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CRUS > SEC Filings for CRUS > Form 10-Q on 26-Jan-2012All Recent SEC Filings

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Form 10-Q for CIRRUS LOGIC INC


26-Jan-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read along with the unaudited consolidated condensed financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended March 26, 2011, contained in our fiscal year 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("Commission") on May 25, 2011. We maintain a web site at investor.cirrus.com, which makes available free of charge our most recent annual report and all other filings we have made with the SEC.

This Management's Discussion and Analysis of Financial Condition and Results of Operations and certain information incorporated herein by reference contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations, estimates, forecasts and projections and the beliefs and assumptions of our management. In some cases, forward-looking statements are identified by words such as "expect," "anticipate," "target," "project," "believe," "goals," "estimates," "intend," and variations of these types of words and similar expressions which are intended to identify these forward-looking statements. In addition, any statements that refer to our plans, expectations, strategies or other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statement for any reason.

For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see "Item 1A - Risk Factors Affecting our Business and Prospects" in our 2011 Annual Report on Form 10-K filed with the Commission on May 25, 2011, and in Part II, Item IA "Risk Factors" within this quarterly report. Readers should carefully review these risk factors, as well as those identified in other documents filed by us with the Commission.

Overview

Cirrus Logic, Inc. ("Cirrus Logic," "Cirrus," "We," "Us," "Our," or the "Company") develops high-precision, analog and mixed-signal integrated circuits ("ICs") for a broad range of audio and energy markets. Building on our diverse analog mixed-signal patent portfolio, Cirrus Logic delivers highly optimized products for consumer and commercial audio, automotive entertainment and targeted industrial and energy-related applications. We develop ICs, board-level modules and hybrids for high-power amplifier applications branded as the Apex Precision Power™ ("Apex") line of products and provide complete system reference designs based on our technology that enable our customers to bring products to market in a timely and cost-effective manner.


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Critical Accounting Policies

Our discussion and analysis of the Company's financial condition and results of operations are based upon the unaudited consolidated condensed financial statements included in this report, which have been prepared in accordance with U. S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts. We evaluate the estimates on an on-going basis. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.

There were no material changes in the first nine months of fiscal year 2012 to the information provided under the heading "Critical Accounting Policies" included in our Annual Report on Form 10-K for the fiscal year ended March 26, 2011.

Results of Operations

The following table summarizes the results of our operations for the third
quarter and first nine months of fiscal years 2012 and 2011 as a percentage of
net sales. All percentage amounts were calculated using the underlying data in
thousands, unaudited:



                                                       September 30,        September 30,         September 30,        September 30,
                                                                                 Percentage of Net Sales
                                                              Three Months Ended                         Nine Months Ended
                                                      December 31,         December 25,          December 31,         December 25,
                                                          2011                 2010                  2011                 2010
Audio products                                                    86 %                 76 %                  82 %                 71 %
Energy products                                                   14 %                 24 %                  18 %                 29 %

Net sales                                                        100 %                100 %                 100 %                100 %
Cost of sales                                                     46 %                 45 %                  47 %                 44 %
Gross margin                                                      54 %                 55 %                  53 %                 56 %

Research and development                                          19 %                 17 %                  19 %                 17 %
Selling, general and administrative                               13 %                 14 %                  15 %                 15 %
Restructuring and other costs, net                                -                     0 %                  -                     0 %
Impairment of non-marketable securities                           -                    -                     -                     0 %
Provision for litigation expenses and settlements                 -                    -                     -                     0 %
Patent agreement, net                                             -                    -                     -                    (1 %)

Total operating expenses                                          32 %                 31 %                  34 %                 31 %

Income from operations                                            22 %                 24 %                  19 %                 25 %

Interest income, net                                               0 %                  0 %                   0 %                  0 %
Other income (expense), net                                        0 %                  0 %                   0 %                  0 %

Income before income taxes                                        22 %                 24 %                  19 %                 25 %
Provision (benefit) for income taxes                               8 %                 (2 )%                  7 %                 (1 %)

Net income                                                        14 %                 26 %                  12 %                 26 %

Net Sales

Net sales for the third quarter of fiscal year 2012 increased $26.7 million, or 28 percent to $122.4 million from $95.6 million in the third quarter of fiscal year 2011. Net sales from our audio products increased $32.7 million, or 45 percent, primarily due to increased sales in our portable, surround codecs and DSP products partially offset by decreases in DAC products during the comparable time period in the prior fiscal year. Energy product sales decreased $6.0 million, or 26 percent, during the third quarter of fiscal year 2012 versus the comparable quarter of the prior fiscal year due primarily to sales reductions of our seismic products, as well as additional decreased sales across various products lines such as our power amplifier and power meter products.

Net sales for the first nine months of fiscal year 2012 increased $38.1 million, or 14 percent, to $316.2 million from $278.1 million for the first nine months of fiscal year 2011. Net sales from our audio products increased $62.3 million, or 32 percent, as compared to the comparable period from the prior fiscal year and were attributable to increased sales in our portable products. Energy product sales decreased $24.3 million, or 30 percent, during the first nine months of fiscal year 2012 versus the comparable period of the prior fiscal year. These decreases were attributable to sales reductions across various products within the energy product group and in particular to a year-over-year reduction in sales of seismic, end-of-life energy products, power amplifier, and power meter products.


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Export sales, principally to Asia, including sales to U.S.-based customers with manufacturing plants overseas, were 90 percent and 83 percent of net sales during the third quarter of fiscal years 2012 and 2011, respectively. For the first nine months of fiscal years 2012 and 2011, export sales, principally to Asia, were 88 percent and 83 percent of net sales, respectively. Our sales are denominated primarily in U.S. dollars. As a result, we have not entered into foreign currency forward exchange and option contracts.

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 an external sales representative or distributor, or through a third party manufacturer contracted to produce their designs. For the third quarter of fiscal years 2012 and 2011, our ten largest end customers represented approximately 80 percent and 67 percent of our sales, respectively. For the first nine months of fiscal years 2012 and 2011, our ten largest end customers represented approximately 74 percent and 60 percent of our sales, respectively.

We had one end customer, Apple Inc., that purchased through multiple contract manufacturers and represented approximately 70 percent and 54 percent of the Company's total sales for the third quarter of fiscal years 2012 and 2011, respectively. This same customer represented approximately 62 percent and 44 percent of the Company's total sales for the first nine months of fiscal years 2012 and 2011, respectively.

We had one distributor, Avnet Inc., which represented approximately 12 percent and 16 percent of our sales for the three and nine month periods ending December 31, 2011, respectively. This same distributor represented approximately 21 percent and 24 percent of the Company's total sales for the three and nine month periods ending December 25, 2010, respectively.

For more information, please see Part II-Item 1A-"We depend on a limited number of customers and distributors for a substantial portion of our sales, and the loss of, or a significant reduction in orders from, any key customer or distributor could significantly reduce our sales."

No other end customer or distributor represented more than 10 percent of net sales for the three and nine month periods ending December 31, 2011, or December 25, 2010.

Gross Margin

Gross margin was 54.0 percent in the third quarter of fiscal year 2012, down from 54.9 percent in the third quarter of fiscal year 2011. Gross margin during the current fiscal quarter was primarily reduced by the change in product mix to higher revenue in our lower margin Audio products combined with a reduction in sales from our higher margin Energy products.

Gross margin was 53.2 percent in the first nine months of fiscal year 2012, down from 56.1 percent in the first nine months of fiscal year 2011. Gross margin year over year was affected by a reduction in the sales of our higher margin energy products.

Research and Development Expense

Research and development expense for the third quarter of fiscal year 2012 was $23.1 million, an increase of $6.8 million, or 42 percent, from $16.3 million in the third quarter of fiscal year 2011. This increase was primarily due to a 22 percent increase in research and development headcount and the associated employee related expenses, coupled with higher engineering software contract expenses and product development expenses.


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Research and development expense for the first nine months of fiscal year 2012 was $61.6 million, an increase of $14.7 million, or 31 percent, from $46.9 million in the first nine months of fiscal year 2011. This increase was primarily due to an increase in research and development headcount and associated employee related expenses, coupled with higher software maintenance contract expenses and product development expenses.

Selling, General and Administrative Expense

Selling, general and administrative ("SG&A") expense in the third quarter of fiscal year 2012 was $16.5 million, an increase of $3.1 million, or 23 percent, from $13.4 million in the third quarter of fiscal year 2011. The increase was primarily attributable to a 7 percent increase in SG&A headcount as well as employee related expenses and equipment costs.

Selling, general and administrative expense in the first nine months of fiscal year 2012 was $47.9 million, an increase of $5.0 million, or 12 percent, from $42.8 million in the first nine months of fiscal year 2011. The increase was primarily attributable to increased salaries and benefits costs attributable to the 7 percent increase in SG&A headcount, increased equipment expenses, higher depreciation and amortization expenses, office rent expense, and outside professional services.

Restructuring and Other Costs, Net

The Company's remaining restructuring initiative relates to our facilities abandonment activities which commenced in fiscal year 2004. For the quarter ending December 25, 2010, the Company recognized a $0.4 million release for changed assumptions on future rent occupation and sublease income. For the first nine months of fiscal year 2011, we incurred a net reduction in the fiscal year 2004 restructuring accrual in the amount of $0.8 million. The net reduction reflects cash payments of $0.9 million, partially offset by an additional accrual of $0.1 million for recurring accretion activity and a six thousand dollar net charge for changed assumptions on future sublease income. The entries to record the changed sublease assumptions are reflected as a separate line item on the consolidated condensed statement of operations in operating expenses under the heading "Restructuring and other costs, net."

Provision for Litigation Expenses and Settlements

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."

Patent Agreement, Net

On July 13, 2010, we entered into a Patent Purchase Agreement for the sale of certain Company owned patents. As a result of this agreement, on August 31, 2010, the Company received cash consideration of $4.0 million from the purchaser. The proceeds were recorded as a recovery of costs previously incurred and are reflected as a separate line item on the consolidated condensed statement of operations in operating expenses under the caption "Patent agreement, net."

Income Taxes

We recorded income tax expense of $9.7 million and $21.8 million for the third quarter and first nine months of fiscal year 2012, both of which were primarily non-cash, on pre-tax income of $26.4 million and $58.9 million, respectively, yielding effective tax rates of 36.7 percent and 36.9 percent, respectively. Our income tax expense for the third quarter and first nine months of fiscal year 2012 is based on estimated effective tax rates 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 rates were impacted primarily by the worldwide mix of consolidated earnings before taxes. Our income tax expense for the third quarter and first nine months of fiscal year 2012 was slightly above the federal statutory rate primarily due to the effect of state income taxes and nondeductible expenses.


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We recorded an income tax benefit of $1.3 million and $2.8 million for the third quarter and first nine months of fiscal year 2011, respectively, yielding an effective tax benefit rate of 5.7 percent and 4.0 percent, respectively. Our income tax benefit for the third quarter and first nine months of fiscal year 2011 is based on an estimated effective tax rate 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. This assessment resulted in a $1.8 million and $4.1 million net increase in deferred tax assets for the three and nine month periods ended December 25, 2010, respectively. Our income tax expense for the third quarter and first nine months 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.

Recently Issued Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (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 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. For public entities, the amendments 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 ASU should be applied retrospectively. For public entities, the amendments 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.

Liquidity and Capital Resources

We require cash to fund our operating expenses and working capital requirements, including outlays for research and development, capital expenditures, stock repurchases, investments in marketable securities, and strategic acquisitions. Our principal sources of liquidity are cash on hand, cash generated from operations, cash generated from the sale and maturity of marketable securities, and funds from equity issuances.


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Cash provided by operating activities is net income adjusted for certain non-cash items and changes in certain current assets and current liabilities. Our operational cash flows are affected by the ability of our operations to generate cash, and our management of our assets and liabilities, including both working capital and long-term assets and liabilities. Net cash provided by operating activities was $51.9 million for the first nine months of fiscal year 2012 as compared to $66.6 million for the corresponding period of fiscal year 2011. The primary source of cash from operations during the current period was related to the cash components of our net income, in addition to a $21.3 million net increase in operating assets and liabilities. Working capital fluctuates depending on end-market demand and our management of certain items such as receivables, inventory and payables. In times of escalating demand, our working capital requirements may increase as we purchase additional manufacturing materials and increase production. Our working capital, including cash, was $220.3 million at December 31, 2011 and $267.4 million at March 26, 2011. During the first nine months of fiscal year 2011, net cash provided by operating activities was $66.6 million. The primary source of cash from operations during the first nine months of fiscal year 2011 was related to the cash components of our net income, in addition to a $14.7 million net increase in operating assets and liabilities.

Net cash provided by investing activities was $24.5 million during the first nine months of fiscal year 2012 as compared to net cash used in investing activities of $55.4 million during the first nine months of fiscal year 2011, primarily as a result of a net $52.7 million received from the sale and maturity of marketable securities. We utilized $25.7 million for the purchase of property, equipment, and software, including approximately $14.2 million in our new headquarters facility construction costs and $3.4 million for the purchase of additional land and a building adjacent to our new headquarters facility currently under construction. Further, investments in technology required an additional $6.0 million during the nine month period ending December 31, 2011. Net cash used in investing during the first nine months of fiscal year 2011 was $55.4 million, primarily as a result of a net $36.5 million utilized for the purchase of marketable securities. In addition, we utilized $18.9 million for the purchase of property, equipment, software, and technology assets, including $10.8 million for the purchase of land for our new headquarters facility.

Net cash used in financing activities was $75.5 million during the first nine months of fiscal year 2012 as compared to $1.2 million provided by financing activities during the first nine months of fiscal year 2011. The use of cash during the first nine months of fiscal year 2012 was primarily attributable to the use of $76.8 million to repurchase 4.9 million shares of the Company's common stock at an average price of $15.63, as discussed previously in Note 12 - Stockholder's Equity of the Notes to Consolidated Condensed Financial Statements contained in Item 1. This use of cash in financing activities was partially offset by the issuance of 261 thousand shares of common stock in connection with option exercises during the current fiscal year, which resulted in proceeds of $1.3 million. Net cash provided by financing activities during the first nine months of fiscal year 2011 was $1.2 million, primarily attributable to the issuance of 3.7 million shares of common stock in connection with option exercises, which netted $24.0 million in proceeds. This source of cash provided by financing activities was substantially offset by the use of $22.8 million to repurchase 1.8 million shares of the Company's common stock at an average price of $12.94.

As of December 31, 2011, we had restricted cash of $2.9 million, which primarily secures certain obligations under our lease agreement for the headquarters and engineering facility in Austin, Texas. The cash restriction for this lease agreement was reduced during the second quarter of fiscal year 2012 and will expire in May 2012.

The Company continued construction of our new headquarters facility in Austin, Texas, with completion expected in the summer of calendar year 2012. We estimate that total facility construction costs will be approximately $31 million. In addition, we estimate that we will incur an additional $8 million in furniture, fixtures, and equipment in order to fully move our headquarters employees into this new facility. Project to date, we have paid $17.6 million related to the new building. It is anticipated that the project will be funded internally from existing and future cash flows.

On December 22, 2011, the Company entered into a Capacity Investment and Loading Agreement with STATS ChipPAC Ltd. pursuant to which we will pay $10 million to STATS ChipPAC in order to secure assembly and test capacity for certain products. We paid an initial $5 million payment on January 24, 2012, and the remaining $5 million payment is due thirty days after certain capacity expansion commitments have been achieved by STATS ChipPAC. As part of the agreement, we are eligible to receive rebates on our purchases up to the full amount of our $10 million payments upon our meeting certain purchase volume milestones. Based on our current projections, we expect to receive the full amount of our $10 million payments back in rebates during the term of the agreement.


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We have not paid cash dividends on our common stock and currently intend to continue our policy of retaining any earnings for reinvestment in our business. . . .

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