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1. Basis of Presentation
The consolidated condensed financial statements have been prepared by Cirrus Logic, Inc. ("we," "us," "our," or the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission ("Commission"). The accompanying unaudited consolidated condensed financial statements do not include complete footnotes and financial presentations. As a result, these financial statements should be read along with the audited consolidated financial statements and notes thereto for the year ended March 26, 2011, included in our Annual Report on Form 10-K filed with the Commission on May 25, 2011. In our opinion, the financial statements reflect all adjustments, including normal recurring adjustments, necessary for a fair presentation of the financial position, operating results and cash flows, for those periods presented. The preparation of financial statements in conformity with United States ("U.S.") generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect reported assets, liabilities, revenues and expenses, as well as disclosure of contingent assets and liabilities. Actual results could differ from those estimates and assumptions. Moreover, the results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the entire year. Certain reclassifications have been made to the 2011 fiscal year presentation to conform to the fiscal year 2012 presentation. This reclassification had no effect on the results of operations or stockholders' equity.
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2. Recently Issued Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-04, Fair Value Measurement (Accounting Standards Codification ("ASC") Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this ASU result in common fair value measurement and disclosure requirements in U.S. GAAP and international financial reporting standards ("IFRS"). Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. To improve consistency in application across jurisdictions some changes in wording are necessary to ensure that U.S. GAAP and IFRS fair value measurement and disclosure requirements are described in the same way. The ASU also provides for certain changes in current GAAP disclosure requirements, for example with respect to the measurement of level 3 assets and for measuring the fair value of an instrument classified in a reporting entity's shareholders' equity. The amendments in this ASU are to be applied prospectively, and are effective during interim and annual periods beginning after December 15, 2011. The adoption of this guidance is not anticipated to have a material impact on our consolidated financial position, results of operations or cash flows.
In May 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (ASC Topic 220) — Presentation of Comprehensive Income. The amendments from this update will result in more converged guidance on how comprehensive income is presented under both U.S. GAAP and IFRS. With this update to ASC 220, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income, nor does it affect how earnings per share is calculated or presented. Current U.S. GAAP allows reporting entities three alternatives for presenting other comprehensive income and its components in financial statements. One of those presentation options is to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. This update eliminates that option. The amendments in this Update should be applied retrospectively, and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance is not anticipated to have a material impact on our consolidated financial position, results of operations or cash flows.
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3. Fair Value of Financial Instruments
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
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Level 1 - Quoted prices in active markets for identical assets or liabilities. |
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Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
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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. |
As of June 25, 2011, the Company's cash and cash equivalents and restricted investments of $47.2 million, and short and long-term investments of $108.4 million, were valued using quoted prices generated by market transactions involving identical assets, or Level 1 assets, as defined under FASB ASC Topic 820.
The following table summarizes the carrying amount and fair value of the Company's financial instruments (in thousands):
| June 25, 2011 | March 26, 2011 | |||||||
| Financial instruments | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||
| Cash and cash equivalents | $ 41,490 | $ 41,490 | $ 37,039 | $ 37,039 | ||||
| Restricted investments | 5,755 | 5,755 | 5,786 | 5,786 | ||||
| Marketable securities | 107,016 | 107,016 | 159,528 | 159,528 | ||||
| Long-term marketable securities | 1,334 | 1,334 | 12,702 | 12,702 | ||||
| $ 155,595 | $ 155,595 | $ 215,055 | $ 215,055 | |||||
Financial assets with carrying amounts approximating fair value include cash and cash equivalents, restricted investments, and marketable securities. The carrying amount of these financial assets approximates fair value because of their short maturity. The fair values of long-term marketable securities are valued using quoted prices generated by market transactions involving identical assets.
The Company's investments that have original maturities greater than 90 days have been classified as available-for-sale securities in accordance with ASC Topic 320 - "Investments – Debt and Equity Securities." Marketable securities are categorized on the consolidated condensed balance sheet as restricted investments and marketable securities, as appropriate.
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value (Net Carrying Amount) | |||||
| Corporate securities – U.S. | $ 43,723 | $ 26 | $ (30) | $ 43,719 | ||||
| U.S. Government securities | 21,485 | 9 | - | 21,494 | ||||
| Agency discount notes | 10,841 | 6 | - | 10,847 | ||||
| Commercial paper | 32,280 | 10 | - | 32,290 | ||||
| Total securities | $ 108,329 | $ 51 | $ (30) | $ 108,350 |
The Company's specifically identified gross unrealized losses of $30 thousand relates to ten different securities with amortized costs of approximately $21.5 million at June 25, 2011. The securities with gross unrealized losses have been in a continuous unrealized loss position for less than 12 months as of June 25, 2011.
The following table is a summary of available-for-sale securities at March 26, 2011 (in thousands):
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value (Net Carrying Amount) | |||||
| Corporate securities – U.S. | $ 64,228 | $ 22 | $ (38) | $ 64,212 | ||||
| U.S. Government securities | 35,268 | 13 | - | 35,281 | ||||
| Agency discount notes | 16,588 | 5 | (2) | 16,591 | ||||
| Commercial paper | 56,130 | 23 | (7) | 56,146 | ||||
| Total securities | $ 172,214 | $ 63 | $ (47) | $ 172,230 |
The Company's specifically identified gross unrealized losses of $47 thousand relates to 28 different securities with a total amortized cost of approximately $61.8 million at March 26, 2011. The securities with gross unrealized losses had been in a continuous unrealized loss position for less than 12 months as of March 26, 2011.
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4. Accounts Receivable, net
The following are the components of accounts receivable, net (in thousands):
| June 25, | March 26, | ||||
| 2011 | 2011 | ||||
| Gross accounts receivable | $ 42,399 | $ 39,519 | |||
| Allowance for doubtful accounts | (432) | (421) | |||
| $ 41,967 | $ 39,098 |
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Inventories are comprised of the following (in thousands):
| June 25, | March 26, | ||||
| 2011 | 2011 | ||||
| Work in process | $ 24,989 | $ 22,048 | |||
| Finished goods | 21,862 | 18,449 | |||
| $ 46,851 | $ 40,497 |
The increase in inventory balances at June 25, 2011, as compared to March 26, 2011, is primarily related to the expected increased demand for our products, and reflects planned inventory builds.
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6. Income Taxes
We recorded income tax expense of $5.3 million, primarily a non-cash charge, on pre-tax income of $14.5 million for the first quarter of fiscal year 2012, yielding an effective tax rate of 36.6 percent. Our income tax expense for the first quarter of fiscal year 2012 is based on an estimated effective tax rate derived from an estimate of consolidated earnings before taxes, adjusted for nondeductible expenses and other permanent differences for fiscal year 2012. The estimated effective tax rate was impacted primarily by the worldwide mix of consolidated earnings before taxes. Our income tax expense for the first quarter of fiscal year 2012 was slightly above the federal statutory rate primarily due to the effect of state income taxes and nondeductible expenses.
We recorded income tax expense of $155 thousand for the first quarter of fiscal year 2011, yielding an effective tax rate of 0.9 percent. Our income tax expense for the first quarter of fiscal year 2011 was based on an estimated effective tax rate, which was derived from an estimate of consolidated earnings before taxes for fiscal year 2011. The estimated effective tax rate was impacted primarily by the worldwide mix of consolidated earnings before taxes and an assessment regarding the ability to realize our deferred tax assets. Our income tax expense for the first quarter of fiscal year 2011 was less than the federal statutory rate primarily as a result of the utilization of a portion of our U.S. deferred tax asset and related valuation allowance.
We had no unrecognized tax benefits as of June 25, 2011. We do not expect our unrecognized tax benefits to change significantly over the next 12 months. Our policy is to recognize interest and penalties related to income tax matters in income tax expense. As of June 25, 2011, the balance of accrued interest and penalties was zero. No interest or penalties were incurred during the first quarter of fiscal year 2012.
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 2008 through 2011 remain open to examination by the major taxing jurisdictions to which we are subject.
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8. Legal Matters
During the first quarter of fiscal year 2011, the Company incurred $135 thousand in settlement costs related to a dispute with a former distributor of the Company's products. This transaction is reflected as a separate line item on the consolidated condensed statement of operations in operating expenses under the caption "Provision for litigation expenses and settlements."
From time to time, other various claims, charges and litigation are asserted or commenced against us arising from, or related to, contractual matters, intellectual property, employment disputes, as well as other issues. Frequent claims and litigation involving these types of issues are not uncommon in our industry. As to any of these claims or litigation, we cannot predict the ultimate outcome with certainty.
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9. Stockholder's Equity
Common Stock
The Company issued 0.1 million and 2.0 million shares of common stock, respectively, for the three month periods ending June 25, 2011 and June 26, 2010, in connection with stock option exercises during the periods.
Comprehensive Income
The components of comprehensive income, net of tax, are as follows (in thousands):
| Three Months Ended | ||||
| June 25, | June 26, | |||
| 2011 | 2010 | |||
| Net income | $ 9,178 | $ 17,602 | ||
| Adjustments to arrive at comprehensive income: | ||||
| Change in unrealized gain on marketable securities | 5 | (100) | ||
| Comprehensive income | $ 9,183 | $ 17,502 | ||
Share Repurchase Program
On November 4, 2010, we announced that a new $80 million share repurchase program had been approved by our Board of Directors. In the third quarter of fiscal year 2011, 216 thousand shares were repurchased at a cost of $2.8 million, or an average price of $12.80 per share. In the first quarter of fiscal year 2012, the Company completed the repurchase of approximately 3.5 million shares of the Company's stock, at a total cost of $56.5 million, or an average cost of $15.94 per share. As of June 25, 2011, approximately $20.7 million remains available for share repurchases under this $80 million share repurchase program. All shares of our common stock that were repurchased were cancelled and retired.
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10. Segment Information
We determine our operating segments in accordance with FASB ASC Topic 280, "Segment Reporting." Our Chief Executive Officer ("CEO") has been identified as the chief operating decision maker as defined by FASB ASC Topic 280.
The Company operates and tracks its results in one reportable segment based on the aggregation of activity from its two product lines under ASC Topic 280. 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):
| Three Months Ended | ||||
| June 25, | June 26, | |||
| 2011 | 2010 | |||
| Audio Products | $ 71,119 | $ 53,988 | ||
| Energy Products | 21,123 | 27,927 | ||
| $ 92,242 | $ 81,915 | |||
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| June 25, 2011 | March 26, 2011 | |||||||
| Financial instruments | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||
| Cash and cash equivalents | $ 41,490 | $ 41,490 | $ 37,039 | $ 37,039 | ||||
| Restricted investments | 5,755 | 5,755 | 5,786 | 5,786 | ||||
| Marketable securities | 107,016 | 107,016 | 159,528 | 159,528 | ||||
| Long-term marketable securities | 1,334 | 1,334 | 12,702 | 12,702 | ||||
| $ 155,595 | $ 155,595 | $ 215,055 | $ 215,055 | |||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value (Net Carrying Amount) | |||||
| Corporate securities – U.S. | $ 43,723 | $ 26 | $ (30) | $ 43,719 | ||||
| U.S. Government securities | 21,485 | 9 | - | 21,494 | ||||
| Agency discount notes | 10,841 | 6 | - | 10,847 | ||||
| Commercial paper | 32,280 | 10 | - | 32,290 | ||||
| Total securities | $ 108,329 | $ 51 | $ (30) | $ 108,350 |
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value (Net Carrying Amount) | |||||
| Corporate securities – U.S. | $ 64,228 | $ 22 | $ (38) | $ 64,212 | ||||
| U.S. Government securities | 35,268 | 13 | - | 35,281 | ||||
| Agency discount notes | 16,588 | 5 | (2) | 16,591 | ||||
| Commercial paper | 56,130 | 23 | (7) | 56,146 | ||||
| Total securities | $ 172,214 | $ 63 | $ (47) | $ 172,230 |
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| June 25, | March 26, | ||||
| 2011 | 2011 | ||||
| Gross accounts receivable | $ 42,399 | $ 39,519 | |||
| Allowance for doubtful accounts | (432) | (421) | |||
| $ 41,967 | $ 39,098 |
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| June 25, | March 26, | ||||
| 2011 | 2011 | ||||
| Work in process | $ 24,989 | $ 22,048 | |||
| Finished goods | 21,862 | 18,449 | |||
| $ 46,851 | $ 40,497 |
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| Three Months Ended | ||||
| June 25, | June 26, | |||
| 2011 | 2010 | |||
| Net income | $ 9,178 | $ 17,602 | ||
| Adjustments to arrive at comprehensive income: | ||||
| Change in unrealized gain on marketable securities | 5 | (100) | ||
| Comprehensive income | $ 9,183 | $ 17,502 | ||
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| Three Months Ended | ||||
| June 25, | June 26, | |||
| 2011 | 2010 | |||
| Audio Products | $ 71,119 | $ 53,988 | ||
| Energy Products | 21,123 | 27,927 | ||
| $ 92,242 | $ 81,915 | |||
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