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 September 27, 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
November 7, 2003.
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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 nine months ended September 27, 2003
and September 28, 2002 3
Consolidated Balance Sheets as of September 27, 2003
and December 31, 2002 4
Consolidated Statements of Cash Flows for the
nine months ended September 27, 2003 and
September 28, 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 6 Exhibits and Reports on Form 8-K 11
Signatures 12
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SILICONIX INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts) Three Months Ended Nine Months Ended
Sept 27, Sept 28, Sept 27, Sept 28,
2003 2002 2003 2002
---------- --------- --------- ---------
Net sales $ 97,411 $ 96,149 $ 283,444 $ 274,686
Cost of sales 69,555 65,944 200,234 190,799
--------- --------- --------- ---------
Gross profit 27,856 30,205 83,210 83,887
Operating expenses:
Research and development 4,706 4,436 14,419 14,701
Selling, marketing, and administration 11,460 10,791 33,518 31,490
--------- --------- --------- ---------
Operating income 11,690 14,978 35,273 37,696
Interest income 610 777 1,810 2,266
Other income 92 1,411 117 2,201
--------- --------- --------- ---------
Income before taxes and minority interest 12,392 17,166 37,200 42,163
Income taxes (2,722) (3,764) (8,146) (9,237)
Minority interest in income of consolidated
subsidiary (60) (59) (180) (178)
--------- --------- --------- ---------
Net income $ 9,610 $ 13,343 $ 28,874 $ 32,748
========= ========= ========= =========
Net income per share (basic and diluted) $ 0.32 $ 0.45 $ 0.97 $ 1.10
========= ========= ========= =========
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) September 27, December 31,
2003 2002
------------ -----------
Assets
Current assets:
Cash and cash equivalents $ 263,435 $ 137,082
Note receivable from affiliate -- 75,000
Accounts receivable, less allowances 53,658 42,331
Accounts receivable from affiliates 15,196 10,076
Inventories 63,939 66,553
Other current assets 28,376 23,241
Deferred income taxes 3,148 3,146
--------- ---------
Total current assets 427,752 357,429
--------- ---------
Property, plant, and equipment, at cost:
Land 1,715 1,715
Buildings and improvements 57,779 55,954
Machinery and equipment 375,855 368,232
--------- ---------
435,349 425,901
Less accumulated depreciation 296,775 272,935
--------- ---------
Net property, plant, and equipment 138,574 152,966
Goodwill 7,445 7,445
Other assets 58 195
--------- ---------
Total assets $ 573,829 $ 518,035
========= =========
Current liabilities:
Accounts payable $ 17,609 $ 20,734
Accounts payable to affiliates 27,236 7,385
Accrued payroll and related compensation 9,498 9,395
Other accrued liabilities 38,963 28,803
--------- ---------
Total current liabilities 93,306 66,317
--------- ---------
Long-term debt, less current portion 2,459 2,708
Deferred income taxes 16,258 16,256
Other non-current liabilities 44,540 44,540
Minority interest 3,563 3,383
--------- ---------
Total liabilities 160,126 133,204
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 (100,000,000
shares authorized, 29,879,040
shares issued and outstanding at September
27, 2003 and December 31, 2002, respectively) 299 299
Additional paid-in-capital 59,373 59,370
Retained earnings 355,132 326,258
Accumulated other comprehensive loss (1,101) (1,096)
--------- ---------
Total stockholders' equity 413,703 384,831
--------- ---------
Total liabilities and stockholders' equity $ 573,829 $ 518,035
========= =========
See accompanying Notes to Consolidated Financial Statements.
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SILICONIX INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands) Nine Months Ended
September 27, September 28,
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 28,874 $ 32,748
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 28,263 30,444
Other non-cash (income) expense (249) 188
Changes in assets and liabilities,
net of acquisitions:
Accounts receivable (11,327) (1,964)
Accounts receivable from affiliate (5,120) 952
Inventories 2,614 (7,376)
Other assets (5,143) (6,577)
Accounts payable (3,125) 6,489
Accounts payable to affiliates 19,851 (28,414)
Accrued liabilities 10,444 17,300
--------- ---------
Net cash provided by operating activities 65,082 43,790
--------- ---------
Cash flows from investing activities:
Purchase of property, plant, and equipment (13,777) (11,849)
Proceeds on disposal of property, plant,
and equipment 51 56
Proceeds from short-term investment with
affiliate 75,000 --
--------- ---------
Net cash provided by (used in) investing
activities 61,274 (11,793)
Cash flows from financing activities:
Proceeds from restricted common stock 3 --
--------- ---------
Net cash provided by financing activities 3 --
Effect of exchange rate changes on
cash and cash equivalents (6) (33)
--------- ---------
Net increase in cash and cash equivalents 126,353 31,964
Cash and cash equivalents:
Beginning of period 137,082 167,236
--------- ---------
End of period $ 263,435 $ 199,200
========= =========
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
nine 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:
September 27, December 31,
(In thousands) 2003 2002
----------- ------------
Finished goods $ 14,365 $ 20,044
Work-in-process 43,660 38,560
Raw materials 5,914 7,949
------------ ------------
$ 63,939 $ 66,553
============ ============
Note 3. Contingencies
As of September 27, 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,
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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
any 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 Nine Months Ended
Sept 27, Sept 28, Sept 27, Sept 28,
2003 2002 2003 2002
-------- -------- -------- --------
Net income $ 9,610 $ 13,343 $ 28,874 $ 32,748
Other comprehensive income (loss):
Foreign currency translation adjustment 5 (6) (6) (33)
Pension liability adjustment -- -- 1 --
-------- -------- -------- --------
Total other comprehensive income (loss) 5 (6) (5) (33)
Comprehensive income $ 9,615 $ 13,337 $ 28,869 $ 32,715
======== ======== ======== ========
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 and diluted earnings per common share are computed by using weighted
average common shares outstanding during the period. 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. Adoption of EITF 00-21 does not have a
significant impact on the Company's consolidated financial statements.
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities." This
interpretation clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. FIN 46 applies to existing entities for interim fiscal
periods beginning after September 15, 2003. The Company is currently evaluating
what impact, if any, adoption of FIN 46 will have on its consolidated financial
position, consolidated results of operations, or liquidity.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." The Standard
requires certain classes of financial instruments to be classified as
liabilities by the issuer. The Company has not issued any such financial
instruments.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Net sales for the third quarter of 2003 were $97.4 million compared to $96.1
million for the third quarter of 2002. Net sales for the first nine months of
2003 were $283.4 million compared to $274.7 million for the first nine months of
2002. The Company's book-to-bill ratio for the third quarter of 2003 increased
to 1.2, compared to 1.1 for the second quarter and .9 for the first quarter,
reflecting a continuing recovery in bookings. In addition, the Company's
backlog at the end of the third quarter was 31% greater than the backlog at the
end of the second quarter, and was at its highest level since December 2000.
These increases were likely a result of the approaching holiday season and the
economic recovery from the SARS outbreak and indicate that the Company may
achieve some sequential revenue growth in the fourth quarter of this year.
During the third quarter, orders were strong from Electronic Manufacturing
Services customers, but the majority of customers continue to request short-term
delivery. Thus, long-term demand is still somewhat uncertain and visibility is
short. The Company resumed customer visits to Asia during the third quarter and
achieved its highest bookings in the region since the second quarter of 2000.
The increase in product demand continues to be largely consumer-driven (i.e.,
cell phones and laptop and desktop computers), and the Company is still not
seeing any significant recovery in the telecommunications infrastructure or
corporate IT markets. The Company expects, however, to be ready to meet any
future demand from these markets.
Gross profit as a percentage of net sales in the third quarter and the first
nine months of 2003 was 29% compared to 31% in the third quarter and first nine
months of 2002. The lower gross margin for this year's third quarter reflected
the effects of continuing price declines and changing product mix as the Company
secured incremental business in the lower gross margin products during the
second quarter and the early part of the third quarter. The Company's successful
cost reduction programs helped to mitigate the impact of these factors. As
demand has shown a sharp increase in the third quarter, price degradation should
be reduced and the industry expects to see prices firming in the near future.
Research and development expenses were $4.7 million for the third quarter of
2003 compared to $4.4 million for the third quarter of 2002, a 6% increase.
Research and development expenses were $14.4 million for the first nine months
of 2003 compared to $14.7 million for the first nine months of 2002, a 2%
decrease. The slight decrease for the first nine months of 2003 was due to the
Company's continued effort to implement cost control programs, however the
Company has not reduced its funding for new technology developments and new
product introductions. During the third quarter of 2003, the Company introduced
51 new products and secured 200 design wins. The Company continues to
successfully contribute to the design community cost effective and high
performance solutions for power management and conversion applications. The
Company has also dedicated significant resources to its environmentally friendly
lead-free conversion program and now offers over 240 devices in this product
line. The Company believes that its focus on developing the best solutions for
customers through innovation will continue to enhance its leadership in key
markets. At the same time, the Company believes that its cost reduction programs
and improving manufacturing efficiencies position it well to penetrate further
into power management applications in the telecommunications, portable computer,
consumer, industrial, and automotive markets.
Selling, marketing, and administration expenses were $11.5 million for the
third quarter of 2003 compared to $10.8 million in the third quarter of 2002.
Selling, marketing, and administration expenses were $33.5 million for the first
nine months of 2003 compared to $31.5 million for the first nine months of 2002.
The Company's selling, marketing, and administration expenses as a percentage of
net sales in the third quarter and the first nine months of 2003 were 12%
compared to 11% for the third quarter and the first nine months of 2002. The
increase in selling, marketing, and administration expenses in 2003 was largely
due to increases in spending for directors' and officers' liability insurance,
compliance with the Sarbanes-Oxley Act, and legal fees incurred in connection
with the Company's efforts to maximize the benefits from its patent portfolio.
Interest income for the third quarter of 2003 was $0.6 million compared to
$0.8 million in the third quarter of 2002. Interest income for the first nine
months of 2003 was $1.8 million compared to $2.3 million for the first nine
months 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.
8
Other expense was $92,000 for the third quarter of 2003 compared to $1.4
million of other income for the third quarter of 2002. The other income in the
third quarter of 2002 was due to the receipt of $1.4 million received from the
Chinese government as an incentive for being a foreign partner in China.
Income tax expense for the third quarter of 2003 was $2.7 million compared to
$3.8 million for the third quarter of 2002. Income tax expense for the first
nine months of 2003 was $8.1 million compared to $9.2 million for the first nine
months of 2002. The Company's effective tax rate was 22.0% in the first nine
months of 2003, the same as in the first nine months of 2002. The Company
expects that the effective tax rate for 2003 will be 22.0%.
Liquidity and Capital Resources
At September 27, 2003, the Company had $263.4 million in cash and cash
equivalents, compared to $212.1 million in cash, cash equivalents and short-term
note receivable from affiliate at December 31, 2002. The increase of $51.3
million was mainly due to cash generated from operations in the first nine
months of 2003 and an increase in the payable balance to affiliates. The cash
balance of $263.4 million as of September 27, 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 $65.1 million in the first nine
months of 2003 compared to $43.8 million in the same period of 2002. The
increase in net cash provided by operating activities for the first nine months
of 2003 was primarily due to an increase in the payable balance to affiliates.
Net affiliate payables as of September 27, 2003 increased by $14.7 million from
December 31, 2002, mainly due to the timing of cash payments made to
unconsolidated affiliates. Accounts payable as of September 27, 2003 decreased
by $3.1 million from December 31, 2002, mainly due to the timing of payments to
vendors. Accrued liabilities as of September 27, 2003 increased by $10.4 million
from December 31, 2002, mainly due to the increase in accrued income taxes and
management incentive programs.
Net inventories as of September 27, 2003 decreased by $2.6 million from
December 31, 2002. Raw materials as of September 27, 2003 decreased by $2.0
million from December 31, 2002, reflecting the Company's improved efficiency in
management of raw material purchases. Work-in-process as of September 27, 2003
increased by $5.1 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 September 27, 2003
decreased by $5.7 million from December 31, 2002, mainly due to an increase in
the Company's sales in the third quarter of 2003.
Net cash provided by investing activities was $61.3 million in the first nine
months of 2003 compared to $11.8 million used in investing activities in the
same period of 2002. The receipt of $75 million from a related party promissory
note primarily drove this increase. The Company spent $13.8 million on capital
expenditures in the first nine months of 2003, primarily related to facility
upgrades and machinery and equipment.
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 the Company's December 31, 2002 Annual 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 September 27, 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 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 September 27, 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 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
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
M. 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 M. Clancy, Principal Accounting Officer
(b) Reports on Form 8-K:
On July 30, 2003, the Company filed a current report under Item 12
of Form 8-K announcing its earnings for its second fiscal quarter
ended June 28, 2003.
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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: November 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