UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Mark One:
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 27, 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
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(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 June 27, 1997:
46,441,302
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
VLSI TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME - unaudited
(thousands, except per share amounts)
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 27, June 28, June 27, June 28,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 182,472 $ 182,526 $ 360,156 $ 350,238
Cost of sales 100,795 111,370 201,700 216,349
----------- ----------- ----------- -----------
Gross profit 81,677 71,156 158,456 133,889
----------- ----------- ----------- -----------
Operating expenses:
Research and development 26,201 25,609 53,632 49,980
Marketing, general and
administrative 36,040 34,061 70,670 69,058
----------- ----------- ----------- -----------
Operating income 19,436 11,486 34,154 14,851
Interest income and other
expenses, net 2,899 2,833 5,851 6,828
Interest expense (4,202) (2,856) (8,666) (5,336)
----------- ----------- ----------- -----------
Income before provision for
taxes on income 18,133 11,463 31,339 16,343
Provision for taxes on income 5,800 3,190 10,020 4,900
----------- ----------- ----------- -----------
Net income $ 12,333 $ 8,273 $ 21,319 $ 11,443
=========== =========== =========== ===========
Net income per share $ .26 $ .18 $ .44 $ .25
=========== =========== =========== ===========
Weighted average common
and common equivalent
shares outstanding 47,958 46,869 48,070 46,637
=========== =========== =========== ===========
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
<PAGE>
<TABLE>
VLSI TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS - unaudited
(thousands)
<CAPTION>
June 27, December 27,
1997 1996
--------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $131,668 $139,074
Liquid investments 94,533 66,685
Accounts receivable, net of allowance
for doubtful accounts and customer
returns of $2,100
($2,200 at December 27, 1996) 112,734 112,508
Inventories:
Raw materials 4,241 3,095
Work-in-process 39,009 42,947
Finished goods 10,733 10,319
-------- --------
Total inventories 53,983 56,361
Deferred and refundable income taxes 58,628 68,638
Prepaid expenses and other current assets 5,662 5,240
-------- --------
Total current assets 457,208 448,506
Property, plant and equipment, at cost 812,913 772,565
Accumulated depreciation and amortization (393,939) (345,301)
-------- --------
Net property, plant and equipment 418,974 427,264
Deferred income taxes 7,621 7,621
Other assets 8,608 7,551
-------- --------
TOTAL ASSETS $892,411 $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>
June 27, December 27,
1997 1996
--------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 58,138 $ 61,586
Accrued compensation and benefits 26,529 23,762
Deferred income 8,648 8,930
Patent matters 21,975 22,028
Reserve for special charges 47,773 50,990
Other accrued liabilities 31,586 34,313
Current capital lease obligations 1,174 1,118
Current portion of long-term debt 7,847 7,763
-------- --------
Total current liabilities 203,670 210,490
Non-current capital lease obligations 1,745 2,346
Long-term debt 203,748 207,627
Stockholders' equity:
Preferred Shares, $.01 par value - -
Common Shares, $.01 par value 472 472
Treasury Common Shares, at cost (13,577) (8,349)
Additional paid-in capital 455,451 458,774
Retained earnings 40,902 19,582
-------- --------
Total stockholders' equity 483,248 470,479
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $892,411 $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>
Six Months Ended
---------------------------
June 27, June 28,
1997 1996
-------- -------
Increase (decrease) in cash
and cash equivalents
<S> <C> <C>
Operating activities:
Net income $ 21,319 $ 11,443
Adjustments to reconcile net income
to cash generated by operations:
Depreciation and amortization 54,750 50,419
Deferred and refundable income taxes 10,606 2,217
Changes in operating assets and liabilities:
Accounts receivable (226) 4,238
Inventories 2,378 (1,909)
Accounts payable, income tax payable,
accrued liabilities and deferred income (8,064) (15,773)
Other (2,674) (2,119)
-------- --------
Cash generated by operations 78,089 48,516
-------- --------
Investing activities:
Purchases of liquid investments (135,799) (101,606)
Proceeds from maturities of liquid investments 107,890 213,076
Purchases of property, plant and equipment (44,757) (186,841)
Other - (300)
-------- --------
Net cash flow used for investing activities (72,666) (75,671)
-------- --------
Financing activities:
Payments on debt and capital lease obligations (4,340) (4,875)
Repurchase Treasury Shares (17,015) (27,181)
Issuance of Common and Treasury Shares, net 8,526 5,317
-------- --------
Net cash flow used for financing activities (12,829) (26,739)
-------- --------
Net decrease in cash and cash equivalents (7,406) (53,894)
Cash and cash equivalents, beginning of period 139,074 183,165
-------- --------
Cash and cash equivalents, end of period $131,668 $129,271
======== ========
Supplemental disclosures:
Cash outflows for property, plant and equipment $ 44,757 $186,841
Change in accrued capital acquisitions 700 (19,635)
-------- --------
Property, plant and equipment additions $ 45,457 $167,206
======== ========
Interest paid $ 10,294 $ 10,846
======== ========
Income taxes paid, net $ 4,795 $ 2,294
======== ========
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 six-month period
ended June 27, 1997 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 26, 1997.
2. The Company's tax rate of 32% for the first six months of 1997 primarily
reflects more pre-tax income flowing through lower tax jurisdictions. The
Company's tax rate of 30% for the first six months of 1996 primarily reflects
benefits from the utilization of state tax credits, as well as effective
foreign tax rates less than the U.S. statutory rate.
3. 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 that 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.
4. 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 half of 1997, the Company repurchased
1,000,000 shares at an average per share price of $17.01 and has re-issued 0.2
million of these shares under employee stock plans. The Company may, from
time to time, continue to repurchase additional shares.
5. 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 was 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.
6. 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 are not materially different from the Company's
reported net income per share for the quarters ended June 27, 1997 and June
28, 1996 and for the six months then ended. 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 SIX MONTHS OF 1997 COMPARED TO THE FIRST SIX
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
six-month period ended June 27, 1997 as compared to the six-month period
ended June 28, 1996 (dollars in thousands):
Six Months
---------------------------------------------------
1997 1996
------------------------------- -------------------
Percent Percent Percent
of Net Change of Net
Amounts Revenues From 1996 Amounts Revenues
------- -------- --------- ------- --------
Net revenues $360,156 100.0% 2.8% $350,238 100.0%
Cost of sales 201,700 56.0 (6.8) 216,349 61.8
-------- ----- -------- -----
Gross profit 158,456 44.0 18.3 133,889 38.2
Research & development 53,632 14.9 7.3 49,980 14.3
Marketing, general and
administrative 70,670 19.6 2.3 69,058 19.7
-------- ----- -------- -----
Operating income 34,154 9.5 130.0 14,851 4.2
Interest income
(expense), net (2,815) (0.8) * 1,492 0.5
Income taxes 10,020 2.8 104.5 4,900 1.4
-------- ----- -------- -----
Net income $ 21,319 5.9 86.3 $ 11,443 3.3
======== ===== ======== =====
* Not meaningful
The Company earned net income of $21.3 million in the first half of 1997,
compared to net income of $11.4 million in the first half of 1996. This change
primarily reflects increased gross profit in dollars and as a percentage of net
revenues (gross margin), partially offset by an increase in research and
development expenses in the first half of 1997.
Net revenues in the first half of 1997 increased 2.8% from the comparable 1996
period. The increase over the first half of 1996 reflects strong demand for
communications products. This increase was offset in part by decreased demand
for personal computer (PC) products and customer efforts to manage
inventories in the set-top box business. Software net revenues decreased in
the first half of 1997 compared to the first half of 1996 due to difficulties
developing new products and increased competition and consolidation among EDA
providers.
International net revenues (including export sales) increased, accounting for
53.1% of net revenues in the first half of 1997 compared to 44.2% of net
revenues in the first half of 1996, primarily due to increases in sales to
the European region. The growth in European net revenues reflects the
location of the major customers for VLSI's communications devices and the
success of GSM as the leading digital wireless standard in Europe. Export
sales to the Asia-Pacific area in the first half of 1997 decreased from the
first half of 1996, due to a decrease in shipments of devices for the PC
market.
Gross margins increased to 44.0% in the first half of 1997 from 38.2% in the
first half of 1996, reflecting improved manufacturing performance and product
mix. First half 1996 gross margin reflected inventory charges taken for
personal computer devices and certain manufacturing inefficiencies as a
result of capacity underutilization and changes in the business mix from the
higher 1995 concentration in PC products to communications and consumer
digital entertainment products.
R&D expenditures increased by $3.7 million in the first half of 1997 over
expenditures in the same 1996 period and increased as a percentage of net
revenues from 14.3% to 14.9%, reflecting continuing investment in new products
and package and process technologies. R&D expenditures in the first half of
1997 focused on design environment, process development and development of
products for the consumer digital entertainment and communications markets.
Marketing, general and administrative expenses for the first half of 1997
increased by $1.6 million from the first half of the prior year reflecting the
Company's efforts to refocus these functions to better support the markets it
serves. As a percentage of net revenues, these expenses are comparable to the
same period in 1996.
Interest income (expense), net shows expense of $2.8 million in the first
half of the current year as compared to income of $1.5 million in the same
period a year ago, reflecting lower interest income on lower average cash
balances than in the first half of 1996. Interest expense increased in the
first half of 1997 over the first half of 1996 due to a lower level of
capitalized interest resulting from reduced capital expenditures.
The Company's tax rate of 32% for the first six months of 1997 primarily
reflects more pre-tax income flowing through lower tax jurisdictions. The
Company's tax rate of 30% for the first six months of 1996 primarily reflects
benefits from the utilization of state tax credits, as well as effective
foreign tax rates less than the U.S. statutory rate.
<PAGE>
RESULTS OF OPERATIONS - SECOND QUARTER OF 1997 COMPARED TO THE SECOND QUARTER
OF 1996
- --------------------------------------------------------------------------------
The following table summarizes the Company's operating results for the three-
month period ended June 27, 1997 as compared to the three-month period ended
June 28, 1996 (dollars in thousands):
Second Quarter
-----------------------------------------------------
1997 1996
------------------------------- -------------------
Percent Percent Percent
of Net Change of Net
Amounts Revenues From 1996 Amounts Revenues
------- -------- --------- ------- --------
Net revenues $182,472 100.0% **% $182,526 100.0%
Cost of sales 100,795 55.2 (9.5) 111,370 61.0
-------- ----- -------- -----
Gross profit 81,677 44.8 14.8 71,156 39.0
Research & development 26,201 14.4 2.3 25,609 14.0
Marketing, general and
administrative 36,040 19.7 5.8 34,061 18.7
-------- ----- -------- -----
Operating income 19,436 10.7 69.2 11,486 6.3
Interest income
(expense), net (1,303) (0.7) * (23) **
Income taxes 5,800 3.2 81.8 3,190 1.8
-------- ----- -------- -----
Net income $ 12,333 6.8 49.1 $ 8,273 4.5
======== ===== ======== =====
* Not meaningful
** Less than 0.1%
The Company earned net income of $12.3 million in the second quarter of 1997,
compared to net income of $8.3 million in the second 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 second quarter of 1997 were comparable to net revenues in
the same 1996 period. Net revenues in 1997 reflect continued strong demand for
communications products and video arcade products. This was offset in part by
decreased demand for personal computer (PC) products and customer efforts to
manage inventories in the set-top box business as discussed earlier. Software
net revenues decreased in the second quarter of 1997 compared to the second
quarter of 1996. The decline reflects difficulties developing new products and
increased competition and consolidation among EDA providers.
Second quarter 1997 international net revenues (including export sales)
increased in terms of both amount and percentage of revenues from the second
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 second quarter of 1997 decreased over the
second quarter of 1996, due to a decrease in shipments of devices for the PC
market.
Gross margins increased to 44.8% in the second quarter of 1997 from 39.0% in
the second quarter of 1996, reflecting improved manufacturing performance
and product mix.
Both research and development expenditures and marketing, general and
administrative expenses in the second quarter of 1997 were higher in dollar
amount (and as a percentage of net revenues) compared to expenditures in the
same 1996 period, reflecting increased costs as previously described for the
first half of 1997.
Interest income (expense), net shows expense of $1.3 million in the current
quarter as compared to approximately zero in the same period a year ago. The
increase in interest expense is due to a lower level of capitalized interest.
Interest income increased slightly due to a higher average quarterly interest
rate.
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, 1996 and year-to-date 1997, VLSI's top 20
customers represented approximately two thirds of the Company's 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.
Due to the decline in the Company's X86 chip set business, the Company
experienced a shift in its business in 1996 away from the previously high
concentration of sales to the personal computer industry that was seen in
1995 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.
Software net revenues, primarily through COMPASS, are subject to various
factors, including pricing pressure, customers' capital budget approval
cycles and limited backlog, which create a high degree of variability from
quarter to quarter. Due to the high gross margin content of software net
revenues and the size of certain transactions, which are often concluded late
in the quarter, such variability can lead to unpredictability of financial
and operating results of the Company for any given period. Results in the
first half of 1997 and from fiscal year 1996 operations for COMPASS were not
satisfactory and adversely affected VLSI's overall results of operations.
Management is considering strategic alternatives to deal with this issue,
including the possible sale or disposition of COMPASS. Until this issue is
resolved, COMPASS may continue to have a negative impact on VLSI's results of
operations.
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 drops and high fixed costs of
operating a wafer fabrication facility are spread over a lower net revenue
base. 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 half of 1997, VLSI produced more than 95% of its wafer
requirements internally versus approximately
80% in 1995).
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; lack of success in implementing cost reduction
programs; and lower factory utilization and excess capacity.
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 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 that 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.
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. Additionally, in 1997 and 1996, VLSI used cash to reacquire
shares of its common stock.
At June 27, 1997, total cash, cash equivalents and liquid investments increased
$20.4 million from the 1996 fiscal year-end balance due primarily to net
income. Working capital increased to $253.5 million at June 27, 1997
compared to $238.0 million at December 27, 1996.
During the six-month period ended June 27, 1997, the Company generated $78.1
million of cash from operations, a 60.9% increase from the $48.5 million of
cash generated for the six-month period ended June 28, 1996. Accounts
payable, income taxes payable, accrued liabilities and deferred income at
June 27, 1997 decreased by $8.1 million from December 27, 1996 due primarily
to improved manufacturing spending.
Cash used for investing activities was $72.7 million for the six-month period
ended June 27, 1997, as compared to $75.7 million for the six-month period
ended June 28, 1996. The decrease is primarily a result of a decrease in
expenditures for the purchase of property, plant and equipment. VLSI
invested $45.5 million in property, plant and equipment during the first six
months of 1997 compared to $167.2 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 $12.8 million in the first six months of
1997 compared to $26.7 million in the same 1996 period. The decrease is a
result of a decrease in the amount of cash used to repurchase common stock.
During the first half of 1996, 1.8 million shares were repurchased for $27.2
million compared to 1.0 million shares repurchased during the first half of
1997 for $17.0 million.
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 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.
<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 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.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of the Company was held on May 7,
1997 (the Meeting).
(b) The following directors were elected at the Meeting:
Richard M. Beyer
Pierre S. Bonelli
Robert P. Dilworth
William G. Howard
Paul R. Low
Alfred J. Stein
Horace H. Tsiang
(c) The results of the vote on the matters voted upon at the Meeting are:
(i) Election of Directors For Withheld
--------------------- ---------- --------
Richard M. Beyer 40,156,896 531,876
Pierre S. Bonelli 40,164,575 524,197
Robert P. Dilworth 40,160,860 527,912
William G. Howard 40,154,240 534,532
Paul R. Low 40,153,307 535,465
Alfred J. Stein 40,136,247 552,525
Horace H. Tsiang 40,183,276 505,496
Broker
For Against Abstained Non-Votes
---------- --------- --------- ---------
(ii) Appoinment of the
selection of Ernst &
Young LLP as independent
auditors for the 1997
fiscal year 40,470,922 114,349 103,501 -
For Against Abstained
---------- ---------- ---------
(iii) Approval of an
amendment to the 1992
Stock Plan 27,637,286 12,126,766 924,720
The foregoing matters are described in more detail in the Registrant's
definitive proxy statement dated April 4, 1997.
Item 6. Exhibits and Reports on form 8-K.
(a) Exhibits - See Index to Exhibits on Page 18.
(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: July 30, 1997 By: /s/ Balakrishnan S. Iyer
-------------------------- -------------------------------
Balakrishnan S. Iyer
Vice President, Finance,
Chief Financial Officer and
Controller
(Principal Financial and
Accounting Officer)
<PAGE>
VLSI TECHNOLOGY, INC.
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
11.1 Calculation of Earnings Per Share
27.1 Financial Data Schedule
1
Exhibit 11.1
<TABLE>
VLSI TECHNOLOGY, INC.
CALCULATION OF EARNINGS PER SHARE - unaudited
(thousands except per share data)
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 27, June 28, June 27, June 28,
Primary Earnings per Share 1997 1996 1997 1996
- ---------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $12,333 $ 8,273 $21,319 $11,443
======= ======= ======= =======
Average number of common and
common equivalent shares:
Average common shares outstanding 46,124 45,672 46,311 45,687
Dilutive options 1,834 1,197 1,759 950
------- ------- ------- -------
Average number of common and
common equivalent shares 47,958 46,869 48,070 46,637
======= ======= ======= =======
Earnings per common and common
equivalent share $ .26 $ .18 $ .44 $ .25
======= ======= ======= =======
Fully Diluted Earnings per Share
- ----------------------------------
Net income $12,333 $ 8,273 $21,319 $11,443
Add interest expense on convertible
debt, net of tax effect (1) - - - -
------- ------- ------- -------
Adjusted net income $12,333 $ 8,273 $21,319 $11,443
======= ======= ======= =======
Average number of common and common
equivalent shares on a fully
diluted basis
Average common shares outstanding 46,124 45,672 46,311 45,687
Dilutive options 2,464 1,197 2,074 950
Conversion of convertible debt (1) - - - -
------- ------- ------- -------
Average number of common and
common equivalent shares on a
fully diluted basis 48,588 46,869 48,385 46,637
======= ======= ======= =======
Fully diluted earnings per common
and common equivalent share $ .25 $ .18 $ .44 $ .25
======= ======= ======= =======
- -----------------------------------------------
(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 six months ended June 27, 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> 6-MOS
<FISCAL-YEAR-END> DEC-26-1997
<PERIOD-START> DEC-28-1996
<PERIOD-END> JUN-27-1997
<EXCHANGE-RATE> 1
<CASH> 131,668
<SECURITIES> 94,533
<RECEIVABLES> 114,834
<ALLOWANCES> 2,100
<INVENTORY> 53,983
<CURRENT-ASSETS> 457,208
<PP&E> 812,913
<DEPRECIATION> (393,939)
<TOTAL-ASSETS> 892,411
<CURRENT-LIABILITIES> 203,670
<BONDS> 205,493
<COMMON> 472
0
0
<OTHER-SE> 482,776
<TOTAL-LIABILITY-AND-EQUITY> 892,411
<SALES> 360,156
<TOTAL-REVENUES> 360,156
<CGS> 201,700
<TOTAL-COSTS> 201,700
<OTHER-EXPENSES> 124,498
<LOSS-PROVISION> (196)
<INTEREST-EXPENSE> 5,851
<INCOME-PRETAX> 31,339
<INCOME-TAX> 10,020
<INCOME-CONTINUING> 21,319
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,319
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
</TABLE>
