10-Q 1 kl08021_10-q.txt FORM 10-Q QUARTERLY REPORT 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 29, 2002 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) 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 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 12, 2002. 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 29, 2002 and June 30, 2001 3 Consolidated Balance Sheets as of June 29, 2002 and December 31, 2001 4 Consolidated Statements of Cash Flows for the six months ended June 29, 2002 and June 30, 2001 5 Notes to Consolidated Financial Statements 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. Other Information Item 1 Legal Proceedings 11 Item 4 Submission of Matters to a Vote of Security Holders 12 Item 6 Exhibits and Reports on Form 8-K 13 Signatures 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 29, June 30, June 29, June 30, 2002 2001 2002 2001 ---------- --------- --------- --------- Net sales $ 94,935 $ 73,288 $ 178,537 $ 161,425 Cost of sales 65,661 54,042 124,855 113,853 --------- --------- --------- --------- Gross profit 29,274 19,246 53,682 47,572 Operating expenses: Research and development 5,504 4,651 10,266 8,986 Selling, marketing, and administration 11,073 10,279 20,698 21,626 Goodwill amortization -- 115 -- 229 --------- --------- --------- --------- Operating income 12,697 4,201 22,718 16,731 Interest income 635 1,385 1,488 3,563 Other income (expense) - net 810 1,160 788 (11) --------- --------- --------- --------- Income before taxes and minority interest 14,142 6,746 24,994 20,283 Income taxes (2,882) (1,597) (5,473) (4,840) Minority interest in income of consolidated subsidiary (60) (59) (118) (118) --------- --------- --------- --------- Net income $ 11,200 $ 5,090 $ 19,403 $ 15,325 ========= ========= ========= ========= Net income per share (basic and diluted) $ 0.37 $ 0.17 $ 0.65 $ 0.51 ========= ========= ========= ========= 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) June 29, December 31, 2002 2001 ----------- ------------ Assets Current assets: Cash and cash equivalents $ 180,499 $ 167,236 Accounts receivable, less allowances 41,185 33,644 Accounts receivable from affiliates 13,344 12,457 Inventories 64,577 61,302 Other current assets 22,621 17,801 Deferred income taxes 5,058 5,058 --------- --------- Total current assets 327,284 297,498 --------- --------- Property, plant, and equipment, at cost: Land 1,715 1,715 Buildings and improvements 55,356 53,946 Machinery and equipment 354,927 352,196 --------- --------- 411,998 407,857 Less accumulated depreciation 255,978 237,378 --------- --------- Net property, plant, and equipment 156,020 170,479 Goodwill 7,445 7,445 Other assets 286 376 --------- --------- Total assets $ 491,035 $ 475,798 ========= ========= Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 26,219 $ 17,800 Accounts payable to affiliates 12,922 36,692 Accrued payroll and related compensation 8,403 6,409 Other accrued liabilities 27,208 18,274 --------- --------- Total current liabilities 74,752 79,175 --------- --------- Long-term debt, less current portion 2,226 2,001 Deferred income taxes 15,010 15,010 Other non-current liabilities 36,976 36,976 Minority interest 3,725 3,666 --------- --------- Total liabilities 132,689 136,828 --------- --------- Commitments and contingencies Stockholders' equity: Common stock 299 299 Additional paid-in-capital 59,370 59,370 Retained earnings 299,505 280,102 Accumulated other comprehensive loss (828) (801) --------- --------- Total stockholders' equity 358,346 338,970 --------- --------- Total liabilities and stockholders' equity $ 491,035 $ 475,798 ========= =========
See accompanying Notes to Consolidated Financial Statements. 4
SILICONIX INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Six Months Ended June 29, June 30, 2002 2001 ---------- ---------- Cash flows from operating activities: Net income $ 19,403 $ 15,325 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 20,292 20,675 Deferred income taxes -- 1,880 Other non-cash expenses 225 64 Changes in assets and liabilities, net of acquisitions: Accounts receivable (7,541) 33,374 Accounts receivable from affiliates (887) 14,308 Inventories (3,275) (1,112) Other assets (4,754) (3,964) Accounts payable 8,419 (24,648) Accounts payable to affiliates (23,770) (14,254) Accrued liabilities 10,987 (18,011) --------- --------- Net cash provided by operating activities 19,099 23,637 --------- --------- Cash flows from investing activities: Purchase of property, plant, and equipment (5,865) (15,651) Proceeds from sale of property, plant, and equipment 56 5 --------- --------- Net cash used in investing activities (5,809) (15,646) --------- --------- Cash flows from financing activities: Proceeds from restricted common stock -- 2 --------- --------- Net cash provided by financing activities -- 2 --------- --------- Effect of exchange rate changes on cash and cash equivalents (27) 20 --------- --------- Net increase in cash and cash equivalents 13,263 8,013 Cash and cash equivalents: Beginning of period 167,236 134,265 --------- --------- End of period $ 180,499 $ 142,278 ========= =========
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, 2001 consolidated financial statements and notes thereto. The results of operations for the first six months of 2002 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 29, December 31, (In thousands) 2002 2001 ------------- -------------- Finished goods $ 19,011 $ 20,985 Work-in-process 36,247 32,963 Raw materials 9,319 7,354 ------------- -------------- $ 64,577 $ 61,302 ============= ============== Note 3. Contingencies As of June 29, 2002, 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. 6 In February and March 2001, several purported class action complaints were filed in the Court of Chancery in and for New Castle County, Delaware and the Superior Court of the State of California against Vishay, the Company, and the Company's directors in connection with Vishay's announced proposal to purchase all issued and outstanding shares of the Company not already owned by Vishay. The class actions, filed on behalf of all non-Vishay Siliconix shareholders, allege, among other things, that Vishay's proposed offer was unfair and a breach of fiduciary duty. One of the Delaware class actions also contains derivative claims against Vishay on behalf of the Company alleging self-dealing and waste because Vishay purportedly usurped the Company's inventory and patents, appropriated the Company's separate corporate identity, and obtained a below-market loan from the Company. In May 2001, the Delaware Court of Chancery consolidated the several class action complaints described above. On or about May 31, 2001, lead plaintiff Fitzgerald served an amended complaint, an application for a preliminary injunction against proceeding with or taking steps to give effect to Vishay's proposed tender offer or the contemplated short-form merger, and a motion to expedite proceedings and additional discovery requests. In addition to his prior allegations, plaintiff claimed, among other things, that in connection with the proposed offer and short-form merger, defendants allegedly violated (i) their duty to deal fairly from a timing and process perspective with the minority shareholders of Siliconix, (ii) their duties of loyalty and candor, and (iii) Vishay's obligations to pay a fair price to the Siliconix minority shareholders. Following expedited discovery and briefing, on June 19, 2001, the Delaware Court of Chancery issued its order denying Fitzgerald's motion for a preliminary injunction. The Court found that Fitzgerald had not succeeded in demonstrating that he had a reasonable probability of success on the merits of his claims. The Company and Vishay filed motions to dismiss the verified amended complaint on June 6, 2001. Vishay filed a motion for summary judgment on June 25, 2001. The motions to dismiss and for summary judgment are pending. On July 3, 2001, the California Superior Court entered an order staying the California state-court actions that had been filed against the Company and Vishay in connection with Vishay's earlier proposal. On April 25, 2001, the Company initiated a lawsuit against General Semiconductor, Inc. In its complaint, the Company asserted claims that General Semiconductor is infringing United States Letters Patent Nos. 5,072,266 and 5,298,442 relating to certain power MOSFET products. General Semiconductor has denied the material allegations in the Company's complaint and has asserted various affirmative defenses. General Semiconductor also has asserted counterclaims for patent misuse and unfair competition against the Company, seeking a declaratory judgment of non-infringement, invalidity and/or unenforceability and seeking injunctive relief, damages, attorneys' fees and costs. The Company has not responded to those counterclaims. On November 2, 2001, General Semiconductor was acquired by Vishay, which owns 80.4% of the Company. The Company and General Semiconductor have agreed to settle the lawsuit. It is expected that the settlement agreement will be signed in the third quarter of 2002. On November 2, 1999, the Company initiated a lawsuit against Fairchild Semiconductor Corporation. In its complaint, the Company asserted claims that Fairchild is infringing United States Letters Patent Nos. 5,072,266 and 5,298,442 relating to certain power MOSFET products. Fairchild denied the material allegations in the Company's complaint and asserted various affirmative defenses. On July 24, 2002, the Company and Fairchild Semiconductor International, Inc. (NYSE: FCS), announced a settlement on mutually agreeable terms. The settlement was reached due to the parties' desire to establish a long-term cooperative business relationship and to avoid future litigation. As part of the settlement, the Company granted Fairchild a license to the two patents. The specific terms of the license and other details of the settlement are confidential. The Company is engaged in discussions with various parties regarding patent licensing and cross patent licensing issues. In the opinion of management, the outcome of these discussions will not have a material adverse effect on the Company's consolidated financial condition or overall trends in the results of operations. 7 Note 4. Comprehensive Income The following are the components of comprehensive income:
(In thousands) Three Months Ended Six Months Ended June 29, June 30, June 29, June 30, 2002 2001 2002 2001 --------- ---------- ---------- -------- Net Income $ 11,200 $ 5,090 $ 19,403 $ 15,325 Other comprehensive income (loss): Foreign currency translation adjustment (26) 6 (27) 20 -------- -------- -------- -------- Total other comprehensive income (loss) (26) 6 (27) 20 Comprehensive income $ 11,174 $ 5,096 $ 19,376 $ 15,345 ======== ======== ======== ========
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 are 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. Change in Accounting Effective January 1, 2002, amortization of goodwill is no longer permitted in accordance with Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets". The non-amortization of goodwill in the second quarter of 2001 and the first half of 2001 would have resulted in an increase in operating income of $115,000 and $229,000, respectively. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Net sales for the second quarter of 2002 were $94.9 million compared to $73.3 million for the second quarter of 2001. Net sales for the first half of 2002 were $178.5 million compared to $161.4 million for the first half of 2001. The improvement in the Company's business that began in the fourth quarter of 2001 has continued into the second quarter of 2002. The portable computer, lithium ion battery pack, and game console markets have been the principal drivers although there has been some uncertainty recently in the portable computer market, which led to softer bookings in Asia Pacific late in the second quarter and into the third quarter of 2002. The desktop computer market has been slower than expected, consistent with recent announcements from some of the Company's customers. At the same time, the Company has observed an increase in cellular telephone production. However, the Company does not have a great deal of visibility beyond the third quarter. Gross profit as a percentage of net sales in the second quarter of 2002 was 31% compared to 26% for the second quarter of 2001. Gross profit as a percentage of net sales in the first half of 2002 was 30% compared to 29% for the first half of 2001. The improvement in the Company's gross profit as a percentage of net sales resulted from higher capacity utilization, cost reduction programs and firming pricing. Research and development expenses were $5.5 million for the second quarter of 2002 compared to $4.7 million for the second quarter of 2001, a 17% increase. Research and development expenses were $10.3 million for the first half of 2002 compared to $9.0 million for the first half of 2001, a 14% increase. The Company continues its commitment to the development of new products and technologies. During the first half of 2002, the Company introduced 61 new products and secured 461 new designs. Additional new technology platforms have also been developed which will allow the Company's products to provide significant performance improvements over competitive solutions. Newer technologies are also being used to help reduce the Company's manufacturing costs. Selling, marketing, and administration expenses were $11.1 million for the second quarter of 2002 compared to $10.3 million for the second quarter of 2001. Selling, marketing, and administration expenses were $20.7 million for the first half of 2002 compared to $21.6 million for the first half of 2001. The sequential increase in the second quarter was mainly due to increased sales and marketing spending, in line with higher revenues and new product introduction. The Company's selling, marketing, and administration expenses as a percentage of net sales were 12% and 14% for the second quarter of 2002 and 2001 respectively. The Company's selling, marketing, and administration expenses as a percentage of net sales were 12% and 13% for the first half of 2002 and 2001, respectively. Interest income for the second quarter of 2002 was $0.6 million compared to $1.4 million for the second quarter of 2001. Interest income for the first half of 2002 was $1.5 million compared to $3.6 million for the first half of 2001. The decrease in interest income in 2002 was due to lower interest rates as compared to 2001. All excess cash not immediately needed to fund the Company's operations is invested in money market funds. Other income was $0.8 million for the second quarter of 2002 compared to $1.2 million for the second quarter of 2001. The higher income in 2001 was mainly due to income received from the Chinese government as an incentive for being a foreign partner in China. Income tax expense for the second quarter of 2002 was $2.9 million compared to $1.6 million for the second quarter of 2001. Income tax expense for the first half of 2002 was $5.5 million compared to $4.8 million for the first half of 2001. The increase in income tax expense in 2002 was due to the increase in earnings before tax. 9 Liquidity and Capital Resources At June 29, 2002, the Company had $180.5 million in cash and cash equivalents, compared to $167.2 million in cash and cash equivalents at December 31, 2001. The increase of $13.3 million was due to a decrease in capital expenditures and a sequential increase in profit in the first half of 2002 as compared to the fourth quarter of 2001. Net cash provided by operating activities was $19.1 million in the first half of 2002 compared to $23.6 million in the same period of 2001. The decrease in net cash provided by operating activities for the first half of 2002 was primarily due to an increase in inventories and payment of affiliate balances. Net affiliate payables as of June 29, 2002 decreased by $24.6 million from December 31, 2001, mainly due to the timing of cash payments made to unconsolidated affiliates. Accounts payable as of June 29, 2002 increased by $8.4 million from December 31, 2001, mainly due to the increase in business volume. Accrued liabilities and contingencies as of June 29, 2002 increased by $11.0 million from December 31, 2001, mainly due to the increase in accrued income taxes and management incentive programs. Inventories as of June 29, 2002 increased by $3.3 million from December 31, 2001. Raw materials as of June 29, 2002 increased by $2.0 million from December 31, 2001 as the Company increased its purchases of silicon, piece parts and foundry wafers as a result of an increase in demand. Work-in-process as of June 29, 2002 increased by $3.3 million from December 31, 2001 as a result of an increase in raw materials and production. Finished goods inventory as of June 29, 2002 decreased by $2.0 million from December 31, 2001, mainly due to the Company's inventory control efforts and higher sales. Net cash used by investing activities was $5.8 million in the first half of 2002 compared to $15.6 million in the same period of 2001. The Company spent $5.8 million in capital expenditures in the first half of 2002, primarily related to 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 its December 31, 2001 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. 10 PART II - OTHER INFORMATION Item 1. Legal Proceedings On April 25, 2001, the Company initiated a lawsuit against General Semiconductor, Inc. In its complaint, the Company asserted claims that General Semiconductor is infringing United States Letters Patent Nos. 5,072,266 and 5,298,442 relating to certain power MOSFET products. General Semiconductor has denied the material allegations in the Company's complaint and has asserted various affirmative defenses. General Semiconductor also has asserted counterclaims for patent misuse and unfair competition against the Company, seeking a declaratory judgment of non-infringement, invalidity and/or unenforceability and seeking injunctive relief, damages, attorneys' fees and costs. The Company has not responded to those counterclaims. On November 2, 2001, General Semiconductor was acquired by Vishay, which owns 80.4% of the Company. The Company and General Semiconductor have agreed to settle the lawsuit. It is expected that the settlement agreement will be signed in the third quarter of 2002. On November 2, 1999, the Company initiated a lawsuit against Fairchild Semiconductor Corporation. In its complaint, the Company asserted claims that Fairchild is infringing United States Letters Patent Nos. 5,072,266 and 5,298,442 relating to certain power MOSFET products. Fairchild denied the material allegations in the Company's complaint and asserted various affirmative defenses. On July 24, 2002, the Company and Fairchild Semiconductor International, Inc. (NYSE: FCS), announced a settlement on mutually agreeable terms. The settlement was reached due to the parties' desire to establish a long-term cooperative business relationship and to avoid future litigation. As part of the settlement, the Company granted Fairchild a license to the two patents. The specific terms of the license and other details of the settlement are confidential. 11 Item 4. Submission of Matters to a Vote of Security Holders. (a) The registrant's Annual Meeting of Stockholders was held on June 13, 2002. (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 Abstain Nonvotes ------- ---------- ------- -------- Arndt 29,361,604 319,756 -0- Heiss 29,586,061 95,299 -0- Lipcaman 29,584,861 96,499 -0- Owyang 29,597,030 84,330 -0- Segall 29,586,161 95,199 -0- Smith 29,584,961 96,399 -0- Talbert 29,586,161 95,199 -0- 2. Ratification of the appointment of Ernst & Young LLP as the registrant's auditors for the fiscal year ending December 31, 2002. Broker For Against Abstain Nonvotes --- ------- ------- -------- 29,656,719 21,134 3,507 -0- (d) Not applicable. 12 Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 3.3 - Bylaws (b) Exhibit 99.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - President and Chief Executive Officer (c) Exhibit 99.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Principal Accounting Officer 13 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 13, 2002 By: /s/ King Owyang --------------------------- King Owyang President and Chief Executive Officer By: /s/ William M.Clancy --------------------------- William M. Clancy Principal Accounting Officer 14