10-Q 1 kl08020_10q.txt FORM 10-Q QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-Q (Mark One) X - QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 28, 2003 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 0-3698 SILICONIX INCORPORATED (Exact name of registrant as specified in its charter) Delaware 94-1527868 (State or other jurisdiction (I.R.S. Employer of incorporation Identification No.) or organization) 2201 Laurelwood Road, Santa Clara, California 95054 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code (408) 988-8000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No _ Indicate the number of shares outstanding of each of the registrant's classes of common stock: Common stock, $0.01 par value -- 29,879,040 outstanding shares as of August 7, 2003. 1 SILICONIX INCORPORATED TABLE OF CONTENTS TO FORM 10-Q Part I. Financial Information Page No. Item 1 Financial Statements Consolidated Statements of Operations for the three and six months ended June 28, 2003 and June 29, 2002 3 Consolidated Balance Sheets as of June 28, 2003 and December 31, 2002 4 Consolidated Statements of Cash Flows for the six months ended June 28, 2003 and June 29, 2002 5 Notes to Consolidated Financial Statements 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3 Quantitative and Qualitative Disclosures About Market Risk 10 Item 4 Controls and Procedures 10 Part II. Other Information Item 4 Submission of Matters to a Vote of Security Holders 11 Item 6 Exhibits and Reports on Form 8-K 11 Signatures 12 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements.

See accompanying Notes to Consolidated Financial Statements. 3

See accompanying Notes to Consolidated Financial Statements. 4 SILICONIX INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Six Months Ended June 28, June 29, 2003 2002 --------- --------- Cash flows from operating activities: Net income $ 19,265 $ 19,403 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 19,116 20,292 Other non-cash (income) expense (397) 225 Changes in assets and liabilities, net of acquisitions: Accounts receivable 254 (7,541) Accounts receivable from affiliate (3,190) (887) Inventories (4,275) (3,275) Other assets (2,366) (4,754) Accounts payable (2,470) 8,419 Accounts payable to affiliates 21,064 (23,770) Accrued liabilities 4,197 10,987 Non-current other liabilities 1 -- --------- --------- Net cash provided by operating activities 51,199 19,099 --------- --------- Cash flows from investing activities: Purchase of property, plant, and equipment (8,108) (5,865) Proceeds on disposal of property, plant, and equipment 10 56 Proceeds from short-term investment with affiliate 75,000 -- Short-term investment with affiliate (70,000) -- --------- --------- Net cash used in investing activities (3,098) (5,809) --------- --------- Effect of exchange rate changes on cash and cash equivalents (11) (27) --------- --------- Net increase in cash and cash equivalents 48,090 13,263 Cash and cash equivalents: Beginning of period 137,082 167,236 --------- --------- End of period $ 185,172 $ 180,499 ========= ========= See accompanying Notes to Consolidated Financial Statements. 5 SILICONIX INCORPORATED Notes to Consolidated Financial Statements (Unaudited) Note 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the management of the Company, the consolidated financial statements appearing herein contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results for, and as of the end of, the periods indicated. These statements should be read in conjunction with the Company's December 31, 2002 consolidated financial statements and notes thereto. The results of operations for the first six months of 2003 are not necessarily indicative of the results to be expected for the full year. Note 2. Inventories The components of inventory are as follows: June 28, December (In thousands) 2003 31, 2002 --------- ---------- Finished goods $ 22,185 $ 20,044 Work-in-process 43,192 38,560 Raw materials 5,451 7,949 --------- ---------- $ 70,828 $ 66,553 ========= ========== Note 3. Contingencies As of June 28, 2003, the Company remained a party to two environmental proceedings. The first involves property that the Company vacated in 1972. In July 1989, the California Regional Water Quality Control Board ("RWQCB") issued Cleanup and Abatement Order No. 89-115 both to the Company and the current owner of the property. The Order alleged that the Company contaminated both the soil and the groundwater on the property by the improper disposal of certain chemical solvents. The RWQCB considered both parties to be liable for the contamination and sought to have them decontaminate the site to acceptable levels. The Company subsequently reached a settlement of this matter with the current owner of the property. The settlement provided that the current owner will indemnify the Company and its employees, officers, and directors against any liability that may arise out of any governmental agency actions brought for environmental cleanup of the subject site, including liability arising out of RWQCB Order No. 89-115, to which the Company remains nominally subject. The second proceeding involves the Company's Santa Clara, California facility, which the Company has owned and occupied since 1969. In February 1989, the RWQCB issued Cleanup and Abatement Order No. 89-27 to the Company. The Order was based on the discovery of contamination of both the soil and the groundwater on the property by certain chemical solvents. The Order called for the Company to specify and implement interim remedial actions and to evaluate final remedial alternatives. The RWQCB issued a subsequent order requiring the Company to complete the decontamination. The Company has substantially complied with the RWQCB's orders. In management's opinion, based on discussions with legal counsel and other considerations, the ultimate resolution of the above-mentioned matters is not expected to have a material adverse effect on the Company's consolidated financial condition or results of operations. The Company is engaged in discussions with various parties regarding patent licensing and cross patent licensing issues. In addition, the Company has observed that in the current semiconductor industry business environment, 6 companies have become more aggressive in asserting and defending patent claims against competitors. While the Company will continue to vigorously defend its intellectual property rights, the Company may become party to disputes regarding patent licensing and cross patent licensing. An unfavorable outcome regarding one of these matters could have a material adverse effect on the Company's business and operating results. Note 4. Comprehensive Income The following are the components of comprehensive income:

Note 5. Segment Reporting The Company is engaged primarily in the design, marketing, and manufacturing of power and analog semiconductor products. The Company is organized into three operating segments, which due to their inter-dependencies, similar long-term economic characteristics, and shared production processes and distribution channels have been aggregated into one reportable segment. Note 6. Earnings Per Share Basic earnings per common share is computed by using weighted average common shares outstanding during the period. Diluted earnings per common share incorporates the incremental shares issuable upon the assumed exercise of stock options when diluted. Due to the Company's simple capital structure, basic and diluted earnings per share are the same. Note 7. Accounting Pronouncements In November 2002, the Emerging Issues Task Force (EITF) issued EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables," which provides guidance on the timing and method of revenue recognition for sales arrangements that include the delivery of more than one product or service. EITF 00-21 is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect that the adoption of EITF 00-21 will have a significant impact on its consolidated financial statements. In May 2003, the FASB issued Statement Number 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS 150). This Statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS 150 generally requires liability classification for two broad classes of financial instruments: (1) instruments that represent, or are indexed to, an obligation to buy back the issuer's shares, and (2) obligations that can be settled in shares, but are subject to certain conditions. SFAS 150 applies to all financial instruments created or modified after May 31, 2003, and to other instruments at the beginning of the first interim period beginning after July 1, 2003. As the Company has not created or modified any financial instruments since the effective date of SFAS 150, the Company does not believe this Statement will have a material impact on its financial statements. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Net sales for the second quarter of 2003 were $88.2 million compared to $94.9 million for the second quarter of 2002. Net sales for the first half of 2003 were $186.0 million compared to $178.5 million for the first half of 2002. The outbreak of SARS in Asia had a significant negative impact on the Company's business in the second quarter as more than 70% of the Company's business is generated from Asia. Nevertheless, the Company was still able to increase bookings for the third consecutive quarter. The book-to-bill ratio for the second quarter was greater than one and improved 14 basis points from the first quarter, resulting in an increase in the backlog by more than 13%. The Company sees no signs of inventory build-up either at the distributors or at the end customers. It is becoming more and more common for the Company's major OEM and contract manufacturer customers to request the Company to consign and hold inventory for them. This creates additional challenges for the demand forecasting at the factories and has resulted in a required increase in the Company's die bank inventory. The portable computer market remains consumer-driven. Therefore, the Company does not anticipate any significant increase in the near term in corporate information technology spending. The Company expects slight improvement from quarter to quarter in the second half of 2003; however, customers continue to place orders for the near term and visibility remains uncertain. Gross profit as a percentage of net sales in the second quarter of 2003 was 31%, the same as in the second quarter of 2002. Gross profit as a percentage of net sales in the first half of 2003 was 30%, also the same as in the first half of 2002. The improvement in the second quarter of 2003 over the first quarter of 2003 was a result of a reduction in subcontract manufacturer's expenses and the Company's continuing cost reduction programs. These factors overcame the substantial pricing pressures that the Company experienced during the second quarter, which were even larger than in the first quarter. Research and development expenses were $5.0 million for the second quarter of 2003 compared to $5.5 million for the second quarter of 2002, a 9% decrease. Research and development expenses were $9.7 million for the first half of 2003 compared to $10.2 million for the first half of 2002, a 5% decrease. The decrease in research and development expenses was mainly due to the Company's continued effort to implement cost control programs. The Company has not reduced its funding for new technology developments and new product introductions. During the second quarter of 2003, the Company introduced 57 new products. The Company continues to strive to turn the process developments into cost-effective and efficient power management solutions. Among other things, these solutions provide for components that take up less space and allow for longer battery life. At the same time, the Company believes its cost reduction programs and improving manufacturing efficiencies have well positioned the Company to penetrate further into power management applications in the telecommunications, portable computer, consumer, industrial, and automotive markets. To complement this strategy, the Company continuously endeavors to become more flexible in its execution to meet the challenging needs of the customers. Selling, marketing, and administration expenses were $11.1 million for the second quarter of 2003, the same as in the second quarter of 2002. Selling, marketing, and administration expenses were $22.1 million for the first half of 2003 compared to $20.7 million for the first half of 2002. The Company's selling, marketing, and administration expenses as a percentage of net sales were 13% and 12% for the second quarter of 2003 and 2002, respectively. The Company's selling, marketing, and administration expenses as a percentage of net sales were 12% and 11% for the first half of 2003 and 2002, respectively. The increase in selling, marketing, and administration expenses in 2003 was due to an increase in sales in the first half of 2003 compared to the first half of 2002. The Company continues its efforts to manage and control costs. Interest income for the second quarter of 2003 was $0.6 million, the same as in the second quarter of 2002. Interest income for the first half of 2003 was $1.2 million compared to $1.5 million for the first half of 2002. The decrease in interest income in 2003 was due to lower interest rates as compared to 2002. All excess cash not immediately needed to fund the Company's operations is invested in money market funds. Other expense was $43,000 for the second quarter of 2003 compared to $0.8 million of other income for the second quarter of 2002. The income in 2002 was mainly due to foreign exchange gains from revaluation of the Company's assets held in foreign currencies. 8 Income tax expense for the second quarter of 2003 was $2.6 million compared to $2.9 million for the second quarter of 2002. Income tax expense for the first half of 2003 was $5.4 million compared to $5.5 million for the first half of 2002. The Company's effective tax rate was 22.0% in the first half of 2003, the same as in the first half of 2002. The Company expects that the effective tax rate for 2003 will be 22.0%. Liquidity and Capital Resources At June 28, 2003, the Company had $255.2 million in cash, cash equivalents and short-term note receivable from affiliate, compared to $212.1 million in cash, cash equivalents and short-term note receivable from affiliate at December 31, 2002. The increase of $43.1 million was mainly due to the cash generated by operations in the first half of 2003 and an increase in the payable balance to affiliates. The cash balance of $185.2 million as of June 28, 2003 was mostly invested in money market accounts outside the United States. The Company's cash and profits are expected to be reinvested indefinitely. Any repatriation of earnings and cash back to the United States would be deemed to be a dividend and would be subject to U.S. income taxes, state income taxes, and foreign withholding taxes. Net cash provided by operating activities was $51.2 million in the first half of 2003 compared to $19.1 million in the same period of 2002. The increase in net cash provided by operating activities for the first half of 2003 was primarily due to an increase in the payable balance to affiliates. Net affiliate payables as of June 28, 2003 increased by $17.9 million on December 31, 2002, mainly due to the timing of cash payments made to unconsolidated affiliates. Accounts payable as of June 28, 2003 decreased by $2.5 million from December 31, 2002, mainly due to the timing of payments to vendors. Accrued liabilities as of June 28, 2003 increased by $4.2 million from December 31, 2002, mainly due to a tax provision made for the income generated in the first half of 2003. Net inventories as of June 28, 2003 increased by $4.3 million from December 31, 2002. Raw materials as of June 28, 2003 decreased by $2.5 million from December 31, 2002 as the Company improved its management of raw material purchases. Work-in-process as of June 28, 2003 increased by $4.6 million from December 31, 2002. This increase was mainly in die bank inventory, which provides better service to customers due to their short order visibility. Finished goods inventory as of June 28, 2003 increased by $2.1 million from December 31, 2002, mainly due to an increase in the Company's bookings for shipments in future periods. Net cash used in investing activities was $3.1 million in the first half of 2003 compared to $5.9 million used in investing activities in the same period of 2002. The Company spent $8.1 million on capital expenditures in the first half of 2003, primarily related to facility upgrades and machinery and equipment. In December 2002, the Company signed a loan agreement with Vishay, under which Vishay may, from time to time, borrow from the Company. The borrowing is on a revolving basis and the agreement expires in January 2005. In June 2003, the Company received a related party promissory note under the loan agreement for $70 million from Vishay, which was callable by the Company at any time and bore an interest rate of 2.75%. As of June 28, 2003, the entire related-party promissory note was outstanding. The promissory note was fully repaid on July 1, 2003. For the next twelve months, management expects that cash flows from operations will be sufficient to meet the Company's normal operating requirements and to fund its research and development and capital expenditure plans. SAFE HARBOR STATEMENT Statements contained herein that relate to the Company's future performance, including statements with respect to anticipated improvements in the Company's business and business climate, future product innovation and implementation of cost savings strategies, are forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on current expectations only, and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Among the factors that could cause actual results to materially differ include: general business and economic conditions, particularly in the markets that the Company serves, cancellation of orders in the Company's backlog, difficulties in new product development, and other factors affecting the Company's operations, markets, products, services and prices that are set forth in its December 31, 2002 Report on Form 10-K filed with the Securities and Exchange Commission. You are urged to refer to the Company's Form 10-K for a detailed discussion of these factors. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not applicable. Item 4. Controls and Procedures. As of June 28, 2003, an evaluation was performed under the supervision of and with the participation of the Company's management, including the Company's CEO and Principal Accounting Officer (PAO), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and PAO, have concluded that the Company's disclosure controls and procedures were effective to ensure that all material information required to be disclosed by the Company in this quarterly report was recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There have been no changes in the Company's internal control over financial reporting during the quarter ended June 28, 2003 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 10 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. (a) The registrant's Annual Meeting of Stockholders was held on June 12, 2003. (b) Not applicable. (c) There were two matters voted on at the Meeting. A brief description of each of these matters, and the results of the votes thereon, are as follows: 1. Election of Directors Broker Nominee For Against Nonvotes ------- --- ------- -------- King Owyang 29,144,348 32,557 -0- Christine Heiss 29,131,016 45,889 -0- Mark Segall 29,131,016 45,889 -0- Glyndwr Smith 29,130,995 45,910 -0- Timothy Talbert 29,130,995 45,910 -0- 2. Ratification of the appointment of Ernst & Young LLP as the registrant's auditors for the fiscal year ending December 31, 2003 Broker For Against Abstain Nonvotes --- ------- ------- -------- 29,135,548 36,408 4,949 -0- (d) Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: Exhibit 3.3 - Bylaws, as amended effective June 12, 2003 Exhibit 31.1 - Certification pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Dr. King Owyang, Chief Executive Officer Exhibit 31.2 - Certification pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - William Clancy, Principal Accounting Officer Exhibit 32.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Dr. King Owyang, Chief Executive Officer Exhibit 32.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - William Clancy, Principal Accounting Officer (b) Reports on Form 8-K: On May 2, 2003, the Company filed a current report under Items 7 and 9 of Form 8-K announcing its earnings for its first fiscal quarter ended March 29, 2003. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SILICONIX INCORPORATED Date: August 11, 2003 By: /s/ King Owyang ---------------------------- King Owyang President and Chief Executive Officer By: /s/ William M. Clancy ---------------------------- William M. Clancy Principal Accounting Officer 12

SILICONIX INC 10-Q