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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
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(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the Quarter ended September 28, 2002
___ 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: 0-19299
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Integrated Circuit Systems, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2000174
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2435 Boulevard of the Generals
Norristown, Pennsylvania 19403
(Address of principal executive offices)
(610) 630-5300
(Registrant's telephone number including area code)
--------------------------------
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 ___
---
As of November 9, 2002, there were 67,781,153 shares of Common Stock; $0.01 par
value, outstanding.
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INTEGRATED CIRCUIT SYSTEMS, INC.
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets:
September 28, 2002 (Unaudited) and June 29, 2002 3
Consolidated Statements of Operations (Unaudited):
Three Months Ended September 28, 2002 and September 29, 2001 4
Consolidated Statements of Cash Flows (Unaudited):
Three Months Ended September 28, 2002 and September 29, 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About 16
Market Risk
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Item 1. Consolidated Financial Statements
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
Sept. 28, June 29,
2002 2002
----------- ---------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 107,182 $ 74,255
Marketable securities 19,174 36,266
Accounts receivable, net 29,633 28,741
Inventory, net 17,060 18,556
Deferred income taxes 7,341 6,791
Prepaid income taxes -- 1,181
Prepaid assets 6,200 4,781
Other current assets 906 8,924
----------- ---------
Total current assets 187,496 179,495
----------- ---------
Property and equipment, net 18,021 18,324
Intangibles 31,825 32,400
Goodwill 41,575 41,575
Other assets 4,555 4,598
----------- ---------
Total assets $ 283,472 $ 276,392
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations $ 14,630 $ 13,744
Accounts payable 14,406 11,416
Accrued expenses and other current liabilities 14,860 25,272
Income taxes payable 770 --
----------- ---------
Total current liabilities 44,666 50,432
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Long-term debt, less current portion 25,510 28,514
Other liabilities 13,163 13,475
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Total liabilities 83,339 92,421
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Shareholders' equity:
Common stock, $0.01 par, authorized 300,000;
Issued and outstanding 68,137 and 67,841 shares as of
September 28, 2002 and June 29, 2002, respectively. 681 678
Additional paid in capital 227,452 227,531
Accumulated deficit (18,738) (32,451)
Deferred compensation (1,463) (3,988)
Treasury stock, at cost, 655 shares (7,799) (7,799)
----------- ---------
Total shareholders' equity 200,133 183,971
----------- ---------
Total liabilities and shareholders' equity $ 283,472 $ 276,392
=========== =========
See accompanying notes to consolidated financial statements.
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands)
(Unaudited)
Three Months Ended
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September 28, September 29,
2002 2001
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Revenues: $ 57,789 $ 35,707
Cost and expenses:
Cost of sales 23,321 15,146
Research and development 8,218 6,648
Selling, general and administrative 9,676 4,448
Amortization of intangibles 575 --
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Operating income 15,999 9,465
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Interest and other income 592 925
Interest expense (486) (22)
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Income before income taxes 16,105 10,368
Income taxes 2,392 1,503
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Net income $ 13,713 $ 8,865
============= =============
Basic
Basic income per share:
Net income $ 0.20 $ 0.13
Diluted income per share:
Net income $ 0.20 $ 0.13
Weighted average shares outstanding - basic 67,336 66,428
Weighted average shares outstanding - diluted 70,076 70,019
See accompanying notes to consolidated financial statements.
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Three Months Ended
------------------
September 28, September 29,
2002 2001
------------- -------------
Cash flows from operating activities:
Net income $ 13,713 $ 8,865
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,262 1,273
Amortization of bond premiums 87 3
Deferred financing charge 27 3
Amortization of deferred compensation (213) 246
(Gain) loss on sale of assets (191) (28)
Tax benefit of stock options 2,177 3,946
Deferred income taxes (836) 414
Changes in assets and liabilities:
Accounts receivable (892) (4,442)
Inventory 1,496 (1,480)
Other assets, net (817) (146)
Accounts payable, accrued expenses and other current liabilities (375) 8,342
Accrued interest expense 391 --
Income taxes 1,951 (2,932)
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Net cash provided by operating activities 18,780 14,064
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Cash flows from investing activities:
Sales/Maturities of marketable securities 22,156 --
Purchases of marketable securities (5,000) (23,019)
Capital expenditures (1,402) (621)
Other 27 101
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Net cash provided by (used in) investing activities 15,781 (23,539)
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Cash flows from financing activities:
Exercise of stock options 294 531
Shares purchased through stock purchase plan 190 144
Purchase of treasury stock -- (4,681)
Repayments of long-term debt (2,118) (121)
------------- -------------
Net cash used in financing activities (1,634) (4,127)
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Net increase (decrease) in cash and cash equivalents 32,927 (13,602)
Cash and cash equivalents:
Beginning of period 74,255 91,400
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End of period $ 107,182 $ 77,798
============= =============
See accompanying notes to consolidated financial statements.
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) INTERIM ACCOUNTING POLICY
The accompanying financial statements have not been audited. In the opinion of
our management, the accompanying consolidated financial statements reflect all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly our financial position at September 28, 2002 and results of operations
and cash flows for the interim periods presented. Certain items have been
reclassified to conform to current period presentation.
Certain footnote information has been condensed or omitted from these financial
statements. Therefore, these financial statements should be read in conjunction
with the consolidated financial statements and related notes included in our
Annual Report on Form 10-K for the year ended June 29, 2002. Results of
operations for the three months ended September 28, 2002 are not necessarily
indicative of results to be expected for the full year.
In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," we have identified below some of
the accounting principles critical to our business and results of operations. We
determined the critical principles by considering accounting policies that
involve the most complex or subjective decisions or assessments. We state these
accounting policies in Management's Discussion and Analysis of Financial
Condition and Results of Operations and in the Notes to the consolidated
financial statements contained in our Annual Report on Form 10-K for our fiscal
year ended June 29, 2002. In addition, we believe our most critical accounting
policies include, but are not limited to, the following:
Consolidation Policy
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany balances
and transactions have been eliminated.
Goodwill and Intangible Assets
Goodwill represents the excess of cost over the fair value of net assets
acquired from business acquisitions. Prior to July 1, 2001, all goodwill was
amortized using the straight-line method over periods ranging from five to
thirty years. Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets", addresses, among other things, how
goodwill and other intangible assets should be accounted for after they have
been initially recorded in the financial statements. Under SFAS 142, goodwill
and other indefinite lived intangible assets are no longer amortized, but are
required to be tested annually or whenever circumstances occur that would
indicate impairment. Beginning July 1, 2001, we ceased the amortization of
goodwill. In assessing recoverability, many factors are considered, including
historical and forecasted operating results and cash flows of the acquired
businesses. After consideration of these factors, we will determine whether or
not there is impairment to goodwill and other indefinite lived intangible
assets. We expect to complete our required annual assessment in the fourth
quarter of fiscal 2003. There can be no assurance that a future impairment test
will not result in a charge to earnings.
At September 28, 2002, we have $41.6 million of goodwill and $18.4 million of
indefinite life intangible assets. We believe that no impairment of goodwill or
other indefinite lived intangible assets existed at September 28, 2002. We had
no indefinite lived intangible assets prior to the acquisition of Micro Networks
Corporation ("MNC").
Revenue Recognition
Revenues from product sales are recognized as revenue upon shipment to the
customer. We offer a right of return to certain customers. Allowances are
established to provide for estimated returns at the time of sale. We recognize
sales to these customers, in accordance with the criteria of SFAS No. 48,
"Revenue Recognition When
Right of Return Exists", at the time of the sale based on the following: the
selling price is fixed at the date of sale, the buyer is obligated to pay for
the products, title of the products has transferred, the buyer has economic
substance apart from us, we do not have further obligations to assist the buyer
in the resale of the product and the returns can be reasonably estimated at the
time of sale.
Income Taxes
Income tax expense includes U.S., state and international income taxes and are
computed in accordance with SFAS No. 109, "Accounting for Income Taxes". Certain
items of income and expense are not reported in income tax returns and financial
statements in the same year. The income tax effects of these differences are
reported as deferred income taxes. Income tax credits are accounted for as a
reduction of income tax expense in the year in which the credits reduce income
taxes payable. Valuation allowances are provided against deferred income tax
assets, which are not likely to be realized. We currently provide income taxes
on the earnings of foreign subsidiaries to the extent those earnings are taxable
in the local jurisdictions. We do not provide for United States income tax on
foreign earnings because, in management's opinion, such earnings have been
indefinitely reinvested in foreign operations.
Estimates
Our preparation of this Quarterly Report on Form 10-Q requires us to make
estimates and assumptions that affect amounts reported in the consolidated
financial statements and notes. Actual results could differ from those estimates
and assumptions. Had our estimates been based on a different set of assumptions,
then estimates may have resulting in a significant impact of the financial
statements.
(2) ACQUISITION
On January 4, 2002, we acquired MNC for $77.3 million, net of cash acquired. We
believe that by acquiring MNC we now have access to technology, that will
broaden our offering of silicon timing products to strengthen our position
within strategic markets such as servers, storage systems and communications.
The purchase price includes $5.6 million in purchase accounting liabilities. Of
the total amount recorded, $4.3 million represents costs associated with closing
or moving office and production activities and $1.3 million represents severance
and other personnel costs. We expect to complete the restructuring by February
28, 2003. As of September 28, 2002, we have expended approximately $0.9 million
of this reserve relating to severance and facility closing costs. Approximately
$0.6 million of the remaining amount relates to severance and other personnel
costs to be paid in fiscal year 2003, $1.8 million relates to vacated facilities
leased with expiration dates through 2012 and the balance represents fixed
assets that we will dispose of. This reserve is included in "Accrued expense and
other current liabilities" in the Balance Sheet. The results of MNC have been
included in the consolidated financial statements since the acquisition date.
The following unaudited pro forma combined results of operations are provided
for illustrative purposes only and assumes this acquisition occurred as of the
beginning of each of the periods presented. The following unaudited pro forma
information (in thousands, except per share amounts) should not be relied upon
as necessarily being indicative of the historical results that would have been
obtained if this acquisition had actually occurred during those periods, nor the
result that may be obtained in the future.
Three Months Ended
September 28, September 29,
2002 2001
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Pro forma revenue $ 57,789 $ 48,774
Pro forma net income 13,713 10,358
Diluted net income per common share as reported 0.20 0.16
Pro forma diluted net income per common share 0.20 0.15
(3) INVENTORY
Inventory is valued at the lower of cost or market. Cost is determined by the
first in, first out (FIFO) method. The components of inventories are as follows
(in thousands):
September 28, 2002 June 29, 2002
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Work-in-process $ 14,966 $ 15,843
Finished parts 9,941 10,797
Less: Obsolescence reserve (7,847) (8,084)
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$ 17,060 $ 18,556
================== =============
(4) DEBT
In connection with the acquisition of MNC, we entered into a revolving credit
and term loan facility dated December 31, 2001, which will expire December 31,
2004. The new facility enables us to draw down $45.0 million under the term loan
and $10.0 million under the revolving credit facility. At our option, the
interest rates under the term loan will be either (1) a base rate, which is the
higher of (i) a rate of interest announced from time to time by the lenders'
administrative agent as the base rate ("Base Rate") or (ii) the sum of 0.5% per
annum plus the federal funds rate or (2) London Interbank Offer Rate ("LIBOR")
plus 1.75%. At our option, the interest rates under the Revolving Credit Loan,
will be either (1) the Base Rate or (2) the LIBOR Rate plus a pre-formulated
margin. Currently we have selected LIBOR plus 1.75% as the interest rate on our
term loan. During the first quarter of fiscal year 2003, we paid down $2.0
million of the term loan. As of September 28, 2002, $40.0 million was
outstanding on our term loan.
In connection with our bank agreement, we entered into an 18-month interest rate
swap agreement with the same financial institution. The interest rate swap
agreement essentially enables us to manage the exposure to fluctuations in
interest rates on a portion of our term loan.
Our term loan requires us to pay interest based on a variable rate. Under the
interest rate swap agreement, we are exchanging the variable rate interest on a
portion of our term loan, equal to a 50% of the outstanding loan amount, with a
fixed rate of 5.00%. The interest rate swap agreement is in effect until June
2003, with the notional amount decreasing to $14.8 million over the effective
period.
The interest rate swap agreement has been designated as a cash flow hedge and,
therefore, changes in the fair value of the agreement will be recorded in
comprehensive loss. To date there has not been a significant change in fair
value of the agreement.
Certain of our loan agreements require the maintenance of specified financial
ratios, including a fixed charge coverage ratio, a funded debt to EBITDA ratio
and a minimum tangible net worth, and impose financial limitations. At September
28, 2002, we were in compliance with the covenants.
(5) CAPITAL STOCK
In September 2001, we announced a repurchase program, which authorized the
purchase, from time to time, of 2.0 million shares of our common stock on the
market. In October 2002, we announced that our board of directors approved to
increase the number of shares to be repurchased under this repurchase program to
3.0 million. As of September 28, 2002, we had purchased 655,000 shares for $7.8
million.
(6) NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB No. 13, and Technical Corrections." Among other
things, SFAS No. 145 updates, clarifies and simplifies existing accounting
pronouncements and allows extraordinary accounting treatment for early
extinguishment only when the provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" are met. SFAS 145 is effective for fiscal years beginning after
May 15, 2002. The adoption of this statement has not had a material impact on
our operating results.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses the recognition,
measurement and reporting of costs associated with exit and disposal activities,
including restructuring activities that are currently accounted for pursuant to
the guidance set forth in Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
scope of SFAS No. 146 includes costs related to terminating a contract that is
not a capital lease, costs to consolidate facilities or relocate employees, and
certain termination benefits provided to employees who are involuntarily
terminated. SFAS No. 146 also requires companies to recognize costs associated
with exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan. SFAS No. 146 is effective for exit
or disposal activities initiated after December 31, 2002. We do not believe that
adoption of this statement will have a material impact on our operating results.
(7) NET INCOME PER SHARE
Basic net income per share is based on the weighted-average number of common
shares outstanding excluding contingently issuable or returnable shares that
contingently convert into Common Stock upon certain events. Diluted net income
per share is based on the weighted average number of common shares outstanding
and diluted potential common shares outstanding.
The following table set forth the computation of net income (numerator) and
shares (denominator) for earnings per share:
Three Months Ended
September 28, September 29,
2002 2001
------------------------------------------
Numerator (in thousands):
Net income $ 13,713 $ 8,865
------------------------------------------
Denominator (in thousands):
Weighted average shares outstanding used for basic
income per share 67,336 66,428
Common stock options 2,740 3,591
------------------------------------------
Weighted average shares outstanding used for diluted
income per share 70,076 70,019
==========================================
(8) INCOME TAXES
Our effective income tax rate was 14.9% for the first quarter of fiscal year
2003 as compared to 14.5% in the prior year period. The effective tax rate for
fiscal years 2002 and 2001 reflects the tax-exempt status of our Singapore
operation, which has been given pioneer status, or exemption of taxes on
non-passive income for five years. We do not currently calculate deferred taxes
on our investment in our Singapore operations, as all undistributed earnings are
permanently reinvested back into the Singapore facility. If we were to record
deferred taxes on our investment, the amount would be a $39.7 million liability
as of September 28, 2002.
(9) LEGAL PROCEEDINGS
From time to time, various inquiries, potential claims and charges and
litigation are made, asserted or commenced by or against us, principally arising
from or related to contractual relations and possible patent infringement. We
believe that any of these claims currently pending, individually and in the
aggregate, have been adequately reserved and will not have any material adverse
effect on our consolidated financial position or results of operations, although
no assurance can be made in this regard.
On March 28, 2001, Cypress Semiconductor Corporation ("Cypress"), filed a patent
infringement lawsuit in Delaware federal court against us ("Delaware Lawsuit").
On April 4, 2001, we filed a patent infringement lawsuit in California federal
court against Cypress ("California Lawsuit"). On July 20, 2001, Cypress filed a
complaint with the International Trade Commission ("ITC"), against us for
infringement of one patent, and on November 5, 2001, we filed a complaint with
the ITC against Cypress for infringement of two patents (collectively, "ITC
Actions"). After we filed the second Motion for Summary Determination in the ITC
Actions, which were consolidated, we and Cypress resolved all litigation between
ourselves. We have accrued the cost of this settlement as of June 29, 2002. On
August 15, 2002, the Delaware Lawsuit was dismissed with prejudice. On August
23, 2002, the California Lawsuit was dismissed with prejudice. On or about
August 26, 2002, the Judge in the ITC Actions granted the Joint Motion to
Terminate the Investigation. As of the date of the filing of this Form 10-Q, we
are no longer engaged in any litigation with Cypress.
(10) CUSTOMERS
In fiscal year 2001, we entered into an Investment and Stock Trade Agreement
(the "agreement") with Maxtek Technology Co. Ltd ("Maxtek"), a distributor in
Taiwan. We invested $4.0 million and own approximately 10% of Maxtek. The
agreement states that if Maxtek fails to successfully complete a public offering
by December 5, 2005, we, at our sole option, have the right to demand immediate
repurchase of all 4.0 million shares, at the original purchase price plus
accrued annual interest (commercial rate set by the Central Bank of China)
during the said period. Maxtek, our distributor for our PC business in Taiwan
and China, represented approximately 21% of our sales for the first three months
of fiscal year 2003, and 11% in the prior year period. Additionally, sales to
Maxtech Corporation Limited ("Maxtech"), an entity which is commonly controlled
by the owners' of Maxtek representing business in Hong Kong and China, were 18%
of our sales in the first three months of fiscal year 2003 and 23% in the prior
year period. In addition, Compaq Computer International represented 12% of our
first quarter fiscal 2003 revenue.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Except for the historical statements and discussions contained herein,
statements contained in this Report on Form 10-Q constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, such as when we describe
what we believe, expect or anticipate will occur, and other similar statements.
You must remember that our expectations may not be correct. While we believe
these expectations and projections are reasonable, such forward-looking
statements are inherently subject to risks, uncertainties and assumptions about
us, including, among other things:
.. Our dependence on continuous introduction of new products based on the latest
technology
.. The intensely competitive semiconductor and personal computer component
industries
.. The importance of frequency timing generator products to total revenue
.. Our dependence on the personal computer industry and third-party silicon
wafer fabricators and assemblers of semiconductors
.. Risks associated with international business activities and acquisitions and
integration of acquired companies or product lines
.. Our dependence on proprietary information and technology and on key personnel
.. Our product liability exposure and the potential unavailability of insurance
.. General economic conditions, including economic conditions related to the
semiconductor and personal computer industries
We do not guarantee that the transactions and events described in this Form 10-Q
will happen as described or that they will happen at all. You should read this
Form 10-Q completely and with the understanding that actual future results may
be materially different from what we expect. We disclaim any intention or
obligation to update these forward-looking statements, even though our situation
will change in the future.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship to revenue of certain cost, expense and income items. The table and
the subsequent discussion should be read in conjunction with the financial
statements and the notes thereto:
Three Months Ended
------------------
September 28, September 29,
2002 2001
---------------- ---------------
Revenues 100.0% 100.0%
Gross Margin 59.6 57.6
Research and development 14.2 18.6
Selling, general and administrative 17.7 12.5
---------------- ---------------
Operating income 27.7 26.5
---------------- ---------------
Interest and other income 1.0 2.6
Interest expense (0.8) (0.1)
---------------- ---------------
Income before income taxes and extraordinary gain 27.9 29.0
Income taxes 4.2 4.2
---------------- ---------------
Net income 23.7% 24.8%
================ ===============
FIRST QUARTER FISCAL YEAR 2003 AS COMPARED TO FIRST QUARTER FISCAL YEAR 2002
Revenue. Revenue increased by $22.1 million to $57.8 million for the first
quarter ended September 28, 2002 as compared to the prior year quarter. This
increase is attributable to several factors: the addition of Micro Network
products due to the acquisition in the third quarter of fiscal 2002, silicon
content of PC clocks per motherboard increased, the beginning ramp for clocks in
DDR Server memory and penetration into enterprise networks. The average selling
price increased 24.1%, while the volume increased 30.4%.
Foreign revenue, which includes shipments of products to foreign companies as
well as offshore subsidiaries of US multinational companies, was 76.7% of total
revenue for the first quarter of fiscal year 2003 as compared to 78.2% of total
revenue in the prior year quarter. Our sales are denominated in U.S. dollars
which minimizes foreign currency risk.
Gross Margin. Cost of sales increased $8.2 million to $23.3 million for the
quarter ended September 28, 2002, as compared to the prior year quarter. Cost of
sales as a percentage of total revenue was 40.4% for the first quarter of fiscal
year 2003 as compared to 42.4% in the prior year quarter. The shift in product
mix was the primary factor for this decrease in cost.
Research and Development Expense. Research and development ("R&D") expense
increased $1.6 million to $8.2 million for the first quarter of fiscal year 2003
from $6.6 million in the prior year quarter. This increase is primarily due to
the acquisition of Micro Networks Corporation ("MNC") in the third quarter of
fiscal 2002. As a percentage of revenue, research and development decreased to
14.2% in the first quarter of fiscal year 2003 as compared to 18.6% in the prior
year period. Our continued emphasis on R&D includes greater spending in research
and development for our silicon timing business. The increased expense
represented a lower percentage of revenue due to the significant increase in
sales during the first quarter of fiscal year 2003 as compared to prior year
quarter.
Selling, General, Administrative and Other. Selling, general, administrative and
other expense increased $5.9 million to $10.3 million for the first quarter of
fiscal year 2003 as compared to the prior year period. This large increase is
primarily due to the acquisition of MNC, variable expenses relating to increased
revenues and due to legal fees from litigation that was settled in the first
quarter of fiscal 2003. As a percentage of total revenue, selling, general and
administrative expenses increased to 17.7% in the first quarter of fiscal year
2003 as compared to 12.5% in the prior year period.
Operating Income. In dollar terms, operating income was $16.0 million in the
first quarter of fiscal year 2003 compared to $9.5 million in the first quarter
of fiscal year 2002. Expressed as a percentage of revenue, operating income was
27.7% and 26.5% in the first quarter of fiscal year 2003 and the prior year
period, respectively.
Interest Expense. Interest expense was $0.5 million in the first quarter of
fiscal year 2003 and $22,000 in the first quarter of fiscal year 2002. The
increase in interest expense is due to the funds borrowed to acquire MNC in the
third quarter of fiscal 2002.
Interest and Other Income. Interest and other income was $0.6 million for the
quarter ended September 28, 2002 and $0.9 million in the prior year quarter.
Income Tax Expense. Our effective income tax rate was 14.9% for the first
quarter of fiscal year 2003 as compared to 14.5% in the prior year period. The
effective tax rate for fiscal years 2003 and 2002 reflects the tax-exempt status
of our Singapore operation, which has been given pioneer status, or exemption of
taxes on non-passive income for five years. The decrease in overall tax rate was
directly attributable to increased revenue and income in our Singapore
operations relative to our domestic operations. We do not currently calculate
deferred taxes on our investment in our Singapore operations, as all
undistributed earnings are permanently reinvested
back into the Singapore facility. If we were to record deferred taxes on our
investment, the amount would be a $39.7 million liability as of September 28,
2002.
INDUSTRY FACTORS
Our strategy has been to develop new products and introduce them ahead of the
competition in order to have them selected for design into products of leading
OEMs. Our newer components, which include advanced motherboard FTG components,
data communication components and memory components, are examples of this
strategy. However, there can be no assurance that we will continue to be
successful in these efforts or that further competitive pressures would not have
a material impact on revenue growth or profitability.
We include customer-released orders in our backlog, which may generally be
canceled with 45 days advance notice without significant penalty to the
customers. Accordingly, we believe that our backlog, at any time, should not be
used as a measure of future revenues.
The semiconductor and personal computer industry, in which we participate, is
generally characterized by rapid technological change, intense competitive
pressure, and, as a result, products price erosion. Our operating results can be
impacted significantly by the introduction of new products, new manufacturing
technologies, rapid changes in the demand for products, decreases in the average
selling price over the life of a product and our dependence on third-party wafer
suppliers. Our operating results are subject to quarterly fluctuations as a
result of a number of factors, including competitive pressures on selling
prices, availability of wafer supply, fluctuation in yields, changes in the mix
of products sold, the timing and success of new product introductions and the
scheduling of orders by customers. We believe that our future quarterly
operating results may also fluctuate as a result of Company-specific factors,
including pricing pressures on our more mature FTG components, continuing demand
for our custom ASIC products, acceptance of our newly introduced components and
market acceptance of our customers' products. Due to the effect of these factors
on future operations, past performance may be a limited indicator in assessing
potential future performance.
LIQUIDITY AND CAPITAL RESOURCES
At September 28, 2002, our principal sources of liquidity included cash and
investments of $126.4 million as compared to the June 29, 2002 balance of $110.5
million. Net cash provided by operating activities was $18.8 million in the
first quarter of fiscal year 2003, as compared to $14.1 million in the prior
year quarter. This increase is primarily attributable to the increase in our
profitability and the decrease in inventory. As a result of our continued
collection efforts, our days sales outstanding remained at 47 days, while our
effort on improving our inventory controls resulted in inventory turns
increasing from 4.7 times in fiscal year 2002 to 5.4 times in the first quarter
of fiscal year 2003.
Purchases for property and equipment were $1.4 million in the first quarter of
fiscal year 2003 as compared to $0.6 million in the prior year quarter as we
purchased production equipment for our Singapore and Worcester facilities and
began the conversion of MNC onto our business systems.
In September 2001, we announced a repurchase program, which authorized the
purchase, from time to time, of 2.0 million shares of our common stock on the
market. In October 2002, we announced that our board of directors approved to
increase the number of shares to be repurchased under this repurchase program to
3.0 million. As of September 28, 2002, we had purchased 655,000 shares for $7.8
million.
In connection with the acquisition of MNC, we entered into a new revolving
credit and term loan facility dated December 31, 2001, which will expire
December 31, 2004. The new facility enables us to draw down $45.0 million under
the term loan and $10.0 million under the revolving credit facility. At our
option, the interest rates under the term loan will be either (1) a base rate,
which is the higher of (i) a rate of interest announced from time to time by the
lenders' administrative agent as the base rate ("Base Rate") or (ii) the sum of
0.5% per annum plus the federal funds rate or (2) London Interbank Offer Rate
("LIBOR") plus 1.75%. At our option, the interest rates under the Revolving
Credit Loan, will be either (1) the Base Rate or (2) the LIBOR Rate plus a
pre-formulated margin. During the first quarter of fiscal year 2003, we paid
down $2.0 million of the term loan. As of September 28, 2002, $40.0 million was
outstanding on our term loan; $14.5 million of this is classified current.
The following summarizes our significant contractual obligations and commitments
as of September 28, 2002 (in thousands):
Contractual Less than After
Obligations Total 1 year 1 - 3 years 4 - 5 years 5 years
---------------------------------------------------------------------------------------------
Long-Term Debt $ 40,000 $ 14,500 $ 25,500 $ -- $ --
Operating Leases 17,288 2,967 5,454 5,143 3,723
---------------------------------------------------------------------------------------------
Total $ 57,288 $ 17,467 $ 30,954 $ 5,143 $ 3,723
---------------------------------------------------------------------------------------------
Operating leases primarily consist of leased facilities that we utilize in
various locations.
Certain of our loan agreements require the maintenance of specified financial
ratios, including a fixed charge coverage ratio, a funded debt to EBITDA ratio
and a minimum tangible net worth, and impose financial limitations. At September
28, 2002, we were in compliance with the covenants.
On January 4, 2002, we acquired MNC for $77.3 million, net of cash acquired. We
believe that by acquiring MNC we now have access to technology, that will
enhance the performance of our silicon timing products in order to strengthen
our position within existing strategic markets such as servers and storage
systems. The purchase price includes $5.6 million in purchase accounting
liabilities. Of the total amount recorded, $4.3 million represents costs
associated with closing or moving office and production activities and $1.3
million represents severance and other personnel costs. We expect to complete
the restructuring by February 28, 2003. As of September 28, 2002, we have
expended approximately $0.9 million of this reserve relating to severance and
facility closing costs. Approximately $0.6 million of the remaining amount
relates to severance and other personnel costs to be paid in fiscal year 2003,
$1.8 million relates to vacated facilities leased with expirations dates through
2012 and the balance represents fixed assets that, management believes, will
have little success in selling. This reserve is included in "Accrued expense and
other current liabilities" in the Balance Sheet. The results of MNC have been
included in the consolidated financial statements since the acquisition date.
In fiscal year 2001, we entered into an Investment and Stock Trade Agreement
(the "agreement") with Maxtek Technology Co. Ltd ("Maxtek"), a distributor in
Taiwan. We invested $4.0 million and own approximately 10% of Maxtek. The
agreement states that if Maxtek fails to successfully complete a public offering
by December 5, 2005, we, at our sole option, have the right to demand immediate
repurchase of all 4.0 million shares, at the original purchase price plus
accrued annual interest (commercial rate set by the Central Bank of China)
during the said period. Maxtek, our distributor for our PC business in Taiwan
and China, represented approximately 21% of our sales for the first three months
of fiscal year 2003, and 11% in the prior year period. Additionally, sales to
Maxtech Corporation Limited ("Maxtech"), an entity which is commonly controlled
by the owners' of Maxtek representing business in Hong Kong and China, were 18%
of our sales in the first three months of fiscal year 2003 and 23% in the prior
year period. In addition, Compaq Computer International represented 12% of our
first quarter fiscal 2003 revenue.
We believe that the funds on hand together with funds expected to be generated
from our operations as well as borrowings under our bank revolving credit
facility will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next twelve months.
Thereafter, we may need to raise additional funds in future periods to fund our
operations and potential acquisitions if any. We may also consider conducting
future equity or debt financings if we perceive an opportunity to access the
capital markets on a favorable basis, within the next twelve months or
thereafter. Any such additional financing, if needed, might not be available on
reasonable terms or at all. Failure to raise capital when needed could seriously
harm our business and results of operations. If additional funds were raised
through the issuance of equity securities or convertible debt securities, the
percentage of ownership of our shareholders would be reduced. Furthermore, such
equity securities or convertible debt securities might have rights, preferences
or privileges senior to our common stock.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB No. 13, and Technical Corrections." Among other
things, SFAS No. 145 updates, clarifies and simplifies existing accounting
pronouncements and allows extraordinary accounting treatment for early
extinguishment only when the provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" are met. SFAS 145 is effective for fiscal years beginning after
May 15, 2002. The adoption of this statement has not had a material impact on
our operating results.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses the recognition,
measurement and reporting of costs associated with exit and disposal activities,
including restructuring activities that are currently accounted for pursuant to
the guidance set forth in Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
scope of SFAS No. 146 includes costs related to terminating a contract that is
not a capital lease, costs to consolidate facilities or relocate employees, and
certain termination benefits provided to employees who are involuntarily
terminated. SFAS No. 146 also requires companies to recognize costs associated
with exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan. SFAS No. 146 is effective for exit
or disposal activities initiated after December 31, 2002. We do not believe that
adoption of this statement will have a material impact on our operating results.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exposures
Our sales are denominated in U.S. dollars and accordingly, we do not use forward
exchange contracts to hedge exposures denominated in foreign currencies or any
other derivative financial instruments for trading or speculative purposes. The
effect of an immediate 10% change in exchange rates would not have a material
impact on our future operating results or cash flows.
Interest Rate Risk
In connection with our bank agreement, we entered into an 18-month interest rate
swap agreement with the same financial institution. The interest rate swap
agreement essentially enables us to manage the exposure to fluctuations in
interest rates on a portion of our term loan.
Our term loan requires us to pay interest based on a variable rate. Under the
interest rate swap agreement, we are exchanging the variable rate interest on a
portion of our term loan, equal to 50% of the outstanding loan amount, with a
fixed rate of 5.0%. The interest rate swap agreement is in effect until June
2003, with the notional amount decreasing to $14.8 million over the effective
period.
The interest rate swap agreement has been designated as a cash flow hedge and,
therefore, changes in the fair value of the agreement will be recorded in
comprehensive loss. To date there has not been a significant change in fair
value of the agreement.
We do not use derivatives for trading or speculative purposes, nor are we party
to leverage derivatives.
The company had interest expense of $0.5 million for the first quarter of fiscal
year 2003. The potential increase in interest expense for the first quarter of
fiscal year 2003 from hypothetical 2% adverse change in variable interest rates
would be approximately $0.2 million.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. Based on their evaluation of
the Company's disclosure controls and procedures (as defined in Rules 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934) (the "Exchange Act") as
of a date within 90 days of the filing date of this Quarterly Report on Form
10-Q, the Company's president, chief executive officer and chief financial
officer (principal executive officer and principal financial officer) have
concluded that the Company's disclosure controls and procedures are designed to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms and are operating in an effective manner.
Changes in internal controls. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their most recent evaluation.
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K:
None
(b) The following is a list of exhibits filed as part
of the Form 10-Q:
(99.1) Certification pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer)
(99.2) Certification pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer)
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.
INTEGRATED CIRCUIT SYSTEMS, INC.
Date: November 12, 2002 By: /s/ Hock E. Tan
---------------------------------
Hock E. Tan
President and Chief Executive Officer
Date: November 12, 2002 By: /s/ Justine F. Lien
---------------------------------
Justine F. Lien
Vice President, Finance and Chief
Financial Officer
(Principal financial & accounting
officer)
CERTIFICATIONS
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Hock E. Tan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Integrated
Circuit Systems, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the Evaluation Date, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
November 12, 2002 /s/ Hock E. Tan
--------------------- -------------------------------------
Date Hock E. Tan
President and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Justine F. Lien, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Integrated
Circuit Systems, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the Evaluation Date, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
November 12, 2002 /s/ Justine F. Lien
------------------ -----------------------
Date Justine F. Lien
Senior Vice President and Chief Financial Officer