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 26, 1997.
-------------------
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 0-11879
VLSI TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2597282
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1109 McKay Drive, San Jose, California, 95131
-----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(408) 434-3100
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(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 ( )
Shares outstanding of the Registrant's Common Stock as of September 26, 1997:
46,892,055
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
VLSI TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME - unaudited
(thousands, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues $ 181,181 $ 170,474 $ 519,636 $ 495,022
Cost of sales 100,241 107,118 298,776 318,727
----------- ----------- ----------- -----------
Gross profit 80,940 63,356 220,860 176,295
----------- ----------- ----------- -----------
Operating expenses:
Research and development 24,831 22,469 71,609 62,980
Marketing, general and
administrative 28,891 27,223 84,520 83,077
----------- ----------- ----------- -----------
Operating income 27,218 13,664 64,731 30,238
Patent matters - (7,500) - (7,500)
Interest income and other
expenses, net 3,423 2,226 9,660 9,067
Interest expense (4,563) (3,502) (13,224) (8,837)
----------- ----------- ----------- -----------
Income from continuing
operations before taxes 26,078 4,888 61,167 22,968
Provision for taxes on income 5,295 1,620 16,515 7,220
----------- ----------- ----------- -----------
Income from continuing
operations 20,783 3,268 44,652 15,748
Loss from discontinued
operation, net of taxes - (635) (2,550) (1,672)
Gain on disposal, net of taxes 7,723 - 7,723 -
----------- ----------- ----------- -----------
Net income $ 28,506 $ 2,633 $ 49,825 $ 14,076
=========== =========== =========== ===========
Income per share from
continuing operations $ .42 $ .07 $ .92 $ .34
Net income per share $ .57 $ .06 $ 1.02 $ .30
=========== =========== =========== ===========
Weighted average common
and common equivalent
shares outstanding 49,865 46,962 48,792 46,745
=========== =========== =========== ===========
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
<PAGE>
<TABLE>
VLSI TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS - unaudited
(thousands)
<CAPTION>
September 26, December 27,
1997 1996
------------- ------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $200,391 $139,074
Liquid investments 84,307 66,685
Accounts receivable, net of allowance
for doubtful accounts and customer
returns of $2,000
($2,200 at December 27, 1996) 114,242 112,508
Inventories:
Raw materials 2,388 3,095
Work-in-process 46,508 42,947
Finished goods 7,194 10,319
-------- --------
Total inventories 56,090 56,361
Deferred and refundable income taxes 79,218 68,638
Prepaid expenses and other current assets 5,170 5,240
-------- --------
Total current assets 539,418 448,506
Property, plant and equipment, at cost 804,495 772,565
Accumulated depreciation and amortization (396,966) (345,301)
-------- --------
Net property, plant and equipment 407,529 427,264
Deferred income taxes 12,941 7,621
Other assets 8,360 7,551
-------- --------
TOTAL ASSETS $968,248 $890,942
======== ========
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
<PAGE>
<TABLE>
VLSI TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS - unaudited (Continued)
(thousands, except per share amounts)
<CAPTION>
September 26, December 27,
1997 1996
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Accounts payable $ 54,284 $ 61,586
Accrued compensation and benefits 24,260 23,762
Deferred income - 8,930
Patent matters 22,935 22,028
Reserve for special charges 43,134 50,990
Other accrued liabilities 49,216 28,536
Income taxes payable 31,077 5,777
Current capital lease obligations 1,204 1,118
Current portion of long-term debt 6,538 7,763
-------- --------
Total current liabilities 232,648 210,490
Long-term debt 198,626 207,627
Other long-term obligations 15,433 2,346
Stockholders' equity:
Preferred Shares, $.01 par value - -
Common Shares, $.01 par value 472 472
Treasury Common Shares, at cost (5,906) (8,349)
Additional paid-in capital 457,568 458,774
Retained earnings 69,407 19,582
-------- --------
Total stockholders' equity 521,541 470,479
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $968,248 $890,942
======== ========
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
<PAGE>
<TABLE>
VLSI TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - unaudited
(thousands)
<CAPTION>
Nine Months Ended
---------------------------
September 26, September 27,
1997 1996
------------- -------------
Increase (decrease) in cash
and cash equivalents
Operating activities:
<S> <C> <C>
Net income $ 49,825 $ 14,076
Adjustments to reconcile net income
to cash generated by operations:
Depreciation and amortization 83,120 82,706
Gain on COMPASS sale, net of discontinued operation (10,592) -
Deferred and refundable income taxes (9,367) 4,318
Changes in operating assets and liabilities:
Accounts receivable (6,293) 2,805
Inventories 271 (1,569)
Accounts payable, income taxes payable, accrued
liabilities and deferred income 13,398 (12,390)
Other (3,359) (5,959)
-------- --------
Cash generated by operations 117,003 83,987
-------- --------
Investing activities:
Purchases of liquid investments (183,024) (107,224)
Proceeds from maturities of liquid investments 179,463 260,782
Purchases of property, plant and equipment (62,758) (237,424)
Proceeds from sale of COMPASS, net of cash sold 25,516 -
Other - (450)
-------- --------
Net cash flow used for investing activities (40,803) (84,316)
-------- --------
Financing activities:
Payments on debt and capital lease obligations (11,053) (7,123)
Repurchase Treasury Shares (17,015) (27,181)
Issuance of Common and Treasury Shares, net 13,185 5,907
-------- --------
Net cash flow used for financing activities (14,883) (28,397)
-------- --------
Net increase (decrease) in cash and cash equivalents 61,317 (28,726)
Cash and cash equivalents, beginning of period 139,074 183,165
-------- --------
Cash and cash equivalents, end of period $200,391 $154,439
======== ========
Supplemental disclosures:
Cash outflows for property, plant and equipment $ 62,758 $237,424
Change in accrued capital acquisitions 3,531 (20,300)
-------- --------
Property, plant and equipment additions $ 66,289 $217,124
======== ========
Interest paid $ 10,869 $ 12,140
======== ========
Income taxes paid, net $ 6,758 $ 3,316
======== ========
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
<PAGE>
VLSI TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The accompanying interim consolidated condensed financial statements have
been prepared in conformance with generally accepted accounting principles,
consistent with those applied in the VLSI Technology, Inc. Annual Report on
Form 10-K for the fiscal year ended December 27, 1996 (the 1996 Annual
Report). This Quarterly Report on Form 10-Q (Form 10-Q) should be read in
conjunction with the 1996 Annual Report. The interim financial statements
are unaudited, but reflect all normal recurring adjustments that are, in
the opinion of management, necessary to a fair statement of results for the
interim periods presented. The results for the quarter and nine-month
period ended September 26, 1997 are not necessarily indicative of the
results that may be expected for the fiscal year ending December 26, 1997.
2. In September 1997, the Company sold its software business, COMPASS Design
Automation Inc. (COMPASS), to Avant! Corporation (Avant!). COMPASS was a
majority owned subsidiary of the Company that provided electronic design
automation (EDA) tools and libraries for deep submicron ASICs and ASSPs.
The Company received approximately $27.5 million in cash, inclusive of
settlement of intercompany debt between COMPASS and VLSI, and 470,000
shares of Avant! common stock in connection with the sale of COMPASS.
Additionally, $1.8 million in cash and 52,000 shares of Avant! stock were
deposited into a one-year escrow account to indemnify Avant! for
contingencies and other matters. VLSI also agreed to a three-year purchase
commitment totaling $21 million for software and EDA tools. As a result,
the Company recognized an after-tax gain of approximately $7.7 million in
the third quarter of 1997 net of the after-tax loss from COMPASS for the
quarter of $2.9 million.
The results for COMPASS have been segregated on the Consolidated Condensed
Statement of Income and accounted for as a discontinued operation, as the
software subsidiary represented a separate line of business for the
Company. Prior period consolidated condensed statements of income have
been reclassified accordingly. COMPASS revenues were $6.5 million and
$12.5 million for the three months ended September 26, 1997 and September
27, 1996, and $28.2 million and $38.2 million for the nine months ended
September 26, 1997 and September 27, 1996, respectively.
3. The Company's tax rate of 27% for the first nine months of 1997 reflects
more pre-tax income flowing through lower tax jurisdictions and the
reversal of certain valuation reserves. The Company's tax rate of 30% for
the first nine months of 1996 primarily reflects benefits from the
utilization of state tax credits and foreign tax rates that are less than
the U.S. statutory rate.
4. In October 1997, the Company entered into an investment agreement with
Wafer Technology (Malaysia) Sdn Bhd, a Malaysian company ("WTM") which
will build a subcontract wafer fabrication facility in Malaysia. In
connection with this agreement, the Company will own less than 20 percent
of WTM. The Company will purchase wafers from the WTM facility and have
the right to receive up to 51 percent of the capacity of the WTM fab. In
addition, the Company will provide certain technology and training and
consulting services to WTM. As part of the agreement, WTM will purchase,
manage and upgrade the Company's San Jose fabrication line, leasing the
current building to operate the fab as a semiconductor development and
prototyping facility. See footnote 7.
5. Periodically, the Company is made aware that technology used by the Company
in the manufacture of some or all of its products may infringe on product
or process technology rights held by others. Resolution of whether the
Company's manufacture of products has infringed on valid rights held by
others could have a material adverse effect on the Company's financial
position or results of operations, and may require material changes in
production processes and products. Several companies, including Motorola,
have individually contacted the Company concerning its alleged use of
intellectual property belonging to them.
VLSI has entered into licensing agreements and technology exchange
agreements with various strategic partners and other third parties in order
to allow VLSI access to third party technology, or to allow third parties
access to VLSI's technology. The Company is unable to predict whether
license agreements can be obtained or renewed on terms acceptable to the
Company or the magnitude of the costs associated with such terms. Failure
to obtain or renew such licenses could have a material adverse effect on
the Company's financial position or results of operations.
The Company continually evaluates the adequacy of its reserve for asserted
and unasserted patent matters. There are many companies which may have
product and process technology rights that VLSI may have infringed. The
reserve for patent matters is based on the best available information at
the time that the reserve is established or re-evaluated, and it is
reasonably possible that the Company's estimate of the exposure for patent
matters could materially change in the near term as additional information
becomes available.
Texas Instruments, Inc. (TI) filed a lawsuit in 1990 claiming process
patent infringement by the Company of now expired U.S. patents. In May
1995, a jury found against the Company in the amount of $19.4 million.
Although contesting the jury verdict, the Company recorded a charge to
earnings of $19.4 million in the second quarter of 1995. The trial judge
subsequently set aside the jury verdict and TI appealed. In July 1996, the
Court of Appeals for the Federal Circuit affirmed the trial judge's order.
In May 1997, the U.S. Supreme Court rejected TI's appeal of the Court of
Appeals order. No license has been concluded with TI and there can be no
assurance that TI will not assert other claims against VLSI for patent
infringement.
6. In January 1996, the Board of Directors (Board) authorized the Company to
repurchase shares of the Company's Common Stock on the open market or in
privately negotiated transactions. The Board authorized the Company to re-
issue these shares at any later date through certain of its employee stock
plans and/or to fund stock or asset acquisitions authorized by the Board.
By the end of 1996, the Company had repurchased 1.8 million shares at an
average price of $15.10 and had re-issued 1.2 million of these shares under
employee stock plans. The remaining 0.6 million shares were re-issued
during the first half of 1997. During the first nine months of 1997 the
Company repurchased 1,000,000 shares at an average per share price of
$17.01 and has re-issued 0.6 million of these shares under employee stock
plans. The Company may, from time to time, continue to repurchase
additional shares.
7. The Company has established a reserve for special charges primarily based
on management's estimated costs associated with the decision to close the
San Jose facility. This estimate is based on the best information
available when the decision was made to close the facility. Although the
Company believes its estimates to be reasonable, actual costs associated
with these plans may differ materially. Particularly, the costs associated
with estimating losses on sales commitments and accommodating customers are
difficult to ascertain. Therefore, the Company may, in future periods, need
to change its estimated costs associated with the special charges as more
information becomes available.
8. Net income per share as presented on the face of the consolidated statements
of income represent primary earnings per common and common equivalent
share. Dual presentation of primary and fully diluted earnings per share
has not been made because the differences are insignificant.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share", which is required to be adopted on
December 26, 1997. At that time, the Company will be required to change
the method currently used to compute net income per share and to restate
all prior periods. The new requirements will include a calculation of
basic earnings per share from which the dilutive effect of stock options
will be excluded. The basic earnings per share is approximately five
percent greater than the Company's reported net income per share for the
quarter and nine months ended September 26, 1997, while not different for
the quarter and nine months ended September 27, 1996. A calculation of
diluted net income per share will also be required; however, this is not
expected to differ materially from the Company's reported net income per
share.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS - FIRST NINE MONTHS OF 1997 COMPARED TO THE FIRST NINE
MONTHS OF 1996
- -----------------------------------------------------------------------------
This Management's Discussion and Analysis of Financial Condition and Results
of Operations (MDA) should be read in conjunction with the MDA in the 1996
Annual Report.
This Form 10-Q contains 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. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk factors
set forth herein and in the 1996 Annual Report. Statements made herein are as
of the date of filing of this Form 10-Q with the Securities and Exchange
Commission. The Company disclaims any obligation to update the contents of
those statements subsequent to the filing of this Form 10-Q.
The following table summarizes the Company's operating results for the nine-
month period ended September 26, 1997 as compared to the nine-month period
ended September 27, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
Nine Months
---------------------------------------------------
1997 1996
------------------------------- -------------------
Percent Percent Percent
of Net Change of Net
Amounts Revenues From 1996 Amounts Revenues
------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
Net revenues $519,636 100.0% 5.0% $495,022 100.0%
Cost of sales 298,776 57.5 (6.3) 318,727 64.4
-------- ----- -------- -----
Gross profit 220,860 42.5 25.3 176,295 35.6
Research & development 71,609 13.8 13.7 62,980 12.7
Marketing, general and
administrative 84,520 16.3 1.7 83,077 16.8
-------- ----- -------- -----
Operating income 64,731 12.4 114.1 30,238 6.1
Patent matters - - (100.0) 7,500 1.5
Interest income
(expense), net (3,564) (0.6) * 230 -
Income taxes 16,515 3.2 128.7 7,220 1.5
-------- ----- -------- -----
Income from continuing
operations 44,652 8.6 183.5 15,748 3.1
Gain (loss) of
discontinued
operation, net of tax 5,173 1.0 * (1,672) (0.3)
-------- ----- -------- -----
Net income $ 49,825 9.6 254.0 $ 14,076 2.8
======== ===== ======== =====
* Not meaningful
</TABLE>
Income from continuing operations was $44.7 million in the first nine months
of 1997, compared to $15.7 million in the first nine months of 1996. This
change primarily reflects increased gross profit and as a percentage of net
revenues (gross margin), partially offset by increased research and
development expenses.
Net revenues in the first nine months of 1997 increased 5.0% from the
comparable 1996 period. The increase over the first nine months of 1996
reflects increased unit volume for the Company's communications products.
This increase was offset in part by decreased demand for the Company's
products for personal computers (PC) and a decrease in orders for the
Company's products for set-top boxes as customers manage their inventories.
International net revenues (including export sales) increased, accounting for
49.5% of net revenues in the first nine months of 1997 compared to 42.9% of
net revenues in the first nine months of 1996, primarily due to increases in
sales to the European region. The growth in European net revenues reflects
increased sales to the Company's major customers for communications devices
and the success of GSM in becoming the leading digital wireless standard in
Europe. Export sales to the Asia-Pacific area in the first nine months of
1997 decreased from the first nine months of 1996, due to a decrease in
shipments of devices for the PC market.
Gross margins increased to 42.5% in the first nine months of 1997 from 35.6%
in the first nine months of 1996, reflecting improved manufacturing
performance, including increased capacity utilization, and changes in product
mix. Gross margin for the first nine months of 1996 included inventory
charges taken for personal computer devices and certain manufacturing
inefficiencies as a result of capacity underutilization.
R&D expenditures increased by $8.6 million in the first nine months of 1997
over expenditures in the same 1996 period and increased as a percentage of net
revenues from 12.7% to 13.8%, reflecting continuing investment in new products
and package and process technologies. R&D expenditures in the first nine
months of 1997 focused on development of products for the communications and
consumer digital entertainment markets and process development.
Marketing, general and administrative expenses for the first nine months of
1997 decreased as a percentage of net revenues compared to the same period in
1996. The Company continues to refocus these functions to better support the
markets it serves.
During the third quarter of 1996, the Company concluded a patent licensing
agreement with IBM. As a result of that agreement, the Company recorded a
charge against earnings of $7.5 million for the release of alleged
infringement claims incurred prior to 1996.
Interest income (expense), net reflects expense of $3.6 million in the first
nine months of the current year as compared to income of $0.2 million in the
same period a year ago. Interest expense increased in the first nine months
of 1997 over the first nine months of 1996 due to a lower level of capitalized
interest resulting from reduced capital expenditures.
The Company's tax rate of 27% for the first nine months of 1997 primarily
reflects more pre-tax income flowing through lower tax jurisdictions and the
reversal of certain valuation reserves. The Company's tax rate of 30% for the
first nine months of 1996 primarily reflects benefits from the utilization of
state tax credits and foreign tax rates that are less than the U.S. statutory
rate.
In September 1997, the Company sold its software business, COMPASS Design
Automation, Inc. (COMPASS) to Avant! Corporation (Avant!). The Company
received approximately $27.5 million in cash, inclusive of settlement of
intercompany debt between COMPASS and VLSI, and 470,000 shares of Avant!
common stock in connection with the sale of COMPASS. Under the terms of the
agreement Avant! is obligated to register the stock, but the Company is at
risk for market price fluctuations until the Company disposes of the stock in
either a public or private sale. Additionally, $1.8 million in cash and
52,000 shares of Avant! stock were deposited into a one-year escrow account to
indemnify Avant! for contingencies and other matters. VLSI also agreed to a
three-year purchase commitment totaling $21 million for software and EDA
tools. As a result, the Company recognized an after-tax gain of approximately
$7.7 million in the third quarter of 1997, net of the after-tax loss from
COMPASS for the quarter of $2.9 million. Net loss from COMPASS for the nine
months ended September 26, 1997 was $5.4 million, of which $2.5 million was
not included in the third quarter gain
calculation. See Note 2 of Notes to Consolidated Condensed Financial
Statements.
<PAGE>
RESULTS OF OPERATIONS - THIRD QUARTER OF 1997 COMPARED TO THE THIRD QUARTER OF
1996
- ---------------------------------------------------------------------------
The following table summarizes the Company's operating results for the three-
month period ended September 26, 1997 as compared to the three-month period
ended September 27, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
Third Quarter
---------------------------------------------------
1997 1996
------------------------------- -------------------
Percent Percent Percent
of Net Change of Net
Amounts Revenues From 1996 Amounts Revenues
------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
Net revenues $181,181 100.0% 6.3% $170,474 100.0%
Cost of sales 100,241 55.3 (6.4) 107,118 62.8
-------- ----- -------- -----
Gross profit 80,940 44.7 27.8 63,356 37.2
Research & development 24,831 13.7 10.5 22,469 13.2
Marketing, general and
administrative 28,891 16.0 6.1 27,223 16.0
-------- ----- -------- -----
Operating income 27,218 15.0 99.2 13,664 8.0
Patent matters - - (100.0) (7,500) 4.4
Interest income
(expense), net (1,140) (0.6) (10.7) (1,276) (0.7)
Income taxes 5,295 2.9 226.9 1,620 1.0
-------- ----- -------- -----
Income from continuing
operations 20,783 11.5 536.0 3,268 1.9
Gain (loss) of
discontinued
operation, net of tax 7,723 4.2 * (635) (0.4)
-------- ----- -------- -----
Net income $ 28,506 15.7 982.6 $ 2,633 1.5
======== ===== ======== =====
* Not meaningful
</TABLE>
Income from continuing operations was $20.8 million in the third quarter of
1997, compared to $3.3 million in the third quarter of 1996. This change
primarily reflects increased gross profit in dollars and as a percentage of
net revenues (gross margin).
Net revenues in the third quarter of 1997 increased 6.3% from the same 1996
period. Net revenues in 1997 reflect increased unit volume for the Company's
communications products. This was offset in part by decreased demand for the
Company's personal computer (PC) products and customer efforts to manage their
inventories in the set-top box business as discussed earlier.
Third quarter 1997 international net revenues (including export sales)
increased in both dollar amount and percentage of revenues from the third
quarter of 1996 as a result of growth in European net revenues due to
increased shipments of communications devices in that region. Export sales to
the Asia-Pacific area in the third quarter of 1997 decreased over the third
quarter of 1996, due to a decrease in shipments of devices for the PC market.
Gross margins increased to 44.7% in the third quarter of 1997 from 37.2% in
the third quarter of 1996, reflecting improved manufacturing performance and
changes in product mix as discussed above for the nine-month period.
Research and development expenditures in the third quarter of 1997 were higher
compared to expenditures in the same 1996 period, reflecting increased costs
as previously described for the first nine months of 1997.
Marketing, general and administrative expenses increased in the third quarter
of 1997 compared to the same 1996 period reflecting the Company's efforts to
refocus these functions to better support the markets it serves.
During the third quarter of 1996, the Company concluded a patent licensing
agreement with IBM. As a result of that agreement, the Company recorded a
charge against earnings of $7.5 million for the release of alleged
infringement claims incurred prior to 1996.
Interest income (expense), net shows expense of $1.1 million in the current
quarter as compared to $1.3 million in the same period a year ago. The
increase in interest expense is due to a lower level of capitalized interest.
Interest income increased due to higher average cash balances and a higher
average quarterly interest rate.
In the third quarter of 1997, the Company sold COMPASS to Avant!. As a
result, the Company recognized an after-tax gain of approximately $7.7 million
as discussed above.
FACTORS AFFECTING FUTURE RESULTS
The Company's stock price, like that of other technology companies, is subject
to significant volatility. If revenue or earnings in any quarter fail to meet
the investment community's expectations, there could be an immediate impact on
the Company's stock price. The stock price may also be affected by broader
market trends unrelated to the Company's performance. Past financial
performance should not be considered a reliable indicator of future
performance, and investors should not use historical trends to anticipate
results or trends in future periods.
During each of the years 1994, 1995 and 1996 VLSI's top 20 customers
represented approximately two thirds of the Company's net revenues and
approximately three-quarters of net revenues in year-to-date 1997. In each of
the three quarters of fiscal 1997, the Company's largest customer, Ericsson,
accounted for between approximately 25% and 32% of net revenues. As a result
of the concentration of the Company's customer base, loss of business or
cancellation of orders from any of these customers, significant changes in
scheduled deliveries to any of these customers or decreases in the prices of
products sold to any of these customers could have a material adverse effect
on the Company's results of operations.
The Company has shifted its business away from the previously high
concentration of sales to the personal computer industry to a concentration of
sales to the communications and consumer digital entertainment markets. The
communications and consumer digital entertainment markets are rapidly evolving
and are characterized by intense competition of suppliers, many of whom have
substantially greater experience and resources than the Company. If the
Company, due to competition or other factors, is unable to capture and
maintain significant market share in these areas, there could be a material
adverse effect on the Company's results of operations.
The Company's success depends on its ability to continue to develop and
introduce new products that compete effectively on the basis of price and
performance and that satisfy customer requirements. New product development
often requires long-term forecasting of markets, market trends, development
and implementation of new processes and technologies and substantial capital
commitments. If the Company is unable to design, develop, manufacture and
market new products successfully in a timely manner, its operating results
could be adversely affected. No assurance can be given that the Company's
product and process development efforts will be successful, that new product
introductions will achieve market acceptance or that the markets in question
will develop.
The Company's products are susceptible to severe pricing pressures and the
Company continually attempts to pursue cost reductions, including process
enhancements, in order to maintain acceptable gross margins. Gross margins
also vary with the general condition of the economy, capacity utilization
levels in the semiconductor industry, customer acceptance of new technologies
and products, product functionality and capabilities, shifts in product mix,
manufacturing yields and the effect of ongoing manufacturing cost reduction
activities.
The Company sells its products under terms and conditions customarily found in
the semiconductor industry. Sales of these products are subject to customer
cancellation with limited advance notice to the Company prior to scheduled
shipment. Due to the Company's relatively narrow customer base for certain
devices and the short product life cycles of such products, such cancellations
can leave the Company with significant inventory exposure, which could have a
material adverse effect on the Company's operating results.
The semiconductor industry has a history of cyclicality and is characterized
by short product life cycles, continuous evolution of process technology, high
fixed costs, additions of manufacturing capacity in large increments and wide
fluctuations in product supply and demand. These product supply and demand
fluctuations have historically been characterized by periods of manufacturing
capacity shortages immediately followed by periods of overcapacity, which are
caused by the previously mentioned additions of manufacturing capacity in
large increments. The industry has moved from a period of capacity shortages
in 1995 to what appears to be a current period of excess capacity for the
immediate future. During a period of industry overcapacity, profitability can
drop sharply as factory utilization declines and high fixed costs of operating
a wafer fabrication facility are spread over a lower net revenue base.
Despite industry overcapacity, there can be no assurance that the Company can
achieve timely cost effective access to such capacity when needed.
In November 1996, the Company announced its intention to close its San Jose
wafer manufacturing facility. The closure of the facility subjects the
Company's results of operations to numerous risks and uncertainties, including
uncertainty as to the exact timing, cost and effects of the proposed shutdown
of the facility; loss of business from the Company's customers whose devices
are currently manufactured at the San Jose plant and who choose to substitute
products from other manufacturers; unanticipated employee costs relating to
the shutdown; inability to retain employees during the phase-out period;
degree of success in implementing cost reduction programs; and lower factory
utilization and excess capacity.
The Company has decided to convert its San Antonio facility from six-inch to
eight-inch wafer capability, with eight-inch production currently expected to
begin late 1998. Any significant expansion or upgrade of semiconductor
manufacturing capacity has attendant risks. Inefficiencies caused by the work
associated with the modifications of the manufacturing facilities could
adversely affect the Company's results of operations. This risk is increased
due to the fact that the Company has shifted an even greater percentage of its
manufacturing to its own facilities (in 1996 and the first nine months of
1997, VLSI produced more than 95% of its wafer requirements internally versus
approximately 80% in 1995).
While the Company operates and maintains its own wafer manufacturing
facilities, the Company relies on three suppliers for the bulk of its assembly
and test operations. Allocations by these suppliers of assembly and test
capacity to the Company depend on VLSI's needs, supply availability during
periods of capacity shortages and excesses and pricing. The Company has no
long-term contractual commitments from these suppliers. Any reduction in
allocation from these suppliers could adversely affect the Company's results
of operations.
Periodically, the Company is made aware that technology used by the Company in
the manufacture of some or all of its products may infringe on product or
process technology rights held by others. Resolution of whether the Company's
manufacture of products has infringed on valid rights held by others could
have a material adverse effect on the Company's financial position or results
of operations, and may require material changes in production processes and
products. Several companies, including Motorola, have individually contacted
the Company concerning its alleged use of intellectual property belonging to
them.
VLSI has entered into licensing agreements and technology exchange agreements
with various strategic partners and other third parties in order to allow VLSI
access to third party technology, or to allow third parties access to VLSI's
technology. The Company is unable to predict whether license agreements can be
obtained or renewed on terms acceptable to the Company or the magnitude of the
costs associated with such terms. Failure to obtain or renew such licenses
could have a material adverse effect on the Company's financial position or
results of operations.
The Company continually evaluates the adequacy of its reserve for asserted and
unasserted patent matters. There are many companies which may have product and
process technology rights that VLSI may have infringed. The reserve for patent
matters is based on the best available information at the time that the
reserve is established or re-evaluated, and it is reasonably possible that the
Company's estimate of the exposure for patent matters could materially change
in the near term as additional information becomes available.
Some of the Company's products include systems which store, retrieve and
transmit data. In order to properly process this data, these products must
manage and manipulate data that includes both 20th and 21st century dates (Year
2000 Compliant). The Company has taken steps to address the year 2000
concerns and believes its products are Year 2000 Compliant. There can be no
assurances, however, that the Company's products are fully Year 2000
Compliant. The inability of these products to properly manage and manipulate
data in the year 2000 could result in a material adverse impact on the
Company, including increased warranty costs, customer satisfaction issues, and
potential lawsuits.
The Company is currently installing various new internal information systems
in connection with operating its business. These systems are believed to be
Year 2000 Compliant. The Company is also identifying and implementing changes
to its other information systems in order to make them Year 2000 Compliant.
While the Company currently expects that the year 2000 will not pose
significant operational problems, delays in the implementation of new
information systems, or a failure to fully identify all year 2000 dependencies
in the Company's systems could have a material adverse effect on the Company's
results of operations.
Other factors that may adversely affect VLSI's future results include
earthquakes, environmental and other governmental regulations and the ability
to attract and retain key employees. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors Affecting
Future Results" in Item 7 of Part II in the 1996 Annual Report.
LIQUIDITY AND CAPITAL RESOURCES
VLSI generates cash from operations, debt and equipment financings and sales
of its securities. Principal uses of cash include purchases of capital
equipment needed for semiconductor manufacturing and engineering and payments
of debt and lease obligations. In the third quarter of 1997, the Company
received approximately $27.5 million in cash, inclusive of settlement of
intercompany debt between COMPASS and VLSI, and 470,000 shares of Avant! stock
in connection with the sale of COMPASS. Additionally, in 1997 and 1996, VLSI
used cash to reacquire shares of its common stock.
At September 26, 1997, total cash, cash equivalents and liquid investments
increased $78.9 million from the 1996 fiscal year-end balance due primarily to
net income and proceeds received on the sale of COMPASS. Working capital
increased to $306.8 million at September 26, 1997 compared to $238.0 million
at December 27, 1996.
During the nine-month period ended September 26, 1997, the Company generated
$117.0 million of cash from operations, a 39.3% increase from the $84.0
million of cash generated for the nine-month period ended September 26, 1996.
Increased profitability of continuing operations is the primary source of
improved cash from operations. Accounts payable, income taxes payable,
accrued liabilities and deferred income at September 26, 1997 increased by
$13.4 million from December 27, 1996 due primarily to obligations arising from
the sale of COMPASS net of a decrease in deferred income due to the COMPASS
sale.
Cash used for investing activities was $40.8 million for the nine-month period
ended September 26, 1997, as compared to $84.3 million for the nine-month
period ended September 27, 1996. The decrease is primarily a result of a
decrease in expenditures for the purchases of property, plant and equipment
and proceeds from the sale of COMPASS, offset by a decrease in proceeds from
maturities of liquid investments and an increase in purchases of liquid
investments. VLSI invested $66.3 million in property, plant and equipment
during the first nine months of 1997 compared to $217.1 million in the
comparable 1996 period. VLSI currently estimates that total capital
expenditures for 1997 could approximate $120 million, which are anticipated to
be used primarily for equipment upgrades and for 0.35-micron wafer fabrication
capability. The Company expects to primarily utilize cash from operations for
its 1997 capital expenditures.
Cash used for financing activities was $14.9 million in the first nine months
of 1997 compared to $28.4 million in the same 1996 period. The decrease is a
result of a decrease in the amount of cash used to repurchase common stock,
offset by an increase in the proceeds from issuance of common and treasury
shares, net. During the first nine months of 1996, 1.8 million shares were
repurchased for $27.2 million compared to 1.0 million shares repurchased
during the first nine months of 1997 for $17.0 million. The Company
accelerated repayment of certain secured equipment loans during the first nine
months of 1997.
The Company currently does not have a committed credit agreement in place.
While the Company believes that its current capital resources are sufficient
to meet its near-term liquidity and capital expenditure needs, in order to
meet its longer-term needs, VLSI continues to investigate the possibility of
generating financial resources through committed credit agreements, technology
or manufacturing partnerships, additional equipment financings and offerings
of debt or equity securities. There can be no assurance that the Company will
obtain additional credit facilities.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3 of Part I of the Company's Annual Report on Form
10-K for the fiscal year ended December 27, 1996 (the 1996 Annual Report) for
a discussion of certain pending legal proceedings. There have been no
material developments in any of such matters since the filing of the Company's
1996 Annual Report except the following:
Texas Instruments, Inc. (TI) filed a lawsuit in 1990 claiming process patent
infringement by the Company of now expired U.S. patents. In May 1995, a jury
found against the Company in the amount of $19.4 million. Although contesting
the jury verdict, the Company recorded a charge to earnings of $19.4 million
in the third quarter of 1995. The trial judge subsequently set aside the jury
verdict and TI appealed. In July 1996, the Court of Appeals for the Federal
Circuit affirmed the trial judge's order. In May 1997 the U.S. Supreme Court
rejected TI's appeal of the Court of Appeals order. No license has been
concluded with TI and there can be no assurance that TI will not assert other
claims against VLSI for patent infringement.
Item 6. Exhibits and Reports on form 8-K.
(a) Exhibits - See Index to Exhibits on Page 20.
(b) Reports on Form 8-K - None.
<PAGE>
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.
VLSI TECHNOLOGY, INC.
(Registrant)
Date: November 5, 1997 By: /s/ Balakrishnan S. Iyer
--------------------- ----------------------------------
Balakrishnan S. Iyer
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 5, 1997 By: /s/ Victor K. Lee
--------------------- ----------------------------------
Victor K. Lee
Vice President, Controller and
Chief Accounting Officer
(Principal Accounting Officer)
<PAGE>
VLSI TECHNOLOGY, INC.
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2.1 Agreement and Plan of Reorganization dated as of July 31, 1997
among Avant! Corporation, GB Acquisition Corporation, COMPASS
Design Automation, Inc. and VLSI Technology, Inc. and Amendment
To Agreement and Plan of Reorganization dated as of August 27,
1997 among such parties (Incorporated by reference to Exhibit
2.1 to Current Report on Form 8-K filed September 26, 1997 by
Avant! Corporation [SEC File No. 0-25864]).
11.1 Calculation of Earnings Per Share
27.1 Financial Data Schedule
Exhibit 11.1
<TABLE>
VLSI TECHNOLOGY, INC.
CALCULATION OF EARNINGS PER SHARE - unaudited
(thousands except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
Primary Earnings per Share 1997 1996 1997 1996
- ---------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $28,506 $ 2,633 $49,825 $14,076
======= ======= ======= =======
Average number of common and
common equivalent shares:
Average common shares outstanding 46,629 45,900 46,417 45,758
Dilutive options 3,236 1,062 2,375 987
------- ------- ------- -------
Average number of common and
common equivalent shares 49,865 46,962 48,792 46,745
======= ======= ======= =======
Earnings per common and common
equivalent share $ .57 $ .06 $ 1.02 $ .30
======= ======= ======= =======
Fully Diluted Earnings per Share
- ----------------------------------
Net income $28,506 $ 2,633 $49,825 $14,076
Add interest expense on convertible
debt, net of tax effect (1) - - - -
------- ------- ------- -------
Adjusted net income $28,506 $ 2,633 $49,825 $14,076
======= ======= ======= =======
Average number of common and common
equivalent shares on a fully
diluted basis
Average common shares outstanding 46,629 45,900 46,417 45,758
Dilutive options 3,602 1,601 2,583 1,167
Conversion of convertible debt (1) - - - -
------- ------- ------- -------
Average number of common and
common equivalent shares on a
fully diluted 50,231 47,501 49,000 46,925
======= ======= ======= =======
Fully diluted earnings per common
and common equivalent share $ .57 $ .06 $ 1.02 $ .30
======= ======= ======= =======
- -----------------------------------------------
(1) The convertible debt is not included in the calculation of fully diluted
earnings per share since its inclusion would have had an antidilutive effect.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements in the Quarterly Report on Form 10-Q of VLSI Technology,
Inc. for the nine months ended September 26, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000704386
<NAME> VLSI TECHNOLOGY, INC.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1997
<PERIOD-START> DEC-28-1996
<PERIOD-END> SEP-26-1997
<EXCHANGE-RATE> 1
<CASH> 200,391
<SECURITIES> 84,307
<RECEIVABLES> 116,242
<ALLOWANCES> (2,000)
<INVENTORY> 56,090
<CURRENT-ASSETS> 539,418
<PP&E> 804,495
<DEPRECIATION> (396,966)
<TOTAL-ASSETS> 968,248
<CURRENT-LIABILITIES> 232,648
<BONDS> 200,059
<COMMON> 472
0
0
<OTHER-SE> 521,069
<TOTAL-LIABILITY-AND-EQUITY> 968,248
<SALES> 519,636
<TOTAL-REVENUES> 519,636
<CGS> 298,776
<TOTAL-COSTS> 298,776
<OTHER-EXPENSES> 156,251
<LOSS-PROVISION> (122)
<INTEREST-EXPENSE> 13,224
<INCOME-PRETAX> 61,167
<INCOME-TAX> 16,515
<INCOME-CONTINUING> 44,652
<DISCONTINUED> 5,173
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,825
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.02
</TABLE>
