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ALPHA & OMEGA SEMICONDUCTOR LTD - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion of the financial condition and results of our operations in conjunction with our consolidated financial statements and the notes to those statements included elsewhere in this annual report. Our consolidated financial statements contained in this annual report are prepared in accordance with U.S. GAAP. Overview We are a designer, developer and global supplier of a broad range of power semiconductors. We have a broad portfolio of power semiconductors that we actively market and we seek to continuously add to our product portfolio each year. Our portfolio of power semiconductors is extensive, with over 800 products, and has grown rapidly with the introduction of over 120 new products each year during the past three fiscal years. In addition, our patent portfolio has grown to include 176 patents and 191 patents applications in the United States at the end of fiscal year 2011. We seek to differentiate ourselves by integrating our expertise in device physics, process technology, design and advanced packaging to optimize product performance and cost. Our portfolio of products targets high-volume applications, including portable computers, flat panel TVs, smart phones, battery packs, portable media players, motor control and power supplies. During the fiscal year ended June 30, 2011, we launched several key product families and technologies to enable high efficiency power conversion solutions. We broadened our MOSFET product family by expanding our high voltage product line with the introduction of the AlphaMOSTM and AlphaIGBTTM technology platform that lower on-resistance to enable high efficiency AC-DC conversion. The development in high voltage product line enables us to broaden the markets we serve. We also released our third generation EzBuck DC-DC Power IC family which offers higher efficiency and output current to power the latest chipsets used in a wide range of consumer applications. Our new PairFET advanced packaging technology allows high power density DC-DC conversion in computing and communication applications by integrating two MOSFETs in a single package, with the performance of two independent MOSFETs. We have assembled a team of scientists and engineers globally and have developed an extensive portfolio of intellectual property. Our intellectual property portfolio and technical knowledge encompass major aspects of power semiconductors, providing us with a platform to rapidly introduce innovative products to address the increasingly complex power requirements of advanced electronics. Our transnational business model leverages global resources, including leading research and development expertise in the United States, cost-effective semiconductor manufacturing in Asia and localized sales and technical support in several fast-growing electronics hubs globally. Our core research and development team, based in Silicon Valley, is complemented by our design center in Taiwan and process, packaging and testing engineers in China. While we currently utilize third-party foundries for our wafer fabrication, we are in the process of transition from a fabless to a "fab-lite" business model. Under this model, we intend to allocate our wafer manufacturing requirements to both in-house and outsourced capacities, which we believe would allow us to accelerate technology development, bring products to market faster, reduce manufacturing costs and improve our long-term financial performance. As part of this transition, we recently announced our intention to acquire certain assets associated with a 200mm wafer fabrication facility located in Hillsboro, Oregon from IDT. We also deploy and implement our proprietary power discrete processes and equipment at third-party foundries to maximize the performance and quality of our products. In addition, in December 2010, we acquired control of APM. After the acquisition, APM became our wholly-owned subsidiary and we primarily rely upon our two in-house facilities for packaging and testing. We believe our in-house packaging and testing capability provides us with a competitive advantage in proprietary packaging technology, product quality, cost, flexibility and cycle time. On December 3, 2010, we acquired control of APM in a cash and stock transaction with a purchase price of $40.0 million. We had a 43% equity interest in APM prior to the acquisition and the equity investment was accounted for under the equity method of accounting. After the acquisition, APM became our wholly-owned subsidiary. We formerly prepared our consolidated financial statements under IFRS and filed our IFRS financial statements for the fiscal year ended June 30, 2010 in our annual report on Form 20-F. Pursuant to the SEC requirements, we assessed our ownership structure as of December 31, 2010 and determined that we no longer qualified as a foreign private issuer. As a result, beginning on July 1, 2011, we are required to report our financial statements under U.S. GAAP and file our annual report on Form 10-K, as well as to comply with additional SEC reporting obligations as a domestic issuer. Accordingly, we have converted our consolidated financial statements from IFRS to U.S. GAAP. See "Item 6. Selected Consolidated Financial Data" for a discussion of relevant differences of individual items in the financial statements between IFRS and U.S. GAAP. Our revenue was $361.3 million for the fiscal year ended June 30, 2011, represented an increase of $59.5 million, or 19.7%, from $301.8 million for the fiscal year ended June 30, 2010. Our net income was $37.8 million, or $1.51 per diluted 35-------------------------------------------------------------------------------- Table of Contents share, for fiscal year 2011, compared to a net income of $37.8 million, or $1.78 per diluted share, for fiscal year 2010. Factors affecting our performance Our performance is affected by several key factors, including the following: Global economic conditions: Because our products primarily serve consumer applications, a deterioration of the global and regional economic conditions could materially affect our revenue and results of operations. In June 2011, we began to experience a general slow down of global economic conditions, particularly in our core computing and consumer markets, that have adversely affected our results of operations. We cannot be certain as to how long this trend will continue and how much negative impact it will have on our results of operations. Distributor ordering patterns and seasonality: Our distributors place purchase orders with us based on their forecasts of end customer demand, and this demand may vary significantly depending on the sales outlooks and market and economic conditions of end customers. Because these forecasts may not be accurate, channel inventory held at our distributors may fluctuate significantly, which in turn may prompt distributors to make significant adjustments to their purchase orders placed with us. As a result, our revenue and operating results may fluctuate significantly from quarter to quarter. In addition, because our products are used in consumer electronics products, our revenue is subject to seasonality. Our sales seasonality is affected by a number of factors, including global and regional economic conditions, revenue generated from new products, changes in distributor ordering patterns in response to channel inventory adjustments and end customer demand for our products and fluctuations in consumer purchase patterns prior to major holiday seasons. However, in recent period broad fluctuations in the semiconductor markets and the global economic conditions have had a more significant impact on our results than seasonality. Product introductions and customers' specification: Our success depends on our ability to introduce products on a timely basis that meet our customers' specifications. Both factors, timeliness of product introductions and conformance to customers' requirements, are equally important in securing design wins with our customers. Our failure to introduce products on a timely basis that meet customers' specifications could adversely affect our financial performance. Erosion of average selling price: Erosion of average selling prices of established products is typical in our industry. Consistent with this historical trend, we expect that average selling prices of our established products will continue to decline in the future. However, as a normal course of business, we seek to offset the effect of declining average selling prices by reducing manufacturing cost of existing products and introducing new and higher value products. Manufacturing costs: Our gross margin may be affected by our manufacturing costs, including pricing of wafers and semiconductor raw materials, which may fluctuate from time to time largely due to the market demand and supply. Capacity utilization may also affect our gross margin because we have certain fixed costs associated with our in-house packaging and testing facilities. If we are unable to utilize the capacity of our in-house manufacturing facilities at a desirable level, our gross margin may be adversely affected. During fiscal year 2011, we acquired APM and continued to expand our in-house packaging and testing capacity. As part of our transition to a "fab-lite" business model, on August 27, 2011, we announced our intention to acquire certain assets associated with a wafer fabrication facility from IDT, which is expected to close prior to January 31, 2012. We expect the IDT acquisition to accelerate our technology and product development and reduce our manufacturing costs, thereby improving our long-term financial performance. However, we currently anticipate an initial ramp-up period of two to three quarters following the proposed acquisition, and during this period, we do not expect to observe any significant improvement in our gross margin as a result of this acquisition. Following the initial-ramp period, we expect the "fab-lite" approach would have a positive impact on our gross margin by allowing us to develop high-value products more quickly and in a more cost-effective manner. Other factors that may affect comparability APM acquisition: We held a 40.3% equity interest in APM at June 30, 2010. We made an additional equity investment of $1.8 million in APM in October 2010 resulting in a 43% equity interest in APM. The investment was accounted for under the equity method of accounting through the date of acquisition. On December 3, 2010, we acquired APM and APM's operating results were reflected in our consolidated financial statements subsequent to that date. Change in accounting estimate: During fiscal year 2011, upon the completion of APM acquisition, we performed a review and assessment of the useful lives of certain of our property and equipment. Based on the results of our review, we revised the estimated useful life of our manufacturing and facility equipment for depreciation purposes from 5 years to 8 years beginning December 1, 2010 on a prospective basis. The effect of this change was to decrease depreciation expense by $5.1 36-------------------------------------------------------------------------------- Table of Contents million, increase net income by approximately $3.9 million, net of a tax effect of $1.2 million, and increase basic net income per share by approximately $0.17 and increase diluted net income per share approximately by $0.16 for fiscal year 2011. Public company expenses: Our general and administrative expenses have increased since our IPO effective in April 2010 due to the additional legal, accounting and consulting fees as well as additional headcount that we added in order to comply with additional requirements as a public company, including costs associated with establishing and maintaining internal control over financial reporting and preparing and filing periodic reports required under federal securities laws. We also established the Employee Share Purchase Plan (the "ESPP") effective upon the completion of the IPO, and accordingly we incurred share-based compensation expenses associated with such purchase rights. In addition, our recent transition from a foreign private issuer to a domestic issuer status under the federal securities laws also requires us to incur additional legal and accounting expenses in order to comply with incremental SEC reporting obligations for a domestic issuer. Principal line items of statements of income (loss) The following describes the principal line items set forth in our consolidated statements of income (loss): Revenue We generate revenue from the sale of our power semiconductors, consisting of power discretes and power ICs. Historically, a majority of our revenue was derived from power discrete products and a small but growing amount was derived from power IC products. Because our products typically have three to five years life cycles, the rate of new product introductions is an important driver of revenue growth over time. We believe that expanding the breadth of our product portfolio is important to our business prospects, because it provides us with an opportunity to increase our total bill-of-materials within an electronic system and to address the power requirements of additional electronic systems. On December 3, 2010, we acquired APM and our revenue included APM's revenue generated by providing packaging and testing services to third-parties since the APM acquisition. Our product revenue includes the effect of the estimated stock rotation returns and price adjustments that we expect to provide to our distributors. Stock rotation returns are governed by contract and are limited to a specified percentage of the monetary value of products purchased by the distributor during a specified period. At our discretion or upon our direct negotiations with ODMs or OEMs, we may elect to grant special pricing that is below the prices at which we sold our products to the distributors; in these situations, we will grant price adjustments to the distributors reflecting such special pricing. We estimate the price adjustments for inventory at the distributors based on factors such as distributor inventory levels, pre-approved future distributor selling prices, distributor margins and demand for our products. Cost of goods sold Our cost of goods sold primarily consists of costs associated with semiconductor wafers, packaging and testing, personnel, including share-based compensation expense, overhead attributable to manufacturing, operations and procurement, yield improvements, capacity utilization, warranty and inventory reserves. As the volume of sales increases, we expect cost of goods sold to increase in absolute dollar amount. Operating expenses Our operating expenses consist of research and development and selling, general and administrative expenses. We expect that our total operating expenses will generally increase in absolute dollar amount over time due to our belief that our business will continue to grow. However, our operating expenses as a percentage of revenue may fluctuate from period to period. Research and development expenses. Our research and development expenses consist primarily of salaries, bonuses, benefits, share-based compensation expense, expenses associated with new product prototypes, travel expenses, fees for engineering services provided by outside contractors and consultants, amortization of software and design tools, depreciation of equipment and overhead costs for research and development personnel. As we continue to invest significant resources in developing new technologies and products, we expect our research and development expenses to increase in absolute dollar amount. Selling, general and administrative expenses. Our selling, general and administrative expenses consist primarily of salaries, bonuses, benefits, share-based compensation expense, product promotion costs, occupancy costs, travel expenses, expenses related to sales and marketing activities, amortization of software, depreciation of equipment, maintenance costs and other expenses for general and administrative functions as well as costs for outside professional services, including legal, audit and accounting services. We expect our selling, general and administrative expenses to increase in absolute dollar amount as we 37-------------------------------------------------------------------------------- Table of Contents expand our business. Income (loss) on equity investment in APM We had a 40.3% equity interest in APM at June 30, 2010 and a 43% equity interest in APM prior to the APM acquisition on December 3, 2010. Our investment in APM was accounted for under the equity method of accounting. Accordingly, we recorded income (loss) on equity investment in APM in our statements of income (loss). Income tax expense (benefit) We are subject to income taxes in various jurisdictions. Significant judgment and estimates are required in determining our worldwide income tax expense. The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations of different jurisdictions globally. We establish accruals for potential liabilities and contingencies based on a more likely than not threshold to the recognition and de-recognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits us to recognize a tax benefit measured at the largest amount of tax benefit that is more than likely to be realized upon settlement. If the actual tax outcome of such exposures is different from the amounts that were initially recorded, the differences will impact the income tax and deferred tax provisions in the period in which such determination is made. Changes in the location of taxable income (loss) could result in significant changes in our income tax expense. We record deferred tax assets to the extent it is more likely than not that we will be able to utilize them, based on historical profitability and our estimate of future taxable income in a particular jurisdiction. Our judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, tax planning strategies or other factors. If our assumptions and consequently our estimates change in the future, the deferred tax assets may increase or decrease, resulting in corresponding changes in income tax expense. Our effective tax rate is highly dependent upon the geographic distribution of our worldwide profits or losses, the tax laws and regulations in each geographical region where we have operations, the availability of tax credits and carry-forwards and the effectiveness of our tax planning strategies. 38-------------------------------------------------------------------------------- Table of Contents Operating results Comparison of fiscal year 2011 to fiscal year 2010 and comparison of fiscal year 2010 to fiscal year 2009 The following tables set forth selected statements of income (loss) data derived from our audited consolidated financial statements, also expressed as a percentage of revenue, for the fiscal years ended June 30, 2011, 2010 and 2009. Our historical results of operation are not necessarily indicative of the results for any future period. Fiscal Year Ended June 30, 2011 2010 2009 2011 2010 2009 (in thousands) (% of revenue) Revenue $ 361,308 $ 301,840 $ 185,076 100.0 % 100.0 % 100.0 % Cost of goods sold (1) 256,087 221,649 146,510 70.9 % 73.4 % 79.2 % Gross profit 105,221 80,191 38,566 29.1 % 26.6 % 20.8 % Operating expenses: Research and development (1) 29,470 20,943 19,273 8.2 % 7.0 % 10.4 % Selling, general and administrative (1) 37,937 26,323 20,443 10.5 % 8.7 % 11.0 % Total operating expenses 67,407 47,266 39,716 18.7 % 15.7 % 21.4 % Operating income (loss) 37,814 32,925 (1,150 ) 10.4 % 10.9 % (0.6 )% Interest income 280 39 648 0.1 % - % 0.3 % Interest expense (263 ) (189 ) (587 ) (0.1 )% (0.1 )% (0.3 )% Income (loss) on equity investment in APM 1,768 6,546 (4 ) 0.5 % 2.2 % - % Gain on equity interest in APM 837 - - 0.3 % - % - % Income (loss) before income taxes 40,436 39,321 (1,093 ) 11.2 % 13.0 % (0.6 )% Income tax expense (benefit) 2,609 1,497 (192 ) 0.7 % 0.5 % (0.1 )% Net income (loss) $ 37,827 $ 37,824 $ (901 ) 10.5 % 12.5 % (0.5 )% (1) Includes share-based compensation expense, which was allocated as follows: Fiscal Year Ended June 30, 2011 2010 2009 2011 2010 2009 (in thousands) (% of revenue) Cost of goods sold $ 629 $ 317 $ 381 0.2 % 0.1 % 0.2 % Research and development $ 1,716 $ 905 $ 1,272 0.5% 0.3 % 0.7 % Selling, general and administrative $ 3,829 $ 2,337 $ 1,931 1.1 % 0.8 % 1.0 % Revenue The following is a summary of revenue by product type: Year Ended June 30, Change 2011 2010 2009 2011 2010 (in thousands) (in thousands) (in percentage) (in thousands) (in percentage) Power discrete $ 284,094 $ 258,037 $ 165,712 $ 26,057 10.1 % $ 92,325 55.7 % Power IC 62,706 43,803 19,364 18,903 43.2 % 24,439 126.2 % Packaging and testing services 14,508 - - 14,508 100.0 % - - % $ 361,308 $ 301,840 $ 185,076 $ 59,468 19.7 % $ 116,764 63.1 % 39-------------------------------------------------------------------------------- Table of Contents Our revenue was $361.3 million for fiscal year 2011, increased by $59.5 million, or 19.7%, from $301.8 million for fiscal year 2010. The increase was primarily as a result of a 10.0% increase in unit shipments, a 4.6% increase in average selling prices due to favorable product mix and a $14.5 million increase in packaging and testing services revenue generated by APM since we acquired APM in December 2010. Toward the end of fourth quarter in fiscal year 2011, we began to experience a general slow down on a global basis in our core computing and consumer markets and softened demand causing a shift in product mix and average selling prices. We introduced 196 and 145 new products during fiscal years 2011 and 2010, respectively. New products introduced in fiscal years 2011 included high-voltage and medium-voltage products that were developed based on our new technology platforms. Revenue from these high-voltage and medium-voltage products were ramped up slowly as we gradually gained design wins in the new application markets. As we continued to expand our power IC product family, revenue from our power IC products for fiscal year 2011 increased by $18.9 million, or 43.2%, to $62.7 million from $43.8 million for fiscal year 2010. Our revenue was $301.8 million for fiscal year 2010, increased by $116.8 million, or 63.1%, from $185.1 million for fiscal year 2009. The increase was primarily as a result of a 76.3% increase in unit shipments due to increased end customer demand for our products, offset by a 7.5% decline in average selling prices. We introduced 145 and 121 new products during fiscal years 2010 and 2009, respectively. As we continued to expand our power IC product family, revenue from our power IC products for fiscal year 2010 increased by $24.4 million, or 126.2%, to $43.8 million from $19.4 million for fiscal year 2009. Cost of goods sold and gross profit Year Ended June 30, Change 2011 2010 2009 2011 2010 (in thousands) (in thousands) (in percentage) (in thousands) (in percentage) Cost of goods sold $ 256,087 $ 221,649 $ 146,510 $ 34,438 15.5 % $ 75,139 51.3 % Percentage of revenue 70.9 % 73.4 % 79.2 % Gross profit $ 105,221 $ 80,191 $ 38,566 $ 25,030 31.2 % $ 41,625 107.9 % Percentage of revenue 29.1 % 26.6 % 20.8 % Cost of goods sold was $256.1 million for fiscal year 2011, increased by $34.4 million, or 15.5%, from $221.6 million for fiscal year 2010, primarily as a result of increased unit shipments. Our gross margin improved by 2.5% to 29.1% for fiscal year 2011 from 26.6% for fiscal year 2010. This improvement was primarily due to higher factory utilization as the majority of our packaging and testing manufacturing was handled in-house after we acquired APM and a decrease in packaging and testing service fees paid to third-party contractors. We also changed our estimated depreciation life for our manufacturing machinery and equipment from 5 years to 8 years, which resulted in lower depreciation expense in fiscal year 2011. These cost reductions were partially offset by an increase in wafer prices from our primary foundry. We expect that our gross margin will continue to fluctuate in the future as a result of variations in our product mix, semiconductor wafer and raw material pricing, manufacturing labor cost and factory utilization. Cost of goods sold was $221.6 million for fiscal year 2010, increased by $75.1 million, or 51.3%, from $146.5 million for fiscal year 2009, primarily as a result of increased unit shipments. Our gross margin improved by 5.8% to 26.6% for fiscal year 2010 from 20.8% for fiscal year 2009. This improvement was primarily due to lower material costs associated with our volume purchases and lower packaging and testing costs, including savings from increased utilization of our in-house packaging and testing facility during fiscal year 2010. Research and development expenses Year Ended June 30, Change 2011 2010 2009 2011 2010 (in thousands) (in thousands) (in percentage) (in thousands) (in percentage) Research and development $ 29,470 $ 20,943 $ 19,273 $ 8,527 40.7 % $ 1,670 8.7 % Research and development expenses were $29.5 million for fiscal year 2011, increased by $8.5 million, or 40.7% from $20.9 million for fiscal year 2010. This increase was partially attributable to a $2.0 million increase in engineering and new products prototyping expenses as we introduced 196 new products during fiscal year 2011, compared to 145 new products in fiscal year 2010. In addition, we incurred $2.2 million incremental expenses in qualifying a new third-party fabrication facility 40-------------------------------------------------------------------------------- Table of Contents to expand our manufacturing capacity. The increase in research and development expenses was also attributable to a $1.8 million increase in personnel expenses as we increased headcount and bonuses in fiscal year 2011, a $0.8 million increase in share-based compensation expense, and a $0.8 million increase in facility expenses as our corporate and research and development center in the U.S. was relocated to a larger facility in March 2010. As we continue to invest significant resources in developing new technologies and new products and expanding our manufacturing capacity, we expect our research and development expenses to increase in absolute dollar amount. Research and development expenses were $20.9 million for fiscal year 2010, increased by $1.7 million, or 8.7% from $19.3 million for fiscal year 2009. This increase was primarily attributable to a $2.1 million increase in personnel expenses as we increased headcount and bonuses, while in fiscal year 2009, we implemented temporary salary reductions and holiday office closures in response to the global economic recession, which resulted in lower salary, bonus and vacation expenses. The increase in research and development expenses was partially offset by a $0.6 million decrease in engineering and new products prototyping expenses due to the timing of product prototyping and savings from increased research and development activities performed at our in-house packaging and testing facility, while we continued to invest in our new products development and introduced 145 new products in fiscal year 2010. Selling, general and administrative expenses Year Ended June 30, Change 2011 2010 2009 2011 2010 (in thousands) (in thousands) (in percentage) (in thousands) (in percentage) Selling, general and administrative $ 37,937 $ 26,323 $ 20,443 $ 11,614 44.1 % $ 5,880 28.8 % Selling, general and administrative expenses were $37.9 million for fiscal year 2011, increased by $11.6 million, or 44.1%, from $26.3 million for fiscal year 2010. This increase was primarily attributable to a $2.8 million increase in personnel expenses due to an increase in headcount and bonuses, a $1.9 million increase in sales commissions and sales samples associated with our revenue growth, and a $1.4 million increase in share-based compensation expense. In addition, we incurred $1.1 million of professional fees related to the conversion of our financial statements under IFRS to U.S. GAAP and a $0.9 million incremental expenses associated with the requirements of being a public company. The increase in selling, general and administrative expenses was also attributable to a $0.4 million increase in facility expenses as our corporate and research and development center in the U.S. was relocated to a larger facility in March 2010 and a $0.4 million of incremental professional services fees related to the APM acquisition in December 2010. These increases were partially offset by a $1.1 million decrease in audit, tax and legal expenses that were incurred in connection with our IPO in fiscal year 2010. Selling, general and administrative expenses were $26.3 million for fiscal year 2010, increased by $5.9 million, or 28.8%, from $20.4 million for fiscal year 2009. This increase was primarily due to a $3.5 million increase in personnel expenses as we increased our headcount and bonuses in fiscal year 2010. We implemented temporary salary reductions and holiday office closures in fiscal year 2009 in response to the global economic recession, and these cost reduction measures resulted in lower salary, bonus and vacation expenses. The increase in selling, general and administrative expenses was also attributed to a $1.2 million increase in our sales commissions, product promotion and travel related expenses as we generated more revenue with increased sales and marketing activities during fiscal year 2010. The increase in selling, general and administrative expenses was also attributed to a $1.1 million increase in expenses related to our audit and IPO activities during fiscal year 2010. In addition, we became a public company in the fourth quarter of fiscal year 2010 and incurred an additional $0.2 million in expenses associated with the requirements of being a public company. These increases in selling, general and administrative expenses were partially offset by a $1.2 million reduction in legal costs related to a patent litigation which was settled in fiscal year 2009. 41-------------------------------------------------------------------------------- Table of Contents Income (loss) on equity investment in APM Year Ended June 30, Change 2011 2010 2009 2011 2010 (in thousands) (inthousands) (in percentage) (in thousands) (in percentage) Income (loss) on equity investment in APM $ 1,768 $ 6,546 $ (4 ) $ (4,778 ) (73.0 )% $ 6,550 (163,750.0 )% Income (loss) on equity investment in APM was $1.8 million for fiscal year 2011, decreased by $4.8 million, or 73.0%, from $6.5 million for fiscal year 2010. The decrease was primarily due to consolidation of APM's financial results into our financial statements since the APM acquisition in December 2010 and a $2.6 million benefit related to our share of deferred tax assets APM recognized during fiscal year 2010. Income (loss) on equity investment in APM was $6.5 million and loss of $4,000 for the fiscal years ended June 30, 2010 and 2009, respectively. The increase was due to higher profitability generated by APM resulting from higher packaging and testing processing volume during fiscal year 2010, as well as a $2.6 million tax benefit recognized related to APM's deferred tax assets during fiscal year 2010. Income tax expense (benefit) Year Ended June 30, Change 2011 2010 2009 2011 2010 (in thousands) (in thousands) (in percentage) (in thousands) (in percentage) Income tax expense (benefit) $ 2,609 $ 1,497 $ (192 ) $ 1,112 74.3 % $ 1,689 (879.7 )% Our income tax expense for the fiscal years ended June 30, 2011 and 2010 was $2.6 million and $1.5 million, respectively. Income tax expense increased by $1.1 million, or 74.3%, in fiscal year 2011 as compared to fiscal year 2010 due primarily to an increased percentage of our pretax book income in fiscal year 2011 being subject to the taxes in higher tax rate jurisdictions, largely as a result of our acquisition of APM in December 2010, partially offset by $0.5 million of increased U.S. federal research and development credits as a result of the extension of the U.S. federal research and development credit retroactive to December 31, 2009 during fiscal year 2011. Our income tax expense was $1.5 million for the fiscal year ended June 30, 2010, as compared to an income tax benefit of $0.2 million for the fiscal year ended June 30, 2009. This was due primarily to the increased profitability in fiscal year 2010 in certain foreign jurisdictions, partially offset by $0.3 million less U.S. federal research and development credits in fiscal year 2010 as compared to 2009 and a $0.5 million valuation allowance release in fiscal year 2009. Liquidity and Capital Resources Our principal need for liquidity and capital resources is to maintain working capital sufficient to support our operations and to make capital expenditures to finance the growth of our business. To date, we have primarily financed our operations through funds generated from operations, borrowings under our revolving lines of credit, proceeds from our IPO, and the issuance of preferred shares. Our IPO became effective on April 28, 2010 and closed on May 4, 2010. Approximately 5.1 million common shares were sold in our IPO at the price of $18.00 per share, including 3.4 million shares newly issued by us and approximately 1.7 million shares sold by our selling shareholders. Gross proceeds received by us from the 3.4 million shares were $61.2 million, and net proceeds were $53.3 million after deducting $4.3 million for underwriting discounts and commissions and $3.7 million for other offering related costs. Since the completion of the IPO to June 30, 2011, we have invested all of net proceeds of $53.3 million received by us from our IPO in our in-house packaging and testing facilities, including $17.0 million paid for the acquisition of APM. We believe our in-house packaging and testing capability provides us with improved gross margin, faster time to market for our new products, and competitive advantages in proprietary packaging technology and product quality. 42-------------------------------------------------------------------------------- Table of Contents In April 2010, one of our subsidiaries in China entered into a revolving line of credit arrangement with a Chinese bank to allow us to draw down, from time to time, up to 80% of the balance of the subsidiary's accounts receivable with a maximum amount of 40 million Chinese RMB (equivalent of $6.2 million as of June 30, 2011) to finance the subsidiary's accounts receivable on a maximum of 120-day repayment term. The interest rate on each drawdown varies and indexes to the published London Interbank Offered Rate per annum. There was no outstanding balance at June 30, 2011. The effective interest rate for the borrowing was 3.42% for the fiscal year ended June 30, 2011. In December 2010, we acquired APM and assumed APM's bank borrowing liabilities. These bank borrowings were made under various line of credit agreements with local banks. The interest rate on each drawdown from these lines of credit varies and indexes to the published London Interbank Offered Rate per annum. The effective interest rate for these borrowings was 3.38% for the fiscal year ended June 30, 2011. APM's property and equipment with carrying amount of $64.0 million were pledged as collateral under one of the lines of credit. There was no outstanding balance at June 30, 2011. These lines of credit have expired as of the filing of this annual report. The following outlines the details of each line of credit and its available credit amount as of June 30, 2011: Maximum Limit in Maximum Limit Available credit Chinese ( U.S. Dollar at June 30, Line of Credit Maturity Date RMB Equivalent) 2011 (in thousands) A July 16, 2011 105,000 $ 16,250 $ 16,250 B August 16, 2011 40,000 $ 6,191 $ 6,191 C July 20, 2011 30,000 $ 4,643 $ 4,643 D July 31, 2011 - $ 3,000 $ 3,000 We believe that our current cash and cash equivalents and cash flows from operations will be sufficient to meet our anticipated cash needs, including working capital and capital expenditures, for at least the next twelve months. In the long-term, we may require additional capital due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our cash is insufficient to meet our needs, we may seek to raise capital through equity or debt financing. The sale of additional equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and may include operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all. Cash and cash equivalents As of June 30, 2011 and 2010, we had $86.7 million and $119.0 million of cash and cash equivalents, respectively. Our cash and cash equivalents primarily consist of cash on hand and short-term bank deposits with original maturities of three months or less. The following table shows our net cash provided by operating activities, net cash used in investing activities and net cash provided by (used in) financing activities for the periods indicated: Year Ended June 30, 2011 2010 2009 (in thousands) Net cash provided by operating activities $ 30,088 $ 29,787 $ 22,716 Net cash used in investing activities (49,820 ) (14,685 ) (9,744 ) Net cash provided by (used in) financing activities (12,667 ) 43,470 3,368 Net increase (decrease) in cash and cash equivalents $ (32,399 ) $ 58,572 $ 16,340 Cash flows provided operating activities Our net cash provided by operating activities for the fiscal year ended June 30, 2011 was $30.1 million, which consisted primarily of our net income of $37.8 million. This amount was increased by depreciation and amortization expense of $16.7 million, share-based compensation expense of $6.2 million and an increase of $5.2 million in accrued liabilities. Net cash 43-------------------------------------------------------------------------------- Table of Contents generated from operating activities was partially offset by a total of $2.6 million in income on equity investment in APM and gain on equity interest in APM, an increase in inventories of $26.9 million due to an increase in raw materials and wafers since the majority of our packaging and testing manufacturing process was handled in-house, and by an increase in accounts receivable of $5.2 million due to the timing of our shipments and collections. Our net cash provided by operating activities for the fiscal year ended June 30, 2010 was $29.8 million, which consisted primarily of our net income of $37.8 million, increased by depreciation and amortization expense of $9.0 million, share-based compensation expense of $3.6 million and an increase of $5.0 million in accrued liabilities. These increases in cash flows from operating activities were partially offset by $6.5 million in income on equity investment in APM, an increase of $9.4 million in accounts receivable due to the timing of our shipments and collections, and by an increase of $5.6 million in inventories as we increased our inventory production to meet increasing demand from our customers. Our net cash provided by from operating activities for the fiscal year ended June 30, 2009 was $22.7 million, which consisted primarily of our net loss of $0.9 million, increased by depreciation and amortization expense of $7.5 million, share-based compensation expense of $3.6 million, a decrease in accounts receivable of $8.8 million due to the timing of our shipments and collections and a decrease in inventories of $10.1 million due to our operating initiatives in managing inventory levels. These increases in cash flows from operating activities were partially offset by a decrease of $4.1 million in accrued liabilities as part of our efforts to manage spending. Cash flows used in investing activities Our net cash used in investing activities was $49.8 million for the fiscal year ended June 30, 2011, which was primarily attributable to $42.1 million in purchases of property and equipment mainly to expand our in-house packaging and testing production, $5.0 million deposit for acquisition of wafer fabrication assets, $1.8 million in equity investment in APM prior to the APM acquisition and $1.6 million cash used, net of cash acquired in APM acquisition. Our net cash used in investing activities was $14.7 million for the fiscal year ended June 30, 2010, which was primarily attributable to the purchase of property and equipment of $14.0 million, the majority of which was to expand our in-house packaging and testing facility, and $0.7 million in restricted cash deposited with a bank as required under our letters of credit. Our net cash used in investing activities for the fiscal year ended June 30, 2009 was $9.7 million, which was primarily attributable to the purchase of property and equipment of $10.1 million, offset by a $0.2 million release of the restricted cash required under our prior letters of credit with a bank. Cash flows provided by (used in) financing activities Our net cash used in financing activities for the fiscal year ended June 30, 2011 was $12.7 million, which was principally attributable to $15.0 million net repayments under our lines of credit, offset by $4.2 million proceeds from exercise of employee share options and from ESPP. Our net cash provided by financing activities for the fiscal year ended June 30, 2010 was $43.5 million, which was primarily attributable to net proceeds of $53.9 million from the IPO, while we incurred approximately $0.5 million in unpaid and accrued IPO related expenses at June 30, 2010. During fiscal year 2010, we borrowed an aggregate of $3.7 million from our a line of credit and paid off in full the then outstanding balance of $13.9 million under our equipment term loan. Our net cash provided by financing activities for the fiscal year ended June 30, 2009 was $3.4 million, which was primarily attributable to $3.9 million in net borrowings under our equipment term loan, offset by $0.3 million used to repurchase our common shares and $0.2 million in principal payments on our capital leases. Capital expenditures Our capital expenditures were $42.1 million, $14.0 million and $10.1 million for the fiscal years ended June 30, 2011, 2010 and 2009, respectively. Our capital expenditures principally consisted of the purchases of property and equipment. Capital expenditures for fiscal years 2011 primarily consisted of purchases of packaging and testing equipment for our two in-house manufacturing facilities and purchases of consigned equipment to a third-party foundry. Following the acquisition of APM in December 2010, we rely primarily on our in-house capacities for packaging and testing our products and expect to do so in the future. We utilize third-party foundries for wafer fabrication, and our capital expenditures related to the wafer fabrication process are primarily for the purchases of certain specialized equipment that are consigned to our third-party foundries to support our production requirement. In August 2011, we announced our intention to exercise an option to acquire certain assets associated with the IDT's 44-------------------------------------------------------------------------------- Table of Contents wafer manufacturing facility, which is located in Hillsboro, Oregon for a total purchase price of $26 million. We have obtained this option as part of the consideration for us entering into a foundry service agreement with IDT and a cash prepayment of $5.0 million which will be applied to the purchase price. The acquisition is subject to the execution of a definitive asset purchase agreement, which is expected to occur by the end of calendar year 2011. During the initial ramp-up period of the IDT facility, which is expected to last for approximately two to three quarters, we may incur additional costs and expenses relating to integration of the wafer fabrication facility, including costs for additional personnel, raw materials, equipment and other overhead expenses. As we pursue a "fab-lite" model and continue to grow our business, we expect to increase our capital expenditures to expand our manufacturing capacity in order to reduce manufacturing cost and to provide better services to our customers. Tabular Disclosure of Contractual Obligations The following table provides selected information regarding our contractual obligations as of June 30, 2011: Payments Due by Period Less than More than Total 1 year 1-3 years 3-5years 5 years (in thousands) Capital leases $ 499 $ 324 $ 50 $ 50 $ 75 Operating leases 20,149 2,750 5,482 4,382 7,535 Capital commitments with respect to property and equipment 5,170 5,170 - - - Purchase commitments with respect to inventory and research and development 22,014 22,014 - - - Total contractual obligations $ 47,832 $ 30,258 $ 5,532 $ 4,432 $ 7,610 As of June 30, 2011, we had recorded liabilities of $2.7 million for uncertain tax positions and $0.4 million for potential interest and penalty, which are not included in the above table because we are unable to reliably estimate the amount of payments in individual years that would be made in connection with these uncertain tax positions. Off-Balance Sheet Arrangements As of June 30, 2011, we had no material off-balance sheet arrangements as defined in Regulation S-K 303(a)(4)(ii). Critical Accounting Policies and Estimates The preparation of our consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. To the extent there are material differences between these estimates and actual results, our consolidated financial statements will be affected. On an ongoing basis, we evaluate the estimates, judgments and assumptions including those related to revenue recognition, inventory reserves, warranty accrual, income taxes, share-based compensation, variable interest entities and useful lives for property and equipment and for intangible assets. Revenue recognition We recognize revenue when there is persuasive evidence that an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable and when collectability is reasonably assured. We recognize revenue when product is shipped to the customer, net of estimated stock rotation returns and price adjustments to certain distributors. We sell our products primarily to distributors, who in turn sell our products globally to various end customers. Our revenue is net of the effect of the estimated stock rotation returns and price adjustments that we expect to provide to certain 45-------------------------------------------------------------------------------- Table of Contents distributors. Stock rotation returns are governed by contract and are limited to a specified percentage of the monetary value of the products purchased by distributors during a specified period. We estimate provision for stock rotation returns based on historical returns and individual distributor agreements. We also provide special pricing to certain distributors primarily based on volume, to encourage resale of our products. We estimate the expected price adjustments at the time the revenue is recognized based on distributor inventory levels, pre-approved future distributor selling prices, distributor margins and demand for our products. If actual stock rotation returns or price adjustments differ from our estimates, adjustments may be recorded in the period when such actual information is known. Allowance for price adjustments is recorded as contra accounts receivable and provision for stock rotation is recorded in accrued liabilities in the consolidated balance sheets. Revenue from certain distributors is deferred until the distributor resells the products to end customers due to price protection adjustments and right of returns that cannot be reliably measured. Packaging and testing services revenue is recognized upon shipment of serviced products to the customer. Inventory reserves We carry inventories at the lower of cost (determined on a first-in, first-out basis) or market. Cost primarily consists of semiconductor wafers, packaging and testing, personnel, including share-based compensation expense, overhead attributable to manufacturing, operations and procurement, yield improvements, capacity utilization. Inventory reserves are made based on our periodic review of inventory quantities on hand as compared with our sales forecasts, historical usage, aging of inventories, production yield levels and current product selling prices. If actual market conditions are less favorable than those forecasted by us, additional future inventory write-downs may be required that could adversely affect our operating results. Inventory reserves once established are not reversed until the related inventory has been sold or scrapped. If actual market conditions are more favorable than expected and the products that have previously been written down are sold, our gross margin would be favorably impacted. Warranty accrual We provide a standard one-year warranty for the products we sell. We accrue for estimated warranty costs at the time revenue is recognized. Our warranty obligation is affected by product failure rates, the cost of replacement product, freight costs for failed parts and their replacement and other quality assurance costs. We monitor our product returns for warranty claims and maintain an accrual for the related warranty cost based on our historical data and anticipated warranty claims known at the time that the estimate is made. If actual warranty costs differ significantly from our estimates, revisions to the estimated warranty accrual would be required and any such adjustments could be material. Accounting for income taxes We are subject to income taxes in a number of jurisdictions. We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits and deductions, and in the calculation of certain tax assets and liabilities which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as interest and penalties related to uncertain tax positions. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. We establish accruals for certain tax contingencies based on estimates of whether additional taxes may be due. While the final tax outcome of these matters may differ from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. As a result, significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period. Significant management judgment is also required in determining whether deferred tax assets will be realized in full or in part. When it is more likely than not that all or some portion of specific deferred tax assets such as net operating losses or foreign tax credit carryforwards will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that cannot be realized. We consider all available positive and negative evidence on a jurisdiction-by-jurisdiction basis when assessing whether it is more likely than not that deferred tax assets are recoverable. We consider evidence such as our past operating results, the existence of cumulative losses in recent years and our forecast of future taxable income. We intend to maintain a partial valuation allowance equal to the state research and development credit carryfowards until sufficient 46-------------------------------------------------------------------------------- Table of Contents positive evidence exists to support reversal of the valuation allowance. We have not provided for withholding taxes on the undistributed earnings of our foreign subsidiaries because we intend to reinvest such earnings indefinitely. As of June 30, 2011 the cumulative amount of undistributed earnings considered permanently reinvested is $22,000,000. The determination of the unrecognized deferred tax liability on these earnings is not practicable. Should we decide to remit this income to the Bermuda parent company in a future period, our provision for income taxes may increase materially in that period. In July 2006, the Financial Accounting Standards Board, or FASB, issued guidance which clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely to be realized upon ultimate settlement. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax law and regulations in a multitude of jurisdictions. Although the guidance on the accounting for uncertainty in income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. If the ultimate resolution of tax uncertainties is different from what is currently estimated, a material impact on income tax expense could result. Our provision for income taxes is subject to volatility and could be adversely impacted by changes in earnings or tax laws and regulations in various jurisdictions. We are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our operating results and financial condition. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of changes to reserves, as well as the related net interest and penalties. Share-based compensation expense We recognize share-based compensation expense based on the estimated fair value of the options determined by the Black-Scholes option pricing model, using the accelerated vesting attribution method. Share-based compensation expense is significant to the consolidated financial statements and is calculated using our best estimates, which involve inherent uncertainties and the application of management's judgment. Significant estimates include fair value of the underlying common shares prior to our IPO, expected term, share price volatility and forfeiture rates. We established the expected term based on the historical data of similar entities' data as adjusted for expected changes in future exercise patterns. We estimate forfeiture rates based on historical average period of time that options were outstanding and forfeited. We estimate expected volatility based on the volatility of similar entities whose shares are publicly available. The risk-free interest rate is based on the U.S. Treasury yields at the time of grant for periods corresponding to the expected term of the options. The expected dividend yield is zero based on the fact that we have not historically paid dividends and have no current intention to pay dividends. Prior to our IPO which became effective on April 28, 2010, the absence of a public market for our common shares required our compensation committee of the board of directors, the members of which we believe have extensive business, industry, finance and venture capital experience, to estimate the fair value of our common shares for the purpose of granting options and for determining share-based compensation expense for the periods presented. In response to these requirements, the compensation committee, with input from management, estimated the fair value of the common shares at each meeting when options were granted. We commissioned an independent third-party to conduct contemporaneous valuations to assist in the determination of the fair value of the common shares, except for the grant of options on March 1, 2010, the exercise price of which was determined after considering a preliminary valuation analysis provided to us by the representatives of our underwriters, the valuation of the common shares performed by an independent third-party at December 31, 2009 and other factors. Our contemporaneous valuations, using the AICPA Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation , employed a two step process to arrive at an estimate of the value of the common shares. The first step of the analysis was to estimate the total enterprise value. We primarily relied on an income approach, specifically a discounted cash flow analysis, to estimate the total enterprise value. The discounted cash flow analysis involves applying appropriate risk-adjusted discount rates to estimated cash flows, based on forecasted revenue and costs. The assumptions used in connection 47-------------------------------------------------------------------------------- Table of Contents with these valuations were based on our expected operating performance over the discrete forecast period. A terminal value was estimated for the value of the business beyond the discrete forecasted earnings period. This value was estimated by applying a multiple to our projections in the final year of the forecast period. The multiple was selected based on the data of a peer group of public companies in the industry. The discrete period cash flows and terminal value were then discounted to the present at our estimated cost of capital, which was developed through an analysis of required returns for companies in a similar stage of development. The results of the income approach were tested for reasonableness based on an analysis of the multiples of similar public companies. The second step was to allocate our total enterprise value to the preferred and common classes of securities based on the relative rights and preferences of each class. We relied on the option pricing method, which treats the securities as call options on the underlying assets (or enterprise value) to allocate the enterprise value. Significant estimates required in the option pricing method include the expected time to liquidity, risk-free interest rate for the expected time to liquidity, expected dividend yield, fair value of the aggregate enterprise value and expected volatility of the underlying enterprise value. Additionally, we considered a probability-weighted expected return method to estimate the value of the common shares. This methodology considers various scenarios of future exit events, including a public offering, sale, liquidation or remaining private. An estimate of future exit periods and events are made and the exit values are allocated to each class of security based on the rights and preferences that would be exercised to maximize the value of each class, based on seniority. The allocated values are then discounted to the present and weighted based on an assessment of the probability of each scenario. Probabilities of each scenario have been assessed by management at each date, based on consideration of then-current market conditions and changes in the underlying prospects. We also reviewed a variety of factors in determining the deemed fair value of the common shares such as our operating and financial performance, the introduction of new products, the price of the preferred share financings with third-party investors in arm's length transactions, the lack of a public market for its common shares, industry growth and volume, the performance of similarly situated companies in our industry and stock market indices, emerging trends and issues, trends in consumer confidence and spending, overall economic indicators and the general economic outlook. Variable Interest Entities and Investment in APM We evaluate all transactions and relationships with potential variable interest entities (VIEs) to determine whether we are the primary beneficiary of the entities, therefore is required to consolidate with VIEs. Our overall methodology for evaluating transactions and relationships under the VIE requirements includes the following two steps: • determine whether the entity meets the criteria to qualify as a VIE; and • determine whether we are the primary beneficiary of the VIE. In performing the first step, we consider the significant factors and judgments in making the determination as to whether an entity is a VIE include: • the design of the entity, including the nature of its risks and the purpose for which the entity was created, to determine the variability that the entity was designed to create and distribute to its interest holders; • the nature of our involvement with the entity; • whether control of the entity may be achieved through arrangements that do not involve voting equity; • whether there is sufficient equity investment at risk to finance the activities of the entity; and • whether parties other than the equity holders have the obligation to absorb expected losses or the right to receive residual returns. For each VIE identified, we then perform the second step and evaluate whether we are the primary beneficiary of the VIE by considering the following significant factors and judgments: • whether our variable interest absorbs the majority of the VIE's expected losses; • whether our variable interest receives the majority of the VIE's expected returns; and • whether we have the ability to make decisions that significantly affect the VIE's results and activities. Based on our evaluation of the above factors and judgments, no VIEs were identified as of June 30, 2011. Prior to the APM acquisition on December 3, 2010, we had a 43% equity interest in APM which had been identified as a VIE; however, we were not the primary beneficiary and therefore we did not consolidate APM. The equity interest in APM was accounted for 48-------------------------------------------------------------------------------- Table of Contents using the equity method through the date of acquisition. Estimated Useful Lives for Property and Equipment and Intangible Assets Property and equipment are recorded at cost and are depreciated using the straight-line method over estimated useful lives of the assets. Patents and exclusive technology rights purchased from third parties are amortized on a straight-line basis over their estimated useful lives of three to seven years. Identified intangibles acquired in a business combination are recognized at fair value at the acquisition date and amortized on a straight-line basis over their estimated economic lives of three to four years. Prior to December 3, 2010, the APM acquisition date, the Company's manufacturing machinery and equipment were depreciated over a useful life of 5 years. Upon the completion of the APM acquisition, the Company revised the estimated useful life of its manufacturing machinery and equipment for depreciation purposes from 5 years to 8 years on a prospective basis. Recently Issued Accounting Pronouncements In June 2011, the FASB issued new accounting guidance on the presentation of comprehensive income. The new guidance requires the presentation 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. The new guidance also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. We are required to adopt this guidance as of the beginning of 2013. The adoption of this guidance will only impact the presentation of our consolidated financial statements. In December 2010, the FASB issued an amendment to the disclosure of supplementary pro forma information for business combinations. This amendment clarifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendment also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendment is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. We have adopted the disclosure requirements for business combinations in our fiscal year 2011. Effective January 1, 2010, we adopted certain provisions of the FASB's updated guidance related to fair value measurements and disclosures, which require new disclosures about significant transfers in and out of Levels 1 and 2 fair value measurements and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 fair value measurements. The updated guidance also clarifies existing disclosure requirements regarding inputs and valuation techniques, as well as the level of disaggregation for each class of assets and liabilities for which separate fair value measurements should be disclosed. The guidance was effective January 1, 2010, except for the separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements, which are effective for our financial statements beginning in the first quarter of fiscal year 2012. The adoption of the updated guidance did not have an impact on our consolidated financial statements and the deferred provisions are not expected to significantly impact our consolidated financial statements. 49-------------------------------------------------------------------------------- Table of Contents |