 2,796 | 2,732 | |||||
Weighted average diluted shares |
66,561 | 65,993 | 65,235 | |||||
Basic earnings per share |
$ |
4.12 |
$ |
1.96 |
$ |
0.88 | ||
Diluted earnings per share |
$ |
3.92 |
$ |
1.87 |
$ |
0.85 |
The weighted outstanding options excluded from our diluted calculation for the years ended March 25, 2017, March 26, 2016, and March 28, 2015 were 389 thousand, 468 thousand, and 718 thousand, respectively, as the exercise price exceeded the average market price during the period.
Accumulated Other Comprehensive Income (Loss)
Our accumulated other comprehensive income (loss) is comprised of foreign currency translation adjustments, unrealized gains and losses on investments classified as available-for-sale and actuarial gains and losses on our pension plan assets. See Note 14 – Accumulated Other Comprehensive Income (Loss) for additional discussion.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606). The purpose of this ASU is to converge revenue recognition requirements per GAAP and International Financial Reporting Standards (IFRS). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. 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. Through this process, the Company currently expects no material modifications to its financial statements upon adoption of this ASU.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The amendments in this ASU provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company adopted this ASU in the fourth quarter of fiscal year 2017 with no material modifications to the Company’s financial statements as a result.
In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this update require that debt issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the carrying amount of that debt liability and that the amortization of debt issuance costs is reported as interest expense. ASU 2015-03 is to be applied retrospectively and represents a change in accounting principle. In August 2015, the FASB issued FASB ASU No. 2015-15, Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 clarified the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. Debt issuance costs related to a line-of-credit arrangement may be presented in the balance sheet as an asset and subsequently amortized ratably over the term of the arrangement regardless of whether there are any outstanding borrowings. Both ASU 2015-03 and ASU 2015-15 are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Earlier adoption is permitted for financial statements that have not been previously issued. The Company adopted these ASUs in fiscal year 2017 with no material impact to its financial statements.
In April 2015, the FASB issued ASU No. 2015-04, Compensation – Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets. The ASU is part of the FASB’s “Simplification Initiative” to reduce complexity in accounting standards. The FASB decided to permit entities to measure defined benefit plan assets and obligations as of the month-end that is closest to their fiscal year-end. An entity is required to disclose the accounting policy election and the date used to measure defined benefit plan assets and obligations in accordance with the amendments in this update. The amendments in this update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with earlier application permitted. The Company adopted this ASU in the first quarter of fiscal year 2017, with no material impact to its financial statements.
In July 2015, ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory was issued. This ASU requires companies to subsequently measure inventory at the lower of cost and net realizable value versus the previous lower of cost or market. The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, to be applied prospectively. Early application is permitted. The Company early adopted this ASU in fiscal year 2017 with no material modifications to its financial statements as a result.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The FASB issued this 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 March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU requires all excess tax benefits and deficiencies to be recognized as income tax benefit / expense in the income statement and presented as an operating activity in the statement of cash flows. Forfeitures can be calculated based on either the estimated number of awards that are expected to vest, as required by current guidance, or when forfeitures actually occur. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted, but all amendments must be adopted in the same period and any adjustments should be reflected as of the beginning of the fiscal year if adopted in an interim period. The Company early adopted in the third quarter of fiscal year 2017, which resulted in the following:
· |
We recorded excess tax benefits within income tax expense, rather than in additional paid-in capital (“APIC”), of $2.2 million, $8.0 million, $10.8 million and $1.9 million for the first, second, third and fourth quarters of fiscal year 2017, respectively. |
· |
We recorded a cumulative-effect adjustment as of March 27, 2016 to increase retained earnings by $5.6 million, with a corresponding increase to deferred tax assets, to recognize net operating loss and tax credit carryforwards attributable to excess tax benefits on stock-based compensation that had not been previously recognized. |
· |
We now include the excess tax benefits in net operating cash rather than net financing cash in our Consolidated Statements of Cash Flows. |
We applied this change in presentation prospectively and thus prior years have not been adjusted.
We elected not to change our policy on accounting for forfeitures and continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period.
The adoption of this new guidance impacted our previously reported quarterly results for fiscal year 2017 as follows:
|
|||||||||||||
|
Three Months Ended |
Six Months Ended |
|||||||||||
|
June 25, 2016 |
September 24, 2016 |
September 24, 2016 |
||||||||||
|
As reported |
As adjusted |
As reported |
As adjusted |
As reported |
As adjusted |
|||||||
|
(in thousands, except per share data) |
||||||||||||
Consolidated Condensed Statements of Income: |
|||||||||||||
Income tax expense |
$ |
5,805 |
$ |
3,598 |
$ |
24,608 |
$ |
16,634 |
$ |
30,413 |
$ |
20,232 | |
Net income |
$ |
15,864 |
$ |
18,071 |
$ |
78,065 |
$ |
86,039 |
$ |
93,929 |
$ |
104,110 | |
Basic net income per share |
$ |
0.25 |
$ |
0.29 |
$ |
1.24 |
$ |
1.37 |
$ |
1.50 |
$ |
1.66 | |
Diluted net income per share |
$ |
0.24 |
$ |
0.27 |
$ |
1.19 |
$ |
1.30 |
$ |
1.43 |
$ |
1.58 | |
Weighted average shares used in diluted net income per share computation |
65,232 | 65,723 | 65,717 | 66,410 | 65,521 | 66,101 | |||||||
|
|||||||||||||
Consolidated Condensed Statements of Cash Flows: |
|||||||||||||
Net cash provided by operating activities |
$ |
12,226 |
$ |
12,756 |
$ |
19,990 |
$ |
24,091 |
$ |
32,216 |
$ |
36,847 | |
Net cash used in financing activities |
$ |
(13,140) |
$ |
(13,670) |
$ |
(13,859) |
$ |
(17,960) |
$ |
(26,999) |
$ |
(31,630) |
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires credit losses on available-for-sale debt securities to be presented as an allowance rather than a write-down. Unlike current U.S. GAAP, the credit losses could be reversed with changes in estimates, and recognized in current year earnings. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018, including interim periods. The Company is currently evaluating the impact of this ASU with no expected material impact.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU covers several cash flow issues, including the presentation of contingent consideration payments made after a business combination. Cash payments up to the amount of the liability recognized at the acquisition date (including measurement-period adjustments) should be classified as financing activities. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted, including in an interim period, with a required retrospective transition method applied to each period presented. The Company early adopted in the fourth quarter of fiscal year 2017. See Statement of Cash Flows for presentation of contingent consideration payment.
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 is currently evaluating the impact of this ASU.
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, including interim periods within those annual periods. Early adoption is permitted under specific circumstances, including in an interim period, with prospective application on or after the effective date. The Company is currently evaluating the financial statement impact of this ASU, which is dependent upon the specific terms of any applicable future acquisitions or dispositions.
In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323). This ASU amends the disclosure requirements for ASU 2014-09, Revenue from Contracts with Customers (Topic 606), ASU 2016-02, Leases (Topic 842) and ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU states that if a registrant does not know or cannot reasonably estimate the impact that the adoption of the above ASUs is expected to have on the financial statements, then in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. This ASU was effective upon issuance. The adoption did not have a material impact on the Company’s financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates step two of the goodwill impairment test. An impairment charge is to be recognized for the amount by which the current value exceeds the fair value. This ASU is effective for annual periods beginning after December 15, 2019, including interim periods. Early adoption is permitted, for interim or annual goodwill impairment tests performed after January 1, 2017, and should be applied prospectively. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments in this update. The Company is currently evaluating the impact of this ASU
|
|
|||||
|
March 25, |
March 26, |
|||
|
2017 |
2016 |
|||
Work in process |
$ |
83,332 |
$ |
67,827 | |
Finished goods |
84,563 | 74,188 | |||
|
$ |
167,895 |
$ |
142,015 |
|
|||||
|
March 25, |
March 26, |
|||
|
2017 |
2016 |
|||
Land |
$ |
26,379 |
$ |
26,379 | |
Buildings |
74,266 | 73,513 | |||
Furniture and fixtures |
14,231 | 13,226 | |||
Leasehold improvements |
4,355 | 2,637 | |||
Machinery and equipment |
123,054 | 105,880 | |||
Capitalized software |
24,839 | 25,127 | |||
Construction in progress |
22,972 | 5,411 | |||
Total property, plant and equipment |
290,096 | 252,173 | |||
Less: Accumulated depreciation and amortization |
(121,957) | (89,517) | |||
Property, plant and equipment, net |
$ |
168,139 |
$ |
162,656 |
|
||||||||
|
Fiscal Years Ended |
|||||||
|
March 25, |
March 26, |
March 28, |
|||||
|
2017 |
2016 |
2015 |
|||||
Numerator: |
||||||||
Net income |
$ |
261,209 |
$ |
123,630 |
$ |
55,178 | ||
Denominator: |
||||||||
Weighted average shares outstanding |
63,329 | 63,197 | 62,503 | |||||
Effect of dilutive securities |
3,232 | 2,796 | 2,732 | |||||
Weighted average diluted shares |
66,561 | 65,993 | 65,235 | |||||
Basic earnings per share |
$ |
4.12 |
$ |
1.96 |
$ |
0.88 | ||
Diluted earnings per share |
$ |
3.92 |
$ |
1.87 |
$ |
0.85 |
|
|||||||||||||
|
Three Months Ended |
Six Months Ended |
|||||||||||
|
June 25, 2016 |
September 24, 2016 |
September 24, 2016 |
||||||||||
|
As reported |
As adjusted |
As reported |
As adjusted |
As reported |
As adjusted |
|||||||
|
(in thousands, except per share data) |
||||||||||||
Consolidated Condensed Statements of Income: |
|||||||||||||
Income tax expense |
$ |
5,805 |
$ |
3,598 |
$ |
24,608 |
$ |
16,634 |
$ |
30,413 |
$ |
20,232 | |
Net income |
$ |
15,864 |
$ |
18,071 |
$ |
78,065 |
$ |
86,039 |
$ |
93,929 |
$ |
104,110 | |
Basic net income per share |
$ |
0.25 |
$ |
0.29 |
$ |
1.24 |
$ |
1.37 |
$ |
1.50 |
$ |
1.66 | |
Diluted net income per share |
$ |
0.24 |
$ |
0.27 |
$ |
1.19 |
$ |
1.30 |
$ |
1.43 |
$ |
1.58 | |
Weighted average shares used in diluted net income per share computation |
65,232 | 65,723 | 65,717 | 66,410 | 65,521 | 66,101 | |||||||
|
|||||||||||||
Consolidated Condensed Statements of Cash Flows: |
|||||||||||||
Net cash provided by operating activities |
$ |
12,226 |
$ |
12,756 |
$ |
19,990 |
$ |
24,091 |
$ |
32,216 |
$ |
36,847 | |
Net cash used in financing activities |
$ |
(13,140) |
$ |
(13,670) |
$ |
(13,859) |
$ |
(17,960) |
$ |
(26,999) |
$ |
(31,630) |
|
|
|||||||||||
|
Estimated |
||||||||||
|
Gross |
Gross |
Fair Value |
||||||||
|
Amortized |
Unrealized |
Unrealized |
(Net Carrying |
|||||||
As of March 25, 2017 |
Cost |
Gains |
Losses |
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 relates to 18 different securities with a total amortized cost of approximately $99.9 million at March 25, 2017. Four securities had been in a continuous unrealized loss position for more than 12 months as of March 25, 2017. The gross unrealized loss on these securities was less than one tenth of one percent of the position value. Because the Company does not intend to sell the investments at a loss and it is not more likely than not that the Company will be required to sell the investments before recovery of its amortized cost basis, the Company did not consider the investment in these securities to be other-than-temporarily impaired at March 25, 2017.
|
|||||||||||
|
Estimated |
||||||||||
|
Gross |
Gross |
Fair Value |
||||||||
|
Amortized |
Unrealized |
Unrealized |
(Net Carrying |
|||||||
As of March 26, 2016 |
Cost |
Gains |
Losses |
Amount) |
|||||||
Corporate debt securities |
$ |
81,310 |
$ |
3 |
$ |
(100) |
$ |
81,213 |
|
||||||||||||
|
March 25, 2017 |
March 26, 2016 |
||||||||||
|
Amortized |
Estimated |
Amortized |
Estimated |
||||||||
|
Cost |
Fair Value |
Cost |
Fair Value |
||||||||
Within 1 year |
$ |
99,868 |
$ |
99,813 |
$ |
60,603 |
$ |
60,582 | ||||
After 1 year |
- |
- |
20,707 | 20,631 | ||||||||
Total |
$ |
99,868 |
$ |
99,813 |
$ |
81,310 |
$ |
81,213 |
|
|
Quoted Prices |
||||||||||
|
in Active |
Significant |
|||||||||
|
Markets for |
Other |
Significant |
||||||||
|
Identical |
Observable |
Unobservable |
||||||||
|
Assets |
Inputs |
Inputs |
||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||
Assets: |
|||||||||||
Cash equivalents |
|||||||||||
Money market funds |
$ |
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 - short-term |
$ |
- |
$ |
- |
$ |
4,695 |
$ |
4,695 |
The following summarizes the fair value of our financial instruments at March 26, 2016 (in thousands):
|
|||||||||||
|
Quoted Prices |
||||||||||
|
in Active |
Significant |
|||||||||
|
Markets for |
Other |
Significant |
||||||||
|
Identical |
Observable |
Unobservable |
||||||||
|
Assets |
Inputs |
Inputs |
||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||
Cash equivalents |
|||||||||||
Money market funds |
$ |
79,256 |
$ |
- |
$ |
- |
$ |
79,256 | |||
|
|||||||||||
Available-for-sale securities |
|||||||||||
Corporate debt securities |
$ |
- |
$ |
81,213 |
$ |
- |
$ |
81,213 | |||
|
|||||||||||
Liabilities: |
|||||||||||
Other accrued liabilities |
|||||||||||
Contingent consideration - short-term |
$ |
- |
$ |
- |
$ |
4,709 |
$ |
4,709 | |||
Other long-term liabilities |
|||||||||||
Contingent consideration - long-term |
$ |
- |
$ |
- |
$ |
4,359 |
$ |
4,359 |
|
||||||||
|
Maximum Value if Milestones Achieved |
Estimated Discount Rate (%) |
Fair Value |
|||||
Tranche A - 18 month earn out period |
$ |
5,000 | 7.0 |
$ |
- |
|||
Tranche B - 30 month earn out period |
5,000 | 7.7 | 4,695 | |||||
|
$ |
10,000 |
$ |
4,695 |
|
Fiscal year ended |
|
|
March 25, |
|
|
2017 |
|
|
(in thousands) |
|
Beginning balance |
$ |
9,068 |
Adjustment to estimates (research and development expense) |
(3,579) | |
Payout of Tranche A contingent consideration |
(1,213) | |
Fair value charge recognized in earnings (research and development expense) |
419 | |
Ending balance |
$ |
4,695 |
|
|
|||||
|
March 25, |
March 26, |
|||
|
2017 |
2016 |
|||
Gross accounts receivable |
$ |
120,408 |
$ |
89,007 | |
Allowance for doubtful accounts |
(434) | (475) | |||
Accounts receivable, net |
$ |
119,974 |
$ |
88,532 |
|
||
Balance, March 29, 2014 |
$ |
(229) |
Bad debt expense, net of recoveries |
(127) | |
Balance, March 28, 2015 |
(356) | |
Bad debt expense, net of recoveries |
(119) | |
Balance, March 26, 2016 |
(475) | |
Bad debt expense, net of recoveries |
41 | |
Balance, March 25, 2017 |
$ |
(434) |
|
|
|||||||||||
|
March 25, 2017 |
March 26, 2016 |
|||||||||
Intangible Category / Weighted-Average Amortization period (in years) |
Gross Amount |
Accumulated Amortization |
Gross Amount |
Accumulated Amortization |
|||||||
Core technology (a) |
$ |
1,390 |
$ |
(1,390) |
$ |
1,390 |
$ |
(1,390) | |||
License agreement (a) |
440 | (440) | 440 | (440) | |||||||
Existing technology (6.1) |
117,975 | (53,960) | 117,975 | (32,873) | |||||||
In-process research & development ("IPR&D") (7.3) |
72,750 | (24,245) | 72,750 | (14,082) | |||||||
Trademarks and tradename (10.0) |
3,037 | (2,208) | 3,037 | (2,076) | |||||||
Customer relationships (10.0) |
15,381 | (4,191) | 15,381 | (2,655) | |||||||
Backlog (a) |
220 | (220) | 220 | (147) | |||||||
Non-compete agreements (a) |
470 | (470) | 470 | (209) | |||||||
Technology licenses (3.1) |
24,540 | (13,891) | 16,661 | (11,620) | |||||||
Total |
$ |
236,203 |
$ |
(101,015) |
$ |
228,324 |
$ |
(65,492) |
|
||
For the year ended March 31, 2018 |
$ |
37,563 |
For the year ended March 30, 2019 |
$ |
35,660 |
For the year ended March 28, 2020 |
$ |
26,499 |
For the year ended March 27, 2021 |
$ |
15,895 |
For the year ended March 26, 2022 |
$ |
12,145 |
Thereafter |
$ |
8,523 |
|
|
|||||
|
March 25, |
March 26, |
|||
|
2017 |
2016 |
|||
Change in benefit obligation: |
|||||
Beginning balance |
$ |
23,968 |
$ |
27,091 | |
Expenses |
- |
15 | |||
Interest cost |
759 | 821 | |||
Plan settlements |
(4,517) |
- |
|||
Benefits paid and expenses |
(264) | (1,095) | |||
Change in foreign currency exchange rate |
(2,763) | (1,221) | |||
Actuarial (gain) / loss |
3,940 | (1,643) | |||
Total benefit obligation ending balance |
21,123 | 23,968 | |||
|
|||||
Change in plan assets: |
|||||
Beginning balance |
25,688 | 26,735 | |||
Actual return on plan assets |
3,933 | (155) | |||
Employer contributions |
990 | 1,409 | |||
Plan settlements |
(5,243) |
- |
|||
Change in foreign currency exchange rate |
(2,961) | (1,206) | |||
Benefits paid and expenses |
(264) | (1,095) | |||
Fair value of plan assets ending balance |
22,143 | 25,688 | |||
|
|||||
Funded status of Scheme at end of year |
$ |
1,020 |
$ |
1,720 |
|
||||||||
|
Fiscal Years Ended |
|||||||
|
March 25, |
March 26, |
March 28, |
|||||
|
2017 |
2016 |
2015 |
|||||
Expenses |
$ |
- |
$ |
15 |
$ |
16 | ||
Interest cost |
759 | 821 | 544 | |||||
Expected return on plan assets |
(1,126) | (1,212) | (792) | |||||
Settlement (gain) loss |
1,063 |
- |
- |
|||||
Amortization of actuarial (gain) loss |
(89) | 49 |
- |
|||||
|
$ |
607 |
$ |
(327) |
$ |
(232) |
|
|||||||||
|
2017 |
2016 |
2015 |
||||||
Discount rate |
3.60 |
% |
3.20 |
% |
4.00 |
% |
|||
Expected long-term return on plan assets |
4.93 |
% |
4.65 |
% |
5.36 |
% |
|
|||||||||||
|
Quoted Prices |
||||||||||
|
in Active |
Significant |
|||||||||
|
Markets for |
Other |
Significant |
||||||||
|
Identical |
Observable |
Unobservable |
||||||||
|
Assets |
Inputs |
Inputs |
||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||
Plan Assets: |
|||||||||||
Cash |
$ |
160 |
$ |
- |
$ |
- |
$ |
160 | |||
Pension funds |
- |
21,983 |
- |
21,983 | |||||||
|
$ |
160 |
$ |
21,983 |
$ |
- |
$ |
22,143 |
The table below sets forth the fair value of our plan assets as of March 26, 2016, (in thousands):
|
|||||||||||
|
Quoted Prices |
||||||||||
|
in Active |
Significant |
|||||||||
|
Markets for |
Other |
Significant |
||||||||
|
Identical |
Observable |
Unobservable |
||||||||
|
Assets |
Inputs |
Inputs |
||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||
Plan Assets: |
|||||||||||
Cash |
$ |
42 |
$ |
- |
$ |
- |
$ |
42 | |||
Pension funds |
- |
25,646 |
- |
25,646 | |||||||
|
$ |
42 |
$ |
25,646 |
$ |
- |
$ |
25,688 |
|
||
|
Fiscal Year |
|
|
2017 |
|
Net actuarial loss |
$ |
(79) |
|
||
Accumulated other comprehensive income, before tax |
$ |
(79) |
|
||
|
Fiscal Year |
|
|
2018 |
|
Transition (asset) obligation |
$ |
- |
Prior service cost |
- |
|
Actuarial loss (gain) |
(37) |
|
Benefit |
|
|
Payments |
|
2018 |
$ |
266 |
2019 |
411 | |
2020 |
481 | |
2021 |
472 | |
2022 |
415 | |
Thereafter |
2,765 |
|
||||||
|
Actual Allocation |
|||||
|
2017 |
2016 |
||||
Equity securities |
33 |
% |
32 |
% |
||
Corporate bonds |
48 | 47 | ||||
Diversified growth |
19 | 21 | ||||
Cash |
- |
- |
||||
Total |
100 |
% |
100 |
% |
|
||
Change |
Approximate impact on liabilities |
|
Decrease discount rate by 0.1%, per year |
2% increase |
|
Increase inflation linked assumptions by 0.1%, per year |
2% increase (of inflation-linked liabilities) |
|
Increase life expectancy by 1 year |
2% increase |
|
|
||
|
Shares |
|
|
Available for |
|
|
Grant |
|
Balance, March 29, 2014 |
3,547 | |
Shares added |
3,300 | |
Granted |
(3,181) | |
Forfeited |
230 | |
Balance, March 28, 2015 |
3,896 | |
Shares added |
4,900 | |
Granted |
(2,676) | |
Forfeited |
167 | |
Balance, March 26, 2016 |
6,287 | |
Shares added |
- |
|
Granted |
(1,719) | |
Forfeited |
124 | |
Balance, March 25, 2017 |
4,692 |
|
||||||||
|
Fiscal Year |
|||||||
|
2017 |
2016 |
2015 |
|||||
Cost of sales |
$ |
1,071 |
$ |
1,145 |
$ |
747 | ||
Research and development |
21,186 | 17,173 | 11,222 | |||||
Sales, general and administrative |
17,336 | 15,188 | 25,580 | |||||
Effect on pre-tax income |
39,593 | 33,506 | 37,549 | |||||
Income Tax Benefit |
(12,482) | (10,306) | (11,467) | |||||
Total share-based compensation expense (net of taxes) |
27,111 | 23,200 | 26,082 | |||||
Share-based compensation effects on basic earnings per share |
$ |
0.43 |
$ |
0.37 |
$ |
0.42 | ||
Share-based compensation effects on diluted earnings per share |
0.41 | 0.35 | 0.40 | |||||
|
||||||||
|
|
|||||||||||||
|
|||||||||||||
|
March 25, 2017 |
March 26, 2016 |
March 28, 2015 |
||||||||||
Expected stock price volatility |
47.66 |
% |
40.13 |
- |
45.07 |
% |
38.79 |
- |
42.12 |
% |
|||
Risk-free interest rate |
1.13 |
% |
0.94 |
- |
1.05 |
% |
0.49 |
- |
0.91 |
% |
|||
Expected term (in years) |
2.79 |
2.72 |
- |
2.97 |
2.15 |
- |
2.87 |
|
|||||
|
Outstanding Options |
||||
|
Weighted |
||||
|
Average |
||||
|
Number |
Exercise Price |
|||
Balance, March 29, 2014 |
3,725 |
$ |
12.42 | ||
Options granted |
310 | 21.69 | |||
Options exercised |
(696) | 7.47 | |||
Options forfeited |
(5) | 19.94 | |||
Options expired |
(1) | 4.65 | |||
Balance, March 28, 2015 |
3,333 |
$ |
14.31 | ||
Options granted |
387 | 31.39 | |||
Options exercised |
(773) | 8.46 | |||
Options forfeited |
- |
- |
|||
Options expired |
(22) | 35.41 | |||
Balance, March 26, 2016 |
2,925 |
$ |
17.96 | ||
Options granted |
215 | 54.65 | |||
Options exercised |
(1,382) | 11.87 | |||
Options forfeited |
- |
- |
|||
Options expired |
- |
- |
|||
Balance, March 25, 2017 |
1,758 |
$ |
27.25 |
|
||||||||||
|
Weighted |
Weighted Average |
||||||||
|
Number of |
Average |
Remaining Contractual |
Aggregate |
||||||
|
Options |
Exercise price |
Term (years) |
Intrinsic Value |
||||||
Vested and expected to vest |
1,757 |
$ |
27.24 |
6.40 |
$ |
57,674 |
||||
Exercisable |
1,128 |
$ |
21.77 |
5.18 |
$ |
43,196 |
|
||||||||||||
|
Options Outstanding |
Options Exercisable |
||||||||||
|
Weighted Average |
|||||||||||
|
Remaining |
Weighted |
Weighted |
|||||||||
|
Contractual Life |
Average Exercise |
Number |
Average |
||||||||
Range of Exercise Prices |
Number |
(years) |
Price |
Exercisable |
Exercise Price |
|||||||
$2.90 - $15.41 |
371 | 3.33 |
$ |
11.01 | 371 |
$ |
11.01 | |||||
$16.21 - $20.37 |
328 | 5.81 | 18.63 | 242 | 18.02 | |||||||
$20.40 - $24.14 |
265 | 6.48 | 23.29 | 203 | 23.30 | |||||||
$31.25 - $31.25 |
331 | 8.61 | 31.25 | 91 | 31.25 | |||||||
$32.29 - $38.99 |
248 | 5.97 | 38.00 | 221 | 38.60 | |||||||
$54.65 - $54.65 |
215 | 9.61 | 54.65 |
- |
- |
|||||||
|
1,758 | 6.40 |
$ |
27.25 | 1,128 |
$ |
21.77 |
|
|||||||
|
Weighted |
Weighted Average |
|||||
|
Average |
Remaining Contractual |
|||||
|
Shares |
Fair Value |
Term (years) |
||||
Expected to vest |
2,870 |
$ |
34.64 | 1.43 |
|
Year Ended |
|||||
|
March 25, |
March 26, |
||||
|
2017 |
2016 |
||||
Expected stock price volatility |
47.66 |
% |
45.07 |
% |
||
Risk-free interest rate |
0.98 |
% |
1.16 |
% |
||
Expected term (in years) |
3.00 | 3.00 |
|
Weighted |
|||
|
Average |
|||
|
Shares |
Fair Value |
||
March 29, 2014 |
- |
$ |
- |
|
Granted |
35 | 22.00 | ||
Vested |
- |
- |
||
Forfeited |
- |
- |
||
March 28, 2015 |
35 |
$ |
22.00 | |
Granted |
90 | 39.86 | ||
Vested |
- |
- |
||
Forfeited |
- |
- |
||
March 26, 2016 |
125 |
$ |
34.85 | |
Granted |
55 | 75.58 | ||
Vested |
- |
- |
||
Forfeited |
- |
- |
||
March 25, 2017 |
180 |
$ |
47.30 |
|
Weighted |
Weighted Average |
|||||
|
Average |
Remaining Contractual |
|||||
|
Shares |
Fair Value |
Term (years) |
||||
Expected to vest |
171 |
$ |
46.89 | 1.69 |
|
||||
|
Weighted |
|||
|
Average |
|||
|
Shares |
Fair Value |
||
March 29, 2014 |
2,309 |
$ |
25.26 | |
Granted |
1,887 | 22.04 | ||
Vested |
(1,224) | 19.52 | ||
Forfeited |
(151) | 26.17 | ||
March 28, 2015 |
2,821 | 25.57 | ||
Granted |
1,437 | 31.51 | ||
Vested |
(992) | 32.48 | ||
Forfeited |
(103) | 24.75 | ||
March 26, 2016 |
3,163 | 26.14 | ||
Granted |
947 | 52.40 | ||
Vested |
(1,032) | 24.67 | ||
Forfeited |
(83) | 28.40 | ||
March 25, 2017 |
2,995 |
$ |
34.91 |
|
|
||||||||||||||
|
Facilities |
Subleases |
Net Facilities Commitments |
Equipment and Other Commitments |
Total Commitments |
|||||||||
2018 |
$ |
7,074 |
$ |
386 |
$ |
6,688 |
$ |
67 |
$ |
6,755 | ||||
2019 |
10,354 | 391 | 9,963 | 115 | 10,078 | |||||||||
2020 |
9,811 | 266 | 9,545 | 110 | 9,655 | |||||||||
2021 |
9,580 | 245 | 9,335 | 110 | 9,445 | |||||||||
2022 |
9,313 | 251 | 9,062 | 110 | 9,172 | |||||||||
Thereafter |
39,071 | 859 | 38,212 | 432 | 38,644 | |||||||||
Total minimum lease payment |
$ |
85,203 |
$ |
2,398 |
$ |
82,805 |
$ |
944 |
$ |
83,749 |
|
|
||||||||||
|
Unrealized Gains |
Actuarial Gains |
||||||||
|
Foreign |
(Losses) on |
(Losses) on |
|||||||
|
Currency |
Securities |
Pension Plan |
Total |
||||||
Balance, March 28, 2015 |
$ |
(770) |
$ |
(47) |
$ |
(1,293) |
$ |
(2,110) | ||
Current period foreign exchange translation |
294 |
- |
- |
294 | ||||||
Current period marketable securities activity |
- |
(24) |
- |
(24) | ||||||
Current period actuarial gain/loss activity |
- |
- |
2,660 | 2,660 | ||||||
Current period amortization of actuarial loss |
- |
- |
49 | 49 | ||||||
Tax effect |
- |
9 | (546) | (537) | ||||||
Balance, March 26, 2016 |
(476) | (62) | 870 | 332 | ||||||
Current period foreign exchange translation |
(826) |
- |
- |
(826) | ||||||
Current period marketable securities activity |
- |
47 |
- |
47 | ||||||
Current period actuarial gain/loss activity |
- |
- |
(79) | (79) | ||||||
Current period amortization of actuarial loss |
- |
- |
(89) | (89) | ||||||
Tax effect |
- |
(16) | 58 | 42 | ||||||
Balance, March 25, 2017 |
$ |
(1,302) |
$ |
(31) |
$ |
760 |
$ |
(573) |
|
|
||||||||
|
Fiscal Years Ended |
|||||||
|
March 25, |
March 26, |
March 28, |
|||||
|
2017 |
2016 |
2015 |
|||||
U.S. |
$ |
137,654 |
$ |
108,133 |
$ |
133,295 | ||
Non-U.S. |
177,393 | 67,856 | (41,746) | |||||
|
$ |
315,047 |
$ |
175,989 |
$ |
91,549 |
|
||||||||
|
Fiscal Years Ended |
|||||||
|
March 25, |
March 26, |
March 28, |
|||||
|
2017 |
2016 |
2015 |
|||||
Current: |
||||||||
U.S. |
$ |
28,940 |
$ |
28,313 |
$ |
42,165 | ||
Non-U.S. |
7,234 | 703 | 445 | |||||
Total current tax provision |
$ |
36,174 |
$ |
29,016 |
$ |
42,610 | ||
|
||||||||
Deferred: |
||||||||
U.S. |
2,576 | 18,242 | 2,136 | |||||
Non-U.S. |
15,088 | 5,101 | (8,375) | |||||
Total deferred tax provision (benefit) |
17,664 | 23,343 | (6,239) | |||||
Total tax provision |
$ |
53,838 |
$ |
52,359 |
$ |
36,371 |
|
||||||||
|
Fiscal Years Ended |
|||||||
|
March 25, |
March 26, |
March 28, |
|||||
|
2017 |
2016 |
2015 |
|||||
U.S. federal statutory rate |
35.0 | 35.0 | 35.0 | |||||
Foreign income taxed at different rates |
(8.6) | (0.6) | 7.3 | |||||
Research and development tax credits |
(1.8) | (5.6) | (3.6) | |||||
Stock based compensation |
(7.3) |
- |
- |
|||||
Nondeductible expenses |
- |
0.1 | 2.3 | |||||
Other |
(0.2) | 0.9 | (1.3) | |||||
Effective tax rate |
17.1 | 29.8 | 39.7 |
|
|||||
|
March 25, |
March 26, |
|||
|
2017 |
2016 |
|||
Deferred tax assets: |
|||||
Accrued expenses and allowances |
$ |
9,002 |
$ |
3,761 | |
Net operating loss carryforwards |
6,294 | 24,592 | |||
Research and development tax credit carryforwards |
13,977 | 9,649 | |||
Stock based compensation |
17,356 | 16,071 | |||
Other |
9,141 | 9,976 | |||
Total deferred tax assets |
$ |
55,770 |
$ |
64,049 | |
Valuation allowance for deferred tax assets |
(12,570) | (10,773) | |||
Net deferred tax assets |
$ |
43,200 |
$ |
53,276 | |
|
|||||
Deferred tax liabilities: |
|||||
Depreciation and amortization |
$ |
13,837 |
$ |
13,607 | |
Acquisition intangibles |
16,301 | 21,844 | |||
Total deferred tax liabilities |
$ |
30,138 |
$ |
35,451 | |
Total net deferred tax assets |
$ |
13,062 |
$ |
17,825 |
|
|||||
|
March 25, |
March 26, |
|||
|
2017 |
2016 |
|||
Beginning balance |
$ |
18,796 |
$ |
- |
|
Additions based on tax positions related to the current year |
12,127 | 12,592 | |||
Additions based on tax positions related to prior years |
- |
6,204 | |||
Reductions based on tax positions related to the prior years |
(65) |
- |
|||
Ending balance |
$ |
30,858 |
$ |
18,796 |
|
|
||||||||
|
Fiscal Years Ended |
|||||||
|
March 25, |
March 26, |
March 28, |
|||||
|
2017 |
2016 |
2015 |
|||||
Portable Audio Products |
$ |
1,373,848 |
$ |
989,101 |
$ |
740,301 | ||
Non-Portable Audio and Other Products |
165,092 | 180,150 | 176,267 | |||||
|
$ |
1,538,940 |
$ |
1,169,251 |
$ |
916,568 |
|
||||||||
|
Fiscal Years Ended |
|||||||
|
March 25, |
March 26, |
March 28, |
|||||
|
2017 |
2016 |
2015 |
|||||
United States |
$ |
36,024 |
$ |
73,889 |
$ |
31,977 | ||
European Union (excluding United Kingdom) |
9,809 | 12,745 | 13,629 | |||||
United Kingdom |
5,741 | 5,687 | 2,805 | |||||
China |
1,249,325 | 823,843 | 728,413 | |||||
Hong Kong |
181,283 | 10,647 | 15,087 | |||||
Japan |
11,819 | 27,898 | 14,353 | |||||
South Korea |
2,403 | 193,388 | 69,327 | |||||
Taiwan |
14,426 | 9,249 | 15,272 | |||||
Other Asia |
16,585 | 8,657 | 10,991 | |||||
Other non-U.S. countries |
11,525 | 3,248 | 14,714 | |||||
Total consolidated sales |
$ |
1,538,940 |
$ |
1,169,251 |
$ |
916,568 |
|
|||||
|
Fiscal Years Ended |
||||
|
March 25, |
March 26, |
|||
|
2017 |
2016 |
|||
United States |
$ |
120,212 |
$ |
125,674 | |
European Union (excluding United Kingdom) |
793 | 253 | |||
United Kingdom |
44,981 | 34,632 | |||
China |
565 | 483 | |||
Hong Kong |
5 | 1 | |||
Japan |
243 | 260 | |||
South Korea |
202 | 110 | |||
Taiwan |
231 | 180 | |||
Other Asia |
50 | 29 | |||
Other non-U.S. countries |
857 | 1,034 | |||
Total consolidated property, plant and equipment, net |
$ |
168,139 |
$ |
162,656 |
|
|
|||||||||||
|
Fiscal Year 2017 |
||||||||||
|
1st |
2nd |
3rd |
4th |
|||||||
|
Quarter |
Quarter |
Quarter |
Quarter |
|||||||
|
|||||||||||
Net sales |
$ |
259,428 |
$ |
428,619 |
$ |
523,029 |
$ |
327,864 | |||
Gross profit |
126,685 | 211,699 | 255,152 | 164,279 | |||||||
Net income |
18,071 | 86,039 | 122,041 | 35,058 | |||||||
Basic income per share |
$ |
0.29 |
$ |
1.37 |
$ |
1.91 |
$ |
0.55 | |||
Diluted income per share |
0.27 | 1.30 | 1.83 | 0.52 |
|
|||||||||||
|
Fiscal Year 2016 |
||||||||||
|
1st |
2nd |
3rd |
4th |
|||||||
|
Quarter |
Quarter |
Quarter |
Quarter |
|||||||
|
|||||||||||
Net sales |
$ |
282,633 |
$ |
306,756 |
$ |
347,863 |
$ |
231,999 | |||
Gross profit |
132,454 | 142,221 | 164,911 | 115,254 | |||||||
Net income |
33,354 | 34,880 | 41,384 | 14,012 | |||||||
Basic income per share |
$ |
0.53 |
$ |
0.55 |
$ |
0.65 |
$ |
0.22 | |||
Diluted income per share |
0.50 | 0.53 | 0.63 | 0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|