<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- --------- Exchange Act of 1934. For the quarterly period ended September 29,
1996.
- --------- 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: 0-18738
ZILOG, INC.
(Registrant)
California 13-3092996
- ----------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
210 East Hacienda Avenue, Campbell, California, 95008-6600
- -------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 370-8000
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
------------- -------------
20,071,844 shares of Common Stock Issued and Outstanding as of October 27, 1996.
<PAGE> 2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZILOG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
------------------ -----------------
Sep. 29, Oct. 1, Sep. 29, Oct. 1,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $63,803 $62,715 $230,261 $192,154
Costs and expenses:
Cost of sales 41,178 32,264 131,653 96,984
Research and development 7,360 5,562 22,359 18,391
Selling, general and administrative 12,838 9,159 36,352 30,322
------- ------- -------- -------
61,376 46,985 190,364 145,697
------- ------- -------- -------
Operating income 2,427 15,730 39,897 46,457
Other income (expense):
Interest income 611 907 2,049 2,280
Interest expense (56) (81) (219) (248)
Other, net (157) (418) (1,251) 352
------- ------- -------- -------
Income before income taxes 2,825 16,138 40,476 48,841
Provision for income taxes 989 5,810 14,167 17,583
------- ------- -------- -------
Net income $1,836 $10,328 $26,309 $31,258
===== ====== ====== ======
Net income per share $0.09 $0.50 $1.29 $1.54
======= ====== ====== ======
Number of shares used in computing
per share amounts 20,254 20,815 20,434 20,288
======= ====== ====== ======
</TABLE>
See accompanying notes.
2
<PAGE> 3
ZILOG, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
September 29, December 31,
1996 1995
---- ----
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,640 $ 7,784
Short-term investments 48,202 73,824
Accounts receivable, less allowance for doubtful
accounts of $250 in 1996 and 1995 35,154 43,061
Inventories 36,150 28,152
Prepaid expenses, deferred income taxes and
other current assets 14,683 16,071
-------- --------
Total current assets 142,829 168,892
Property, plant and equipment, at cost 359,177 264,111
Less: accumulated depreciation and amortization (117,118) (84,771)
-------- --------
Net property, plant and equipment 242,059 179,340
Other assets 4,055 5,198
-------- --------
$388,943 $353,430
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 30,139 $ 36,207
Accrued compensation and employee benefits 15,016 14,747
Other accrued liabilities 4,781 6,574
Income taxes payable 13,837 8,603
-------- --------
Total current liabilities 63,773 66,131
Deferred income taxes 8,435 8,435
Shareholders' equity:
Common Stock, no par value; 75,000,000 shares
authorized; 20,020,206 shares issued and
outstanding at September 29, 1996 (19,455,627 shares
at December 31, 1995) 156,990 145,313
Retained earnings 159,683 133,374
Net unrealized gain on securities 62 177
-------- --------
Total shareholders' equity 316,735 278,864
-------- --------
$388,943 $353,430
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
ZILOG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Increase (decrease) in cash and cash equivalents
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 29, October 1,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $26,309 $31,258
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 33,977 17,316
Loss from disposition of equipment 97 257
Changes in assets and liabilities:
Accounts receivable 7,907 (2,887)
Inventories (7,998) (1,450)
Prepaid expenses, deferred income taxes and
other assets 2,322 (5,087)
Accounts payable (6,068) (7,760)
Accrued compensation and employee benefits 269 (1,036)
Other accrued liabilities and income taxes payable 3,441 7,320
-------- -------
Cash provided by operating activities 60,256 37,931
-------- -------
Cash flows from investing activities:
Capital expenditures (96,257) (51,890)
Short-term investments:
Purchases (41,357) (89,634)
Proceeds from sales 36,442 64,240
Proceeds from maturities 30,095 23,959
-------- -------
Cash used for investing activities (71,077) (53,325)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of stock 11,677 15,799
-------- -------
Increase in cash and cash equivalents 856 405
Cash and cash equivalents at beginning of period 7,784 8,035
-------- -------
Cash and cash equivalents at end of period $ 8,640 $ 8,440
======== =======
</TABLE>
See accompanying notes.
4
<PAGE> 5
ZILOG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1) Interim information is unaudited; however, in the opinion of the Company's
management, all adjustments (consisting only of normal recurring
adjustments), necessary for a fair statement of interim results have been
included. The results for interim periods are not necessarily indicative of
results to be expected for the entire year. These financial statements and
notes should be read in conjunction with the Company's annual consolidated
financial statements and notes thereto contained in the Company's Annual
Report to Shareholders and the Company's Annual Report on Form 10-K for the
year ended December 31, 1995. The Consolidated Balance Sheet at December 31,
1995 has been derived from audited financial statements at that date.
2) The following is a summary of total securities, which are all held as
available-for-sale (in thousands):
<TABLE>
<CAPTION>
September 29, 1996
--------------------------------------------------------------------
Gross Gross Estimated
Cost Unrealized Unrealized Fair
Gains Losses Value
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bonds $48,108 $116 $(22) $48,202
====================================================================
</TABLE>
The gross realized gains and losses on sales have not been material for the
three and nine month periods ended September 29, 1996 and October 1, 1995.
The amortized cost and estimated fair value of marketable debt securities are
shown below (in thousands):
<TABLE>
<CAPTION>
September 29, 1996
-----------------------------
Estimated
Cost Fair
Value
---------- -----------
<S> <C> <C>
Due in 1 year or less $29,992 $30,054
Due after 1 year through 3 years 18,116 18,148
---------- -----------
Total debt securities $48,108 $48,202
========== ===========
</TABLE>
5
<PAGE> 6
3) The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
September 29, December 31,
1996 1995
---------------- -----------------
<S> <C> <C>
Raw Materials $ 6,837 $ 3,195
Work-in-process 23,836 22,077
Finished goods 5,477 2,880
--------------- -----------------
$36,150 $28,152
=============== =================
</TABLE>
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT:
When used in this Report, the words "estimate," "project," "intend,"
and "expect" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially. For a discussion of certain of such
risks, see "Factors That May Affect Future Results." Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to publicly release
updates or revisions to these statements.
6
<PAGE> 7
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table presents unaudited results. The Company believes that all
necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts shown below to state fairly the selected quarterly
information when read in conjunction with the Condensed Consolidated Financial
Statements included elsewhere herein. Interim results are based on fiscal
quarters of thirteen weeks in duration ending on the last Sunday of each
quarter. The operating results for any quarter are not necessarily indicative of
results for any subsequent quarter or the full fiscal year. All tabular
information is provided in thousands, except per share amounts and percentages.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sep. 29, Oct. 1, Sep. 29, Oct. 1,
1996 1995 1996 1995
---- ---- ----- ----
<S> <C> <C> <C> <C>
Net Sales $63,803 $62,715 $230,261 $192,154
Operating Income $ 2,427 $15,730 $ 39,897 $ 46,457
Net Income $ 1,836 $10,328 $ 26,309 $ 31,258
Net Income Per Share $ 0.09 $ 0.50 $ 1.29 $ 1.54
</TABLE>
Net Sales
The Company's quarterly operating results have and will vary because of
a number of factors, including the timing and success of new product
introductions, changes in product mix, volume, timing and shipment of orders and
fluctuations in manufacturing productivity. Quarter-to-quarter sales comparisons
are also subject to customer order patterns and seasonality. Because the
Company's products are available from both the Company and distributors, the
customer's decision to buy from a distributor or directly from the Company can
affect Zilog's quarterly sales and profitability. See "Factors That May Affect
Future Results" for a discussion of additional considerations which may affect
the Company's future operating results.
Net sales increased 1.7% for the third quarter of 1996 over the
comparable quarter of 1995, and 19.8% for the first nine months of 1996,
compared to the same period of 1995. The increase in the third quarter sales was
due to an increase in the consumer market, primarily as a result of higher
volumes on products used in televisions and infrared (IR) remotes, but offset by
declines in the datacommunications market as volume decreases were experienced
in commodities, modem, military and low end serial products.
7
<PAGE> 8
The revenue growth during the last three quarters was due to higher
sales in the consumer market, primarily in products used in televisions, low end
microcontrollers (MCU) and IR remotes. These higher sales were offset by a
decline in low end serial products, and modem controller products. While the
Company has in the past been a substantial supplier of controller chips for
modems, there is a developing trend for certain modems which do not incorporate
controllers. This trend is anticipated to reduce the Company's participation in
the modem business for the foreseeable future.
Domestic net sales decreased 14.7% for the third quarter of 1996,
compared with the third quarter of 1995, and represented 37.7% of net sales for
the third quarter of 1996. International sales increased by 15.2% from the
comparable quarter of 1995 and represented 62.3% of sales for the third quarter
of 1996. The largest increases in sales in international areas are Hong Kong,
Korea, Japan and Europe.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sep. 29, Oct. 1, Sep. 29, Oct. 1,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cost of Sales $41,178 $32,264 $131,653 $96,984
Percentage of Net Sales 64.5% 51.4% 57.2% 50.5%
</TABLE>
Cost of sales increased as a percentage of net sales in the third
quarter of 1996 compared to the same quarter of 1995. For the nine months ending
September 29, 1996, cost of sales increased as a percentage of sales to 57.2%
from 50.5% compared with the same period of 1995. The increase in the percentage
of cost of sales to net sales for both the third quarter of 1996 and for the
year to date was primarily attributable to additional depreciation expenses and
production overhead costs. During the second half of 1995, the Company began
production in its new eight inch sub-micron facility in Nampa, Idaho.
Depreciation expenses related to the capital additions at the new facility are
expected to increase throughout 1996 and during the first half of 1997. The
financial impact of the additional depreciation and production overhead costs
will be, in part, determined by the volume of products produced and the
efficiency of the production ramp up at the new facility.
Gross margins have also been impacted by a shift from higher margin
datacommunications products towards lower margin consumer products. This trend
is expected to continue throughout the remainder of 1996.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sep. 29, Oct. 1, Sep. 29, Oct. 1,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Research and Development $ 7,360 $ 5,562 $22,359 $18,391
Percentage of Net Sales 11.5% 8.9% 9.7% 9.6%
</TABLE>
8
<PAGE> 9
Research and development expenditures increased during the third
quarter of 1996 in absolute terms when compared to the same period of 1995. The
increase in research and development expenses for the third quarter is related
to product development in our new fabrication facility in Nampa, Idaho. The
Company remains committed to continued investment in new product development and
manufacturing process technology.
The Company introduced 15 new products during the third quarter of
1996, bringing the year to date total to 36. During the quarter, 11 new products
were for the consumer market, three for the computer peripherals market and one
for the datacommunications market.
The Company will continue to introduce new Application Specific
Standard Products tailored to serve its market niches and expects continued
revenue and unit growth in these markets.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sep. 29, Oct. 1, Sep. 29, Oct. 1,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Selling, General and Administrative $12,838 $ 9,159 $36,352 $30,322
Percentage of Net Sales 20.1% 14.6% 15.8% 15.8%
</TABLE>
Selling, general and administrative expenses increased during the third
quarter as compared to the same period of 1995. The higher expense level was
primarily due to the costs associated with a litigation settlement during the
quarter and higher commission expenses.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sep. 29, Oct. 1, Sep. 29, Oct. 1,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Other Income (Expense), net $ 398 $408 $ 579 $2,384
Percentage of Net Sales 0.6% 0.7% 0.3% 1.2%
</TABLE>
Other income remained essentially the same for the third quarter of
1996 as compared to the same period of 1995. During the nine months of 1996,
other income decreased when compared to the same period of 1995, primarily due
to foreign exchange translation losses in the first half of 1996 on the
Company's non dollar-based accounts receivable.
9
<PAGE> 10
Taxes
The estimated annual effective tax rate for the third quarter of 1996
and 1995 was 35.0% and 36.0% respectively. For the nine months ended September
29, 1996 and October 1, 1995, the estimated effective tax rate was 35.0% and
36.0% respectively. The lower effective tax rate for the three month and nine
month periods is primarily attributable to increased state investment tax
credits as a result of capital investments.
FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of uncertainties exist that may affect the Company's future
operating results, including uncertain political and general economic
conditions, market acceptance of the Company's new products, the Company's
ability to introduce new products and technologies on a timely basis, changes in
product mix or fluctuations in manufacturing yield that affect the Company's
gross margins, and numerous competitive factors. The slowdown evident in the
personal computer market in the second and third quarters of 1996 had a negative
effect on the Company's sales of personal computer-related products. A prolonged
slump may continue to affect the Company's future operating results.
During the first nine months of 1996, Zilog introduced a total of 36
new products for its consumer, intelligent peripheral controller and
datacommunications product lines. The success of these new products is dependent
on a number of factors, including the Company's ability to continue to achieve
design wins for these products and the Company's ability to manufacture the
products in sufficient quantities to meet anticipated demand. New products may
exhibit technological defects which may impede market acceptance if defects are
not resolved promptly. There can be no assurance that any new products will
receive or maintain substantial market acceptance, nor can there be assurance
that the Company will continue to introduce new products at a similar pace to
that established over the past nine months. The Company believes that a
significant portion of its future revenues will come from these new products.
Gross margins for new products are generally higher and are expected to somewhat
offset price reductions in older products.
The Company's operating results will depend, to a significant extent,
on its ability to continue to introduce new products. The success of new product
introductions is dependent on several factors, including proper new product
selection, timely completion and introduction of new product designs,
development of support tools and collateral literature that make complex new
products easy for engineers to understand as well as use, and market acceptance
of customers' end products.
10
<PAGE> 11
Operating results could be adversely affected if the Company is unable
to develop and implement new design and process technologies. Design and process
technology advances are extremely complex areas subject to rapid technological
change and significant risk. New product designs must be completed in time to
meet market requirements, and volume production of new products at acceptable
yields must be achieved for business plan operating results to be realized. New
products anticipated from and introduced by Zilog could create uncertainty in
the marketplace and cause customers to defer or alter design wins or purchasing
decisions. Additionally, new products or product enhancements from competitors
of the Company, or significant pricing pressures, could have an adverse impact
on the Company's operating results.
As is typical in the semiconductor industry, the Company has from time
to time experienced lower than anticipated production yields. Qualifying and
ramping a new facility is an extremely complex process. Operating results could
be adversely affected if any problems occur that make it difficult to produce
the quantities of commercial product that the Company anticipates producing in
the new facility in 1996. Such difficulties include but are not limited to:
equipment being delivered later than or not performing as expected; process
technology changes not operating as expected; engineers not operating equipment
as expected; and other possible problems. The Company cannot at this time
foresee with certainty any such problems, but such problems have occurred in the
past in the start-up and ramp of production in a new facility. Margins on
products are also subject to certain pressures because of depreciation costs
associated with new capital equipment purchases. The Company is also
experiencing certain inflationary pressures in labor and materials. Operating
results could be affected if the Company is unable to pass these cost increases
in labor, raw materials and capital equipment through to the Company's
customers.
The Company has used outside wafer foundries and assemblers to supply a
portion of its manufacturing needs, and from time to time the Company expects to
utilize one or more wafer foundries and assemblers for a portion of its
manufacturing needs. No assurance can be given that these foundries will not
raise prices or meet expected delivery quantities. In addition, no assurance can
be given that the Company or its outside wafer foundries or assemblers will not
experience production yield problems in the future which could result in an
adverse effect on the Company's results of operations. The prolonged failure of
the Company to obtain wafers or assembly services from outside suppliers as
needed could adversely affect the Company's operating results.
Certain of the Company's products are incorporated into disk drives,
printers, keyboards and modems. As a result, a continuation of the slowdown in
the demand for personal computers and related peripherals could adversely affect
the Company's operating results. While the Company has in the past been a
substantial supplier of controller chips for modems, there is a developing trend
for certain modems which do not incorporate controllers.
11
<PAGE> 12
This developing trend is anticipated to reduce the Company's participation in
the modem business for the foreseeable future. A significant portion of the
Company sales are to the consumer electronics markets for use in products such
as television sets, infrared remote controls and telephone answering machines.
The consumer electronics markets are subject to volatile and rapid changes in
customer preferences for electronics products that could adversely impact the
Company's results. The semiconductor industry generally has not experienced
growth similar to that experienced in 1995. The Company is uncertain when, if
ever, the market for the semiconductor industry may attain similar growth to
that experienced in 1995.
Because of the foregoing, as well as other factors affecting the
Company's operating results, past financial performance should not be considered
to be a reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods. In
addition, the Company participates in a highly dynamic industry that may result
in significant volatility of Zilog's common stock price.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------
Sep. 29, Oct. 1,
1996 1995
------------------ --------------
<S> <C> <C>
Cash, Cash Equivalents and
Short-Term Investments $56,842 $91,315
Working Capital $79,056 $99,112
Cash Provided By Operating Activities $60,256 $37,931
Cash Used In Investing Activities $71,077 $53,325
Cash Provided By Financing Activities $11,677 $15,799
</TABLE>
Cash and Short-Term Investments declined by $24.8 million during the
nine months ended September 29, 1996 and were used to pay for the expansion of
the Company's wafer fabrication facilities in Idaho. It is expected that Cash
and Short-Term Investment levels will continue to decline during the next
quarter as additional equipment is acquired for the new fab and new research
facility.
Accounts Receivable declined to $35.2 million from $40.3 million as at
the end of October 1, 1995, even though sales for the first nine months of 1996
were 19.8% above the comparable period of 1995. This was reflected in an
improved days sales outstanding for the third quarter ended September 29, 1996
of 50 days from 58 days reported in the corresponding period of 1995. Inventory
levels increased to $36.2 million as work-in-process levels rose in conjunction
with increased processing at the new wafer fabrication facility in Nampa, Idaho.
12
<PAGE> 13
The Company expects to make total capital additions of approximately
$110 million in 1996. These expenditures will primarily be used for the design,
construction and equipping of the Company's new wafer fabrication facility in
Nampa, Idaho and for general corporate purposes. The expansion will provide
increased production capacity and new research facilities as well.
The Company believes its current cash, cash equivalents and short-term
investment balances, together with funds expected to be generated from
operations, will provide adequate cash to fund the Company's anticipated
liquidity needs for at least the next twelve months. The Company may also use
bank borrowings and capital leases, depending on the terms available. The
Company's cash requirements in the future may also be financed by a combination
of additional equity or debt financing.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Ko, et al. v. Zilog, Inc. was settled during the quarter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information concerning the matters submitted for a vote at the
Company's 1996 Annual Meeting on April 24, 1996 was reported in the Company's
Form 10-Q for the quarter ended March 31, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following exhibit is filed herewith:
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K
None
14
<PAGE> 15
ZILOG, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: November 11, 1996 ZILOG, INC.
/s/ Robert E. Collins
----------------------------
Robert E. Collins
Vice President and
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-29-1996
<CASH> 8,640
<SECURITIES> 48,202
<RECEIVABLES> 35,404
<ALLOWANCES> 250
<INVENTORY> 36,150
<CURRENT-ASSETS> 142,829
<PP&E> 359,177
<DEPRECIATION> 117,118
<TOTAL-ASSETS> 388,943
<CURRENT-LIABILITIES> 63,773
<BONDS> 0
0
0
<COMMON> 156,990
<OTHER-SE> 159,745
<TOTAL-LIABILITY-AND-EQUITY> 388,943
<SALES> 230,261
<TOTAL-REVENUES> 230,261
<CGS> 131,653
<TOTAL-COSTS> 131,653
<OTHER-EXPENSES> 22,359
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 219
<INCOME-PRETAX> 40,476
<INCOME-TAX> 14,167
<INCOME-CONTINUING> 26,309
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,309
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.29
</TABLE>
