UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
X
- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-3698
SILICONIX INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 94-1527868
(State or other jurisdiction (I.R.S. Employer
of incorporation Identification No.)
or organization)
2201 Laurelwood Road, Santa Clara, California 95054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (408) 988-8000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No _
Indicate the number of shares outstanding of each of the registrant's
classes of common stock:
Common stock, $0.01 par value -- 29,879,040 outstanding shares as of
August 7, 2003.
1
SILICONIX INCORPORATED
TABLE OF CONTENTS TO FORM 10-Q
Part I. Financial Information Page No.
Item 1 Financial Statements
Consolidated Statements of Operations for
the three and six months ended June 28, 2003
and June 29, 2002 3
Consolidated Balance Sheets as of June 28, 2003
and December 31, 2002 4
Consolidated Statements of Cash Flows for the
six months ended June 28, 2003 and June 29, 2002 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 10
Item 4 Controls and Procedures 10
Part II. Other Information
Item 4 Submission of Matters to a Vote of Security Holders 11
Item 6 Exhibits and Reports on Form 8-K 11
Signatures 12
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SILICONIX INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except
per share amounts) Three Months Ended Six Months Ended
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales $ 88,208 $ 94,935 $ 186,034 $ 178,537
Cost of sales 60,753 65,661 130,680 124,855
--------- --------- --------- ---------
Gross profit 27,455 29,274 55,354 53,682
Operating expenses:
Research and development 5,026 5,504 9,713 10,266
Selling, marketing, and administration 11,077 11,073 22,058 20,698
--------- --------- --------- ---------
Operating income 11,352 12,697 23,583 22,718
Interest income 616 635 1,201 1,488
Other income (expense) - net (43) 810 25 788
--------- --------- --------- ---------
Income before taxes and minority interest 11,925 14,142 24,809 24,994
Income taxes (2,603) (2,882) (5,424) (5,473)
Minority interest in income of
consolidated subsidiary (60) (60) (120) (118)
--------- --------- --------- ---------
Net income $ 9,262 $ 11,200 $ 19,265 $ 19,403
========= ========= ========= =========
Net income per share (basic and diluted) $ 0.31 $ 0.37 $ 0.64 $ 0.65
========= ========= ========= =========
Shares used to compute earnings per share 29,879 29,879 29,879 29,879
========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
3
SILICONIX INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share information) June 28, December 31,
2003 2002
--------- -----------
Assets
Current assets:
Cash and cash equivalents $ 185,172 $ 137,082
Note receivable from affiliate 70,000 75,000
Accounts receivable, less allowances 42,077 42,331
Accounts receivable from affiliates 13,266 10,076
Inventories 70,828 66,553
Other current assets 25,579 23,241
Deferred income taxes 3,148 3,146
--------- ---------
Total current assets 410,070 357,429
--------- ---------
Property, plant, and equipment, at cost:
Land 1,715 1,715
Buildings and improvements 56,929 55,954
Machinery and equipment 371,251 368,232
--------- ---------
429,895 425,901
Less accumulated depreciation 287,828 272,935
--------- ---------
Net property, plant, and equipment 142,067 152,966
Goodwill 7,445 7,445
Other assets 104 195
--------- ---------
Total assets $ 559,686 $ 518,035
========= =========
Current liabilities:
Accounts payable $ 18,264 $ 20,734
Accounts payable to affiliates 28,449 7,385
Accrued payroll and related compensation 8,793 9,395
Other accrued liabilities 33,482 28,803
--------- ---------
Total current liabilities 88,988 66,317
--------- ---------
Long-term debt, less current portion 2,311 2,708
Deferred income taxes 16,258 16,256
Other non-current liabilities 44,540 44,540
Minority interest 3,503 3,383
--------- ---------
Total liabilities 155,600 133,204
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 (100,000,000
shares authorized, 29,879,040
shares issued and outstanding at June 28,
2003 and December 31, 2002, respectively) 299 299
Additional paid-in-capital 59,370 59,370
Retained earnings 345,523 326,258
Accumulated other comprehensive loss (1,106) (1,096)
--------- ---------
Total stockholders' equity 404,086 384,831
--------- ---------
Total liabilities and stockholders' equity $ 559,686 $ 518,035
========= =========
See accompanying Notes to Consolidated Financial Statements.
4
SILICONIX INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands) Six Months Ended
June 28, June 29,
2003 2002
--------- ---------
Cash flows from operating activities:
Net income $ 19,265 $ 19,403
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 19,116 20,292
Other non-cash (income) expense (397) 225
Changes in assets and liabilities, net
of acquisitions:
Accounts receivable 254 (7,541)
Accounts receivable from affiliate (3,190) (887)
Inventories (4,275) (3,275)
Other assets (2,366) (4,754)
Accounts payable (2,470) 8,419
Accounts payable to affiliates 21,064 (23,770)
Accrued liabilities 4,197 10,987
Non-current other liabilities 1 --
--------- ---------
Net cash provided by operating activities 51,199 19,099
--------- ---------
Cash flows from investing activities:
Purchase of property, plant, and equipment (8,108) (5,865)
Proceeds on disposal of property, plant,
and equipment 10 56
Proceeds from short-term investment with
affiliate 75,000 --
Short-term investment with affiliate (70,000) --
--------- ---------
Net cash used in investing activities (3,098) (5,809)
--------- ---------
Effect of exchange rate changes on
cash and cash equivalents (11) (27)
--------- ---------
Net increase in cash and cash equivalents 48,090 13,263
Cash and cash equivalents:
Beginning of period 137,082 167,236
--------- ---------
End of period $ 185,172 $ 180,499
========= =========
See accompanying Notes to Consolidated Financial Statements.
5
SILICONIX INCORPORATED
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of the management of the Company, the consolidated
financial statements appearing herein contain all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
results for, and as of the end of, the periods indicated. These statements
should be read in conjunction with the Company's December 31, 2002 consolidated
financial statements and notes thereto. The results of operations for the first
six months of 2003 are not necessarily indicative of the results to be expected
for the full year.
Note 2. Inventories
The components of inventory are as follows:
June 28, December
(In thousands) 2003 31, 2002
--------- ----------
Finished goods $ 22,185 $ 20,044
Work-in-process 43,192 38,560
Raw materials 5,451 7,949
--------- ----------
$ 70,828 $ 66,553
========= ==========
Note 3. Contingencies
As of June 28, 2003, the Company remained a party to two environmental
proceedings. The first involves property that the Company vacated in 1972. In
July 1989, the California Regional Water Quality Control Board ("RWQCB") issued
Cleanup and Abatement Order No. 89-115 both to the Company and the current owner
of the property. The Order alleged that the Company contaminated both the soil
and the groundwater on the property by the improper disposal of certain chemical
solvents. The RWQCB considered both parties to be liable for the contamination
and sought to have them decontaminate the site to acceptable levels. The Company
subsequently reached a settlement of this matter with the current owner of the
property. The settlement provided that the current owner will indemnify the
Company and its employees, officers, and directors against any liability that
may arise out of any governmental agency actions brought for environmental
cleanup of the subject site, including liability arising out of RWQCB Order No.
89-115, to which the Company remains nominally subject.
The second proceeding involves the Company's Santa Clara, California
facility, which the Company has owned and occupied since 1969. In February 1989,
the RWQCB issued Cleanup and Abatement Order No. 89-27 to the Company. The Order
was based on the discovery of contamination of both the soil and the groundwater
on the property by certain chemical solvents. The Order called for the Company
to specify and implement interim remedial actions and to evaluate final remedial
alternatives. The RWQCB issued a subsequent order requiring the Company to
complete the decontamination. The Company has substantially complied with the
RWQCB's orders.
In management's opinion, based on discussions with legal counsel and other
considerations, the ultimate resolution of the above-mentioned matters is not
expected to have a material adverse effect on the Company's consolidated
financial condition or results of operations.
The Company is engaged in discussions with various parties regarding patent
licensing and cross patent licensing issues. In addition, the Company has
observed that in the current semiconductor industry business environment,
6
companies have become more aggressive in asserting and defending patent claims
against competitors. While the Company will continue to vigorously defend its
intellectual property rights, the Company may become party to disputes regarding
patent licensing and cross patent licensing. An unfavorable outcome regarding
one of these matters could have a material adverse effect on the Company's
business and operating results.
Note 4. Comprehensive Income
The following are the components of comprehensive income:
(In thousands) Three Months Ended Six Months Ended
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
-------- -------- -------- --------
Net income $ 9,262 $ 11,200 $ 19,265 $ 19,403
Other comprehensive loss:
Foreign currency translation adjustment (7) (26) (11) (27)
Pension liability adjustment -- -- 1 --
-------- -------- -------- --------
Total other comprehensive loss (7) (26) (10) (27)
Comprehensive income $ 9,255 $ 11,174 $ 19,255 $ 19,376
======== ======== ======== ========
Note 5. Segment Reporting
The Company is engaged primarily in the design, marketing, and manufacturing
of power and analog semiconductor products. The Company is organized into three
operating segments, which due to their inter-dependencies, similar long-term
economic characteristics, and shared production processes and distribution
channels have been aggregated into one reportable segment.
Note 6. Earnings Per Share
Basic earnings per common share is computed by using weighted average common
shares outstanding during the period. Diluted earnings per common share
incorporates the incremental shares issuable upon the assumed exercise of stock
options when diluted. Due to the Company's simple capital structure, basic and
diluted earnings per share are the same.
Note 7. Accounting Pronouncements
In November 2002, the Emerging Issues Task Force (EITF) issued EITF Issue
No. 00-21, "Revenue Arrangements with Multiple Deliverables," which provides
guidance on the timing and method of revenue recognition for sales arrangements
that include the delivery of more than one product or service. EITF 00-21 is
effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company does not expect that the adoption of
EITF 00-21 will have a significant impact on its consolidated financial
statements.
In May 2003, the FASB issued Statement Number 150 "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS
150). This Statement establishes standards for classifying and measuring as
liabilities certain financial instruments that embody obligations of the issuer
and have characteristics of both liabilities and equity. SFAS 150 generally
requires liability classification for two broad classes of financial
instruments: (1) instruments that represent, or are indexed to, an obligation to
buy back the issuer's shares, and (2) obligations that can be settled in shares,
but are subject to certain conditions. SFAS 150 applies to all financial
instruments created or modified after May 31, 2003, and to other instruments at
the beginning of the first interim period beginning after July 1, 2003. As the
Company has not created or modified any financial instruments since the
effective date of SFAS 150, the Company does not believe this Statement will
have a material impact on its financial statements.
7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Net sales for the second quarter of 2003 were $88.2 million compared to $94.9
million for the second quarter of 2002. Net sales for the first half of 2003
were $186.0 million compared to $178.5 million for the first half of 2002. The
outbreak of SARS in Asia had a significant negative impact on the Company's
business in the second quarter as more than 70% of the Company's business is
generated from Asia. Nevertheless, the Company was still able to increase
bookings for the third consecutive quarter. The book-to-bill ratio for the
second quarter was greater than one and improved 14 basis points from the first
quarter, resulting in an increase in the backlog by more than 13%. The Company
sees no signs of inventory build-up either at the distributors or at the end
customers. It is becoming more and more common for the Company's major OEM and
contract manufacturer customers to request the Company to consign and hold
inventory for them. This creates additional challenges for the demand
forecasting at the factories and has resulted in a required increase in the
Company's die bank inventory. The portable computer market remains
consumer-driven. Therefore, the Company does not anticipate any significant
increase in the near term in corporate information technology spending. The
Company expects slight improvement from quarter to quarter in the second half of
2003; however, customers continue to place orders for the near term and
visibility remains uncertain.
Gross profit as a percentage of net sales in the second quarter of 2003 was
31%, the same as in the second quarter of 2002. Gross profit as a percentage of
net sales in the first half of 2003 was 30%, also the same as in the first half
of 2002. The improvement in the second quarter of 2003 over the first quarter of
2003 was a result of a reduction in subcontract manufacturer's expenses and the
Company's continuing cost reduction programs. These factors overcame the
substantial pricing pressures that the Company experienced during the second
quarter, which were even larger than in the first quarter.
Research and development expenses were $5.0 million for the second quarter of
2003 compared to $5.5 million for the second quarter of 2002, a 9% decrease.
Research and development expenses were $9.7 million for the first half of 2003
compared to $10.2 million for the first half of 2002, a 5% decrease. The
decrease in research and development expenses was mainly due to the Company's
continued effort to implement cost control programs. The Company has not reduced
its funding for new technology developments and new product introductions.
During the second quarter of 2003, the Company introduced 57 new products. The
Company continues to strive to turn the process developments into cost-effective
and efficient power management solutions. Among other things, these solutions
provide for components that take up less space and allow for longer battery
life. At the same time, the Company believes its cost reduction programs and
improving manufacturing efficiencies have well positioned the Company to
penetrate further into power management applications in the telecommunications,
portable computer, consumer, industrial, and automotive markets. To complement
this strategy, the Company continuously endeavors to become more flexible in its
execution to meet the challenging needs of the customers.
Selling, marketing, and administration expenses were $11.1 million for the
second quarter of 2003, the same as in the second quarter of 2002. Selling,
marketing, and administration expenses were $22.1 million for the first half of
2003 compared to $20.7 million for the first half of 2002. The Company's
selling, marketing, and administration expenses as a percentage of net sales
were 13% and 12% for the second quarter of 2003 and 2002, respectively. The
Company's selling, marketing, and administration expenses as a percentage of net
sales were 12% and 11% for the first half of 2003 and 2002, respectively. The
increase in selling, marketing, and administration expenses in 2003 was due to
an increase in sales in the first half of 2003 compared to the first half of
2002. The Company continues its efforts to manage and control costs.
Interest income for the second quarter of 2003 was $0.6 million, the same as
in the second quarter of 2002. Interest income for the first half of 2003 was
$1.2 million compared to $1.5 million for the first half of 2002. The decrease
in interest income in 2003 was due to lower interest rates as compared to 2002.
All excess cash not immediately needed to fund the Company's operations is
invested in money market funds.
Other expense was $43,000 for the second quarter of 2003 compared to $0.8
million of other income for the second quarter of 2002. The income in 2002 was
mainly due to foreign exchange gains from revaluation of the Company's assets
held in foreign currencies.
8
Income tax expense for the second quarter of 2003 was $2.6 million compared
to $2.9 million for the second quarter of 2002. Income tax expense for the first
half of 2003 was $5.4 million compared to $5.5 million for the first half of
2002. The Company's effective tax rate was 22.0% in the first half of 2003, the
same as in the first half of 2002. The Company expects that the effective tax
rate for 2003 will be 22.0%.
Liquidity and Capital Resources
At June 28, 2003, the Company had $255.2 million in cash, cash equivalents
and short-term note receivable from affiliate, compared to $212.1 million in
cash, cash equivalents and short-term note receivable from affiliate at December
31, 2002. The increase of $43.1 million was mainly due to the cash generated by
operations in the first half of 2003 and an increase in the payable balance to
affiliates. The cash balance of $185.2 million as of June 28, 2003 was mostly
invested in money market accounts outside the United States. The Company's cash
and profits are expected to be reinvested indefinitely. Any repatriation of
earnings and cash back to the United States would be deemed to be a dividend and
would be subject to U.S. income taxes, state income taxes, and foreign
withholding taxes.
Net cash provided by operating activities was $51.2 million in the first half
of 2003 compared to $19.1 million in the same period of 2002. The increase in
net cash provided by operating activities for the first half of 2003 was
primarily due to an increase in the payable balance to affiliates. Net affiliate
payables as of June 28, 2003 increased by $17.9 million on December 31, 2002,
mainly due to the timing of cash payments made to unconsolidated affiliates.
Accounts payable as of June 28, 2003 decreased by $2.5 million from December 31,
2002, mainly due to the timing of payments to vendors. Accrued liabilities as of
June 28, 2003 increased by $4.2 million from December 31, 2002, mainly due to a
tax provision made for the income generated in the first half of 2003.
Net inventories as of June 28, 2003 increased by $4.3 million from December
31, 2002. Raw materials as of June 28, 2003 decreased by $2.5 million from
December 31, 2002 as the Company improved its management of raw material
purchases. Work-in-process as of June 28, 2003 increased by $4.6 million from
December 31, 2002. This increase was mainly in die bank inventory, which
provides better service to customers due to their short order visibility.
Finished goods inventory as of June 28, 2003 increased by $2.1 million from
December 31, 2002, mainly due to an increase in the Company's bookings for
shipments in future periods.
Net cash used in investing activities was $3.1 million in the first half of
2003 compared to $5.9 million used in investing activities in the same period of
2002. The Company spent $8.1 million on capital expenditures in the first half
of 2003, primarily related to facility upgrades and machinery and equipment. In
December 2002, the Company signed a loan agreement with Vishay, under which
Vishay may, from time to time, borrow from the Company. The borrowing is on a
revolving basis and the agreement expires in January 2005. In June 2003, the
Company received a related party promissory note under the loan agreement for
$70 million from Vishay, which was callable by the Company at any time and bore
an interest rate of 2.75%. As of June 28, 2003, the entire related-party
promissory note was outstanding. The promissory note was fully repaid on July 1,
2003.
For the next twelve months, management expects that cash flows from
operations will be sufficient to meet the Company's normal operating
requirements and to fund its research and development and capital expenditure
plans.
SAFE HARBOR STATEMENT
Statements contained herein that relate to the Company's future performance,
including statements with respect to anticipated improvements in the Company's
business and business climate, future product innovation and implementation of
cost savings strategies, are forward-looking statements within the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
statements are based on current expectations only, and are subject to certain
risks, uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
projected. Among the factors that could cause actual results to materially
differ include: general business and economic conditions, particularly in the
markets that the Company serves, cancellation of orders in the Company's
backlog, difficulties in new product development, and other factors affecting
the Company's operations, markets, products, services and prices that are set
forth in its December 31, 2002 Report on Form 10-K filed with the Securities and
Exchange Commission. You are urged to refer to the Company's Form 10-K for a
detailed discussion of these factors. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
As of June 28, 2003, an evaluation was performed under the supervision of and
with the participation of the Company's management, including the Company's CEO
and Principal Accounting Officer (PAO), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on that
evaluation, the Company's management, including the CEO and PAO, have concluded
that the Company's disclosure controls and procedures were effective to ensure
that all material information required to be disclosed by the Company in this
quarterly report was recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and forms.
There have been no changes in the Company's internal control over
financial reporting during the quarter ended June 28, 2003 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
10
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The registrant's Annual Meeting of Stockholders was held on June 12,
2003.
(b) Not applicable.
(c) There were two matters voted on at the Meeting. A brief description
of each of these matters, and the results of the votes thereon, are
as follows:
1. Election of Directors
Broker
Nominee For Against Nonvotes
------- --- ------- --------
King Owyang 29,144,348 32,557 -0-
Christine Heiss 29,131,016 45,889 -0-
Mark Segall 29,131,016 45,889 -0-
Glyndwr Smith 29,130,995 45,910 -0-
Timothy Talbert 29,130,995 45,910 -0-
2. Ratification of the appointment of Ernst & Young LLP as the
registrant's auditors for the fiscal year ending December 31,
2003
Broker
For Against Abstain Nonvotes
--- ------- ------- --------
29,135,548 36,408 4,949 -0-
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 3.3 - Bylaws, as amended effective June 12, 2003
Exhibit 31.1 - Certification pursuant to Rules 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Dr. King
Owyang, Chief Executive Officer
Exhibit 31.2 - Certification pursuant to Rules 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - William
Clancy, Principal Accounting Officer
Exhibit 32.1 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
Dr. King Owyang, Chief Executive Officer
Exhibit 32.2 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
William Clancy, Principal Accounting Officer
(b) Reports on Form 8-K:
On May 2, 2003, the Company filed a current report under Items 7 and
9 of Form 8-K announcing its earnings for its first fiscal quarter
ended March 29, 2003.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SILICONIX INCORPORATED
Date: August 11, 2003 By: /s/ King Owyang
----------------------------
King Owyang
President and Chief
Executive Officer
By: /s/ William M. Clancy
----------------------------
William M. Clancy
Principal Accounting Officer
12