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 October 2, 1999
or
--- Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission File Number 0-11438
BURR-BROWN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 86-0445468
---------------------- ---------------------
(State of Incorporation) (IRS Employer I.D. No.)
6730 South Tucson Boulevard
Tucson, Arizona 85706
(Address of principle executive offices)
(520) 746-1111
---------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, not including shares held in treasury.
As of October 2,1999,there were 36,983,650 shares of Common Stock,
$0.01 par outstanding
<PAGE> 1
BURR-BROWN CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page #
- - ------------------------------- ------
Item 1 Financial Statements (Unaudited)
Consolidated Statements of Income, Three and Nine
Months Ended October 2, 1999, and October 3, 1998 3
Consolidated Balance Sheets, October 2, 1999,
and December 31, 1998 4
Consolidated Statements of Cash Flows, Nine
Months Ended October 2, 1999, and October 3, 1998 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3 Quantitative and Qualitative Disclosure of
Market Risk 13
PART II. OTHER INFORMATION
- - ---------------------------
Item 6 Exhibits and Reports on Form 8-K 16
SIGNATURES
- - ----------
Signature Page 16
<PAGE> 2
PART I. FINANCIAL INFORMATION
- - -----------------------------
BURR-BROWN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Oct. 2, Oct. 3, Oct. 2, Oct. 3,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Revenue $ 78,037 $61,164 $207,254 $196,367
Cost of Goods Sold 36,680 29,661 99,552 94,745
-------- ------- -------- --------
Gross Margin 41,357 31,503 107,702 101,622
% of revenue 53.0% 51.5% 52.0% 51.8%
Expenses:
Research & Development 12,598 9,917 33,087 29,697
% of revenue 16% 16% 16% 15%
Sales, Marketing, General
and Administrative 11,951 12,234 34,713 36,708
% of revenue 15% 20% 17% 19%
-------- ------- -------- -------
Total Operating Expenses 24,549 22,151 67,800 66,405
% of revenue 31% 36% 33% 34%
Income from Operations 16,808 9,352 39,902 35,217
% of revenue 22% 15% 19% 18%
Interest Expense 112 101 343 302
Other (Income) Expense (835) (1,267) (2,313) (3,015)
-------- ------- -------- --------
Income Before Income Taxes 17,531 10,518 41,872 37,930
% of revenue 22% 17% 20% 19%
Provision for Income Taxes 4,735 2,998 11,307 10,810
Effective Tax Rate 27% 29% 27% 29%
-------- ------- -------- --------
Net Income $ 12,796 $ 7,520 $ 30,565 $ 27,120
% of revenue 16% 12% 15% 14%
======== ======= ======== ========
Basic Earnings per Common
Share $ 0.35 $ 0.20 $ 0.83 $ 0.74
======== ======= ======== ========
Shares used in basic per
share calculation 36,926 36,757 36,797 36,622
======== ======= ======== ========
Diluted Earnings per
Common Share $ 0.33 $ 0.20 $ 0.79 $ 0.71
======== ======= ======== ========
Shares used in diluted per
share calculation 39,257 38,034 38,839 38,327
======== ======= ======== ========
<FN>
See Notes to Consolidated Financial
Statements.
</FN>
</TABLE>
<PAGE> 3
BURR-BROWN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
<TABLE>
<CAPTION>
Oct. 2, Dec. 31,
1999 1998
-------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $ 102,493 $ 72,427
Short-Term Investments 34,275 3,620
Trade Receivables 68,074 54,677
Inventories 52,277 52,296
Deferred Income Taxes 7,946 6,447
Other 7,931 9,960
--------- ---------
Total Current Assets 272,996 199,427
Long-Term Investments 6,816 44,209
Land, Buildings and Equipment
Land 5,142 5,145
Buildings and Improvements 32,873 28,214
Equipment 175,232 167,596
--------- ---------
213,247 200,955
Less Accumulated Depreciation (119,744) (108,791)
--------- ---------
93,503 92,164
Other Assets 3,000 2,891
--------- ---------
$ 376,315 $ 338,691
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes Payable $ 16,118 $ 17,289
Accounts Payable 16,291 16,179
Accrued Expenses 4,618 3,649
Accrued Employee Compensation and
Payroll Taxes 8,766 6,056
Deferred Profit from Distributors 9,317 8,790
Income Taxes Payable 5,812 4,857
Current Portion of Long-Term Debt 1,258 1,235
-------- ---------
Total Current Liabilities 62,180 58,055
Long-Term Debt 2,183 2,921
Deferred Income Taxes 5,892 3,547
Other Long-Term Liabilities 606 655
Stockholders' Equity
Preferred Stock - -
Common Stock 391 386
Additional Paid-In Capital 107,163 100,212
Retained Earnings 215,852 185,295
Accumulated Other Comprehensive Income 2,569 2,739
Treasury Stock (20,521) (15,119)
--------- ---------
305,454 273,513
--------- ---------
$ 376,315 $ 338,691
========= =========
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE> 4
BURR-BROWN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
Oct. 2, Oct. 3,
1999 1998
------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 30,565 $ 27,120
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 13,904 12,322
Provision for (Benefit from) Deferred
Income Taxes 830 (69)
Increase (Decrease) in Deferred Profit
from Distributors 527 31
Other 246 452
Changes in Operating Assets and Liabilities:
(Increase) Decrease in Trade Receivables (12,088) (1,294)
(Increase) Decrease in Inventories 204 (3,155)
(Increase) Decrease in Other Assets 1,780 (3,071)
Increase (Decrease) in Accounts Payable (140) (1,574)
Increase (Decrease) in Accrued Expenses
and Other Liabilities 6,462 (2,141)
-------- --------
Net Cash Provided By Operating Activities 42,290 28,621
INVESTING ACTIVITIES:
Purchases of Investments (9,612) (14,064)
Maturities of Investments 16,404 36,754
Purchases of Land, Buildings and
Equipment (15,095) (19,907)
Proceeds from Sale of Equipment 15 157
-------- --------
Net Cash (Used in) Provided by Investing
Activities (8,288) 2,940
FINANCING ACTIVITIES:
Proceeds from Short-Term and Long-Term
Borrowings - 4,865
Payments on Short-Term and Long-Term
Borrowings (3,069) (462)
Proceeds from (Payments for) Capital
Stock Activity, Net (349) 3,969
-------- --------
Net Cash (Used in) Provided By Financing
Activities (3,418) 8,372
Effect of Exchange Rate Changes (518) 50
-------- --------
Increase in Cash and Cash Equivalents 30,066 39,983
Cash and Cash Equivalents at Beginning of
Year 72,427 54,284
-------- --------
Cash and Cash Equivalents at End of Nine
Months $102,493 $ 94,267
======== ========
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE> 5
BURR-BROWN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share amounts)
1. BASIS OF PRESENTATION
- - ------------------------
The consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine months ended
October 2, 1999 are not necessarily indicative of the results to
be expected for the year ending December 31, 1999. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998, filed with the
Securities and Exchange Commission.
2. EARNINGS PER SHARE
- - ---------------------
The following table sets forth the shares used in the computation
of basic and diluted earnings per share for the three months
ended October 2, 1999 and October 3, 1998.
<TABLE>
Oct. 2, Oct. 3,
1999 1998
------- -------
<S> <C> <C>
Weighted average common shares outstanding
36,926 36,757
Dilutive effect of stock options
outstanding using the Treasury
Stock Method 2,331 1,277
------- -------
Shares used in computed Diluted Earnings
Per Share 39,257 38,034
======== =======
</TABLE>
The following table sets forth the shares used in the computation
of basic and diluted earnings per share for the nine months ended
October 2, 1999 and October 3, 1998.
<TABLE>
Oct. 2, Oct. 3,
1999 1998
------- -------
<S> <C> <C>
Weighted average common shares outstanding 36,797 36,622
Dilutive effect of stock option outstanding
using the Treasury Stock Method 2,042 1,705
------ ------
Shares used in computed Diluted Earnings
Per Share 38,839 38,327
======= =======
</TABLE>
3. COMPREHENSIVE INCOME
- - ------------------------
The components of comprehensive income, net of related tax, for
the three months ended October 2, 1999 and October 3, 1998 are as
follows:
<TABLE>
Oct. 2, Oct. 3,
1999 1998
-------- --------
<S> <C> <C>
Net Income $ 12,796 $ 7,520
Unrealized loss on cash flow hedges (553) -
Unrealized gain (loss) on investments (53) 46
Foreign currency translation adjustment 1,741 919
-------- --------
Comprehensive income $ 13,931 $ 8,485
======== ========
</TABLE>
The components of comprehensive income, net of related tax, for
the nine months ended October 2, 1999 and October 3, 1998 are as
follows:
<TABLE>
Oct. 2, Oct. 3,
1999 1998
------- --------
<S> <C> <C>
Net Income $ 30,565 $ 27,120
Unrealized loss on cash flow hedges (409) -
Unrealized loss on investments (130) (86)
Foreign currency translation adjustment 369 98
-------- --------
Comprehensive income $ 30,395 $ 27,132
======== ========
</TABLE>
<PAGE> 6
The components of accumulated other comprehensive income, net of
related tax, at October 2, 1999 and December 31, 1998 are as
follows:
<TABLE>
Oct. 2, Dec. 31,
1999 1998
-------- --------
<S> <C> <C>
Unrealized loss on cash flow hedges $ (560) $ (151)
Unrealized gain on investments 35 165
Foreign currency translation adjustment 3,094 2,725
-------- --------
Accumulated other comprehensive income $ 2,569 $ 2,739
======== ========
</TABLE>
4. INVENTORIES
- - --------------
<TABLE>
Inventories consist of the following:
Oct. 2, Dec. 31,
1999 1998
-------- --------
<S> <C> <C>
Raw Material $ 7,655 $ 8,762
Work-in-Process 32,907 25,718
Finished Goods 11,715 17,816
-------- --------
$ 52,277 $ 52,296
======== ========
</TABLE>
5. TAX RATE
- - -----------
The effective tax rate for 1999 is estimated to be 27%. The
Company's effective tax rate is lower than the U.S. statutory
rate due to expected benefits from tax exempt investment income,
a foreign sales corporation, and tax credits.
6. BUSINESS SEGMENT DATA
- - ------------------------
The Company has three reportable segments: North America
(principally the United States), Asia (Japan and other Southeast
Asian countries), and Europe (principally the United Kingdom,
France, Germany, Italy, and Scandinavia). Each of these segments
derives revenue from the sale of the full array of the Company's
product lines, although the Asia segment has a higher
concentration of sales from certain mixed signal products.
Segment information for the three and nine months ended October
2, 1999 and October 3, 1998 is as follows:
<TABLE>
Three Months Ended Nine Months Ended
Oct. 2, Oct. 3, Oct. 2, Oct.3,
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net Revenue:
North American Operations:
Unaffiliated customers $ 31,278 $22,758 $ 84,622 $70,898
Foreign unaffiliated
customers 14,341 9,607 36,310 31,133
Consolidated subsidiaries 18,760 15,762 51,063 52,762
-------- ------- -------- -------
64,379 48,127 171,995 154,793
European Operations:
Unaffiliated customers 7,628 8,180 23,748 28,725
Consolidated subsidiaries - 727 - 5,339
-------- -------- -------- -------
7,628 8,907 23,748 34,064
Asian Operations:
Unaffiliated customers 24,794 20,619 62,567 65,611
Consolidated subsidiaries 8,223 5,795 18,664 10,491
-------- -------- -------- -------
33,017 26,414 81,231 76,102
Eliminations (26,987) (22,284) (69,720) (68,592)
-------- -------- -------- --------
$ 78,037 $ 61,164 $207,254 $196,367
======== ======== ======== ========
</TABLE>
<PAGE> 7
<TABLE>
Three Months Ended Nine Months Ended
Oct. 2, Oct. 3, Oct. 2, Oct. 3,
1999 1998 1999 1998
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Income (Loss) Before Income Taxes:
North American Operations $ 22,350 $ 20,129 $ 50,462 $ 38,731
European Operations (419) (447) 596 1,495
Asian Operations 5,360 3,136 9,392 9,952
Eliminations - primarily
United States (9,760) (12,300) (18,578) (12,248)
-------- -------- -------- --------
$ 17,531 $ 10,518 $ 41,872 $ 37,930
======== ======== ======== ========
Oct. 2, Oct. 3,
1999 1998
-------- --------
<S> <C> <C>
Identifiable Assets:
North American Operations $334,033 $296,831
European Operations 15,792 29,128
Asian Operations 53,923 52,876
Eliminations (27,433) (47,774)
-------- --------
$376,315 $331,061
======== ========
</TABLE>
7. FOREIGN CURRENCY CONTRACTS AND HEDGING ACTIVITIES
- - ----------------------------------------------------
Due to the Company's significant international sales, both to
unafilliated customers and to its foreign subsidiaries, the Company is
exposed to the effect of foreign exchange rate fluctuations on the
future U.S. dollar value of its revenue, operating expense
transactions, as well as the U.S. dollar value of its accounts
receivable denominated in foreign currencies. For currencies other
than the Japanese yen, the Company mainly uses the natural hedges
resulting from intercompany payables and expenses incurred in local
currencies to dampen the effect of foreign currency fluctuations. Due
to the significance of Japan to its consolidated operations, the
Company uses foreign currency forward and purchased options contracts
to hedge forecasted Yen denominated sales transactions and specific
Yen dominated cost transactions and uses foreign currency forward
contracts to hedge Yen denominated accounts receivable.
The Company adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as of October 4, 1998, the
first day of its fourth fiscal quarter in 1998. At October 2,
1999, the Company's foreign currency contracts designated as cash
flow hedges consisted of purchased options and forward contracts.
These contracts had a notional value of $19,788 and hedged
anticipated Japanese Yen denominated sales transactions. The
Company assesses the effectiveness of its foreign currency hedges
using the spot rate, and views the option premium as the
inherently ineffective portion of its purchased option contracts.
The ineffectiveness resulting from such contracts is reflected in
other (income) expense, and was immaterial to the three and nine
months ended October 2, 1999. The loss deferred as other
comprehensive income on cash flow hedges amounted to $560 net of
the deferred tax effect of $343. Such amounts will be reflected
in the Company's income statements between October 1999 and March
2000 as the forecasted transactions occur. Gains on fair value
hedges were reflected in other (income) expense, and were
immaterial to the three and nine months ended October 2, 1999.
No contracts were designated as fair value hedges at October 2,
1999.
The following table presents the gross notional amounts of these
foreign currency contracts and their fair value (based on prices
or forward rates quoted by dealers) as of October 2, 1999:
Foreign Currency Contracts-Japanese Yen
Foreign Currency Contracts Notional Fair Value
- - ------------------------------------------------------------
Forward contracts $ 12,452 $ (781)
Purchased option contracts 7,336 -
-------------------------
$ 19,788 $ (781)
======== =========
Prior to adopting SFAS No. 133, the Company marked all foreign
currency forward contracts which hedged accounts receivable to
market, with the resulting gain or loss included as other
(income) expense. Gains under foreign currency purchased option
contracts which were designated and effective as hedges of
forecasted sales transactions were deferred until realized, at
which time they were reported as revenue in the consolidated
financial statements. Such realized and unrealized gains and
losses were insignificant for the three and nine months ended
October 3, 1998.
<PAGE> 8
BURR-BROWN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains forward-looking
statements that involve risks and uncertainties. These forward
looking statements include those concerning projections of future
revenue growth, gross margin increases, lower expenses and
improved inventory turns and accounts receivable cycles, as well
as expectations for future capital expenditures. Factors that
might cause actual results to differ from those currently
anticipated include, but are not limited to, those discussed
herein and under "Year 2000 Issue" and "Factors that May Affect
Future Operating Results and Financial Condition" as well as in
the Company's Annual Report. Readers are cautioned not to place
undue reliance on any forward-looking statements, as they reflect
management's analysis only as of the date hereof. The Company
undertakes no obligation to release the results of any revision
to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
RESULTS OF OPERATIONS
Net income for the third quarter of 1999 was $12.8 million or
$.33 per diluted share. This compares to net income of $10.3
million or $.27 per diluted share for the preceding quarter and
$7.5 million or $.20 per diluted share for the third quarter of
1998. Net income for the first nine months of 1999 was $30.6
million or $.79 per diluted share. This compares to net income of
$27.1 million or $.71 per diluted share for the same period in
1998.
Third quarter revenue of $78.0 million was 14.4% higher than the
preceding quarter and 27.6% higher than the third quarter of
1998. Revenue for all product lines increased relative to the
second quarter of 1999, with the products serving the Industrial
and Process Control market showing the fastest growth rate of
26.6%. For the first nine months of 1999, revenue was $207.3
million, an increase of 5.5% over the same period last year.
Relative to the second quarter of 1999, revenue increased in
North America and Asia. The North American region experienced
the largest increase in dollar terms, approximately $8.6 million,
or 15.3%. The Asian region was also strong, showing increases
of approximately $7.1 million, or 27.5%. For the first nine
months of 1999, revenue increased 11.1% in the North America
region, 6.7% in Asia, while declining in Europe.
Gross margin for the third quarter of 1999 was 53.0% of revenue.
This compares to gross margin of 52.1% of revenue in the second
quarter of 1999 and 51.5% of revenue in the third quarter of
1998. Like product, like volume pricing, as has been typical,
remained stable during the quarter. It is the Company's intent
to increase its penetration of high volume, fast growing,
emerging applications. It is expected that this will increase
unit volumes, decrease aggregate average selling price and expand
gross margins due to increased operating leverage. For the first
nine months of 1999, gross margin was 52.0% of revenue, compared
to 51.8% of revenue for the same period last year.
Total operating expenses of $24.5 million in the third quarter of
1999 increased $2.4 million from the second quarter of 1999, and
increased $2.4 million from the third quarter 1998. Sales,
Marketing, General & Administrative (SMG&A) expenses of $12.0
million for the third quarter of 1999 were up $280,000,
sequentially, but were down $283,000 from the third quarter of
1998. Research and Development (R&D) expenses of 16.1% of
revenue in the third quarter of 1999 were higher in percentage
terms and higher in absolute terms by $2.2 million when compared
to the second quarter of 1999. R&D spending in the third quarter
of 1999, as compared to the same quarter a year ago, was up in
absolute terms by $2.7 million and relatively flat in percentage
terms, from 16.2% to 16.1%. For the first nine months of 1999,
SMG&A spending was down $2.0 million while R&D spending was up
$3.4 million as compared to the same period in 1998. It is the
Company's intention to target investment in R&D at approximately
16% of revenue and to maintain SMG&A at approximately 14% of
revenue. This reflects the Company's continuing strategy to
maintain a substantial level of R&D investment as the primary
driver of revenue growth while constraining growth in SMG&A
expenses.
Third quarter operating income of $16.8 million or 21.5% of
revenue increased by 24.8% over the second quarter of 1999. This
increase was driven both by higher revenues and higher margins.
Operating income as a percentage of revenue increased to 21.5% in
the third quarter of 1999 from 15.3% in the third quarter of
1998. This was due to lower operating expenses as a percentage of
revenue and to higher margins in the third quarter of 1999. For
the first nine months of 1999 operating income increased 13.3%,
on a revenue increase of 5.5% over the same period in 1998.
<PAGE> 9
Other income was essentially flat in the third quarter of 1999
relative to the second quarter of 1999 and decreased $443,000
from the third quarter of 1998. The effective tax rate for 1999
is expected to be 27%. The Company's effective tax rate is lower
than the U.S. statutory rate due to expected benefits from tax
exempt investment income, a foreign sales corporation, and tax
credits. For the first nine months of 1999, other income
decreased by $702,000, while the tax rate decreased to 27% from
28.5% as compared to the same period in 1998.
As compared to the second quarter of 1999 net income was up 24.2%
on a 14.4% increase in revenue. As compared to the third quarter
of 1998, net income was up 70.2% on a 27.6% increase in revenue.
Year to date for 1999, net income increased $3.4 million or 12.7%
as compared to the same period for 1998. It is the Company's goal
to improve profit performance through gross margin expansion, by
continued constraint on SMG&A expenses, and by revenue growth.
The Company's strategy is to achieve revenue growth through new
product development, increased penetration of traditional markets
such as the industrial market, and expanded participation in new,
emerging markets such as communications, consumer, and computing.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that its financial position as of October 2,
1999 remains very sound. Despite approximately $15 million in
capital spending for the year through October 2, 1999, cash, cash
equivalents, and investments were $143.6 million at quarter end,
an increase of $23.3 million or 19.4% from the same period in
1998.
Inventories have remained flat during 1999. This has been
achieved on an increasing revenue base. The Company has been able
to decrease its finished goods inventory, while at the same time
continue to build strategic die bank inventory. This is
consistent with the Company's intention to have sufficient die
bank inventory to improve delivery performance to customers by
reducing cycle times and lead times.
The Company's expectation for 1999 is for inventory to remain
relatively flat in absolute terms and, if it is successful in
achieving sales growth, to further decline as a percent of
revenue. Inventory turns were 2.8 in the third quarter of 1999,
improved from 2.3 turns in the fourth quarter of 1998. The
Company's 1999 objective is to improve inventory turns to over 3.
During 1999, net accounts receivable increased $13.4 million
relative to December 31, 1998 due to an increase in the level of
revenue. Days sales outstanding (DSO) at October 2, 1999, was
79 days unchanged from December 31, 1998. Third quarter's DSO
reflects non-linearity in monthly shipments during the quarter.
The Company's objective is to improve DSO in the fourth quarter
of 1999 by increased use of distribution, improved shipment
linearity, and more aggressive collection activity. DSO in the
third quarter of 1999 improved two days over the second quarter's
DSO of 81 days.
Capital expenditures totaled $5.2 million for the third quarter
1999, essentially flat relative to the second quarter of 1999.
Backend capacity expansion for increased unit volume, next
generation technology development, and modernization and
standardization of manufacturing equipment were the primary uses
of capital spending. The Company plans to have 1999 capital
expenditures within the range of $20 million to $25 million,
consisting in large part of capacity expansion measures and
improvements in product design automation.
At October 2, 1999, total debt was $19.6 million of which $3.4
million was term debt. This represented a $3.1 million decline in
total debt compared to December 31, 1998. Most of this debt was
held internationally and represented an interest rate arbitrage
opportunity in Japan. In addition to term debt, credit
facilities of approximately $41.3 million, including overdraft
credit facilities with both domestic and international banks,
were available to the Company, of which approximately $16.1
million or 38.8% was utilized. The current ratio improved to
4.39 at October 2, 1999 from 3.44 at December 31, 1998. The debt
to equity ratio declined from .08 at 1998's fiscal year end to
.06 at 1999's third quarter end. In October of 1998, the
Company's board of directors approved the repurchase of up to 3
million shares of Burr-Brown's common stock, from time to time,
pursuant to repurchase guidelines established by the Board. As of
October 2, 1999, the Company has purchased 415,000 shares. No
shares were repurchased in the third quarter of 1999.
Stockholders' equity increased by $31.9 million from December 31,
1998 and $15.0 million from the second quarter of 1999.
International markets constitute a majority of the Company's
revenue. The resulting transactions have exchange rate
fluctuation risk associated with them. The Company acts to
minimize the impact of foreign currency exchange rate
transactions through natural hedges afforded by its significant
foreign operations and through the use of financial hedges in the
form of forward contracts and option contracts. Exchange rate
fluctuations can also affect the Company's reported revenue as
the international subsidiaries' sales are primarily denominated
in foreign currencies but reported in the consolidated financial
statements in U.S. dollars using weighted-average exchange rates.
When compared to the first nine months of 1998, the net effect of
foreign exchange rate changes had a minimal impact on net
profit.(See also "Business Outlook-Market Risks")
<PAGE> 10
The impact of inflation on the Company's financial position and
results of operations has not been significant during the nine
month period ended October 2, 1999.
The Company's balance sheet continues to be strong and management
believes that the Company possesses sufficient capital resources
to meet anticipated requirements over the next twelve months.
YEAR 2000 ISSUE
- - ---------------
Year 2000 Initiative. The Year 2000 issue concerns potential
malfunctions resulting from computer programs using two-digit
year codes in dates instead of four-digit codes. This may result
in hardware and software not functioning properly before or
following January 1, 2000, which may lead to minor or significant
problems associated with manufacturing, distribution, and other
business operations. Burr-Brown's Year 2000 initiative is being
addressed by a multi-disciplinary committee led by senior
information system technology managers.
The committee is evaluating Year 2000 issues in the following
five key categories:
a. Company products;
b. Business application systems;
c. Information technology ("IT") infrastructure;
d. Non-IT infrastructure (factory and facilities equipment and
infrastructure); and
e. Third party suppliers and customers.
The committee is addressing each of these categories in three
phases:
1. Inventory (identify items with possible Year 2000 risk);
2. Assessment (prioritize the inventory, assess Year 2000
compliance, plan corrective action, and identify initial
contingency plans); and
3. Remediation (implement corrective action, test and verify
compliance, and execute contingency plans if not compliant).
State of Readiness. The Company has determined that its
semiconductor products should not produce errors processing data
as a result of Year 2000 failures, provided that all other
products (e.g., other software, hardware, and electronic
components) used with the Burr-Brown semiconductor products
properly exchange accurate data. The Company's products are used
in a wide variety of applications in conjunction with other
electronic components and software from many different vendors;
to verify proper Year 2000 operation of a complete system,
customers will need to verify proper operation of each individual
component as well as the system as a whole in the specific
application environment.
The committee has completed an inventory of all domestic business
applications systems and IT infrastructure (including software,
hardware and communications infrastructure, systems developed in-
house, purchased software and hardware, and services provided by
third parties). The Company began a worldwide replacement of its
primary business systems in 1994 to provide additional
significant information system functionality as well as Year 2000
readiness. This replacement is complete. These primary business
application systems and IT infrastructure have been licensed or
purchased from major software and IT vendors who represent that
such systems and equipment are Year 2000 compliant. In addition
to those representations, the Company is testing these systems to
ensure Year 2000 compliance in the Company's application
environment. The committee has identified certain non-critical,
legacy systems and applications that are not or may not be
compliant. Specific compliance plans have been developed for
these and all other items on the inventory and are being
implemented. These plans include retirement, replacement,
renovation, integration, and testing.
<PAGE> 11
The committee has completed its inventory and assessment of non-
IT infrastructure. Non-IT infrastructure includes physical
fabrication and test facilities and equipment for production.
Burr-Brown's manufacturing processes are highly automated. The
preliminary inventory has identified assembly and test equipment
that contains embedded proprietary software or is integrated into
PC software databases that needed renovation or replacement. If
not remedied, it is possible that some of this infrastructure
could cease to function. However, the Company believes most of
this infrastructure would continue to function, but may report
inaccurate data that could result in production inefficiencies.
Remediation plans are being implemented with the assistance of
the vendors of such equipment and software.
The Company has completed its formal communication with
significant past and present suppliers, customers, and
subcontractors to determine the extent to which they are
vulnerable to Year 2000 issues. In total, the Company
communicated with approximately 400 such parties. The feedback
received indicates that most of the Company's suppliers do not
expect their business operations to be interrupted or adversely
impacted by Year 2000 problems. In the event that any
significant customers and suppliers do not successfully and
timely achieve Year 2000 compliance, it is possible that the
Company's operations could be adversely affected.
Burr-Brown completed its remediations and testing in the third
quarter of 1999. The Company plans to complete its contingency
planning by the end of the fourth quarter of 1999 and intends to
complete Year 2000 compliance solutions for any critical systems
that might be earlier impacted by Year 2000 issues (e.g., order
entry systems) prior to any anticipated significant impact from
Year 2000 date issues. Of course, completion of the project is
contingent upon the timeliness and accuracy of software upgrades
and equipment from vendors, the adequacy and accuracy of our
internal and external resources used in assessing, remediating,
and testing our internal systems for compliance, the timely
cooperation of our suppliers, subcontractors and customers, and
other potential factors. Furthermore, there can be no assurances
that implementation of the Company's Year 2000 initiatives will
fully mitigate potential failures or problems.
Cost of Compliance. Since 1994, the Company has expended
approximately $15.7 million on information system replacement.
The committee currently anticipates spending between $0.1 - $0.3
million to achieve Year 2000 compliance for presently identified
IT and Non-IT infrastructure that will require remediation. The
committee has and will continue to use, as required, external
consultants to assess and mitigate Year 2000 problems. To the
extent the Company is required to use outside consultants more
than presently anticipated, the Company's costs to address Year
2000 issues will increase. These cost estimates may change as
more information becomes known. All Year 2000 costs have been and
are expected to continue to be funded from operations.
Critical Risks. Although the Company intends that its Year 2000
initiative will avoid any material adverse effect on its
operations, cash flows, or financial condition, it recognizes
that the occurrence of worst case Year 2000 scenarios could
significantly impede its ability to manufacture, distribute, and
sell its products for an indefinite period of time. The Company
is dependent on basic public and private infrastructure for its
normal operations. In the event utilities, distribution
channels, banking systems, or other fundamental services are
unavailable as a result of Year 2000 failures, this would have a
severe impact on continuing business operations. Any long-term
interruption would have a material adverse impact on the Company.
In addition, the Company does not have readily available
alternative sources of supply for certain materials and services
(e.g., specific wafer production processes). The Company would
not be able to replace these critical suppliers without
significant delay and cost.
BUSINESS OUTLOOK
- - ----------------
In order to provide our shareholders with better insight to our
future plans, directions, and objectives, the following forward
looking statements are provided. The forward looking statements
are based on management's current expectations and are subject to
the risks and other contingencies described elsewhere herein and
in "Factors That May Affect Future Operating Results and
Financial Conditions."
<PAGE> 12
MARKETS: The Company intends to continue to emphasize the
industrial and process control and test and instrumentation
markets in which it holds a leadership position in order to
protect and enhance market penetration. The Company expects to
hold a steady market position in the digital audio and video
market. In addition, it will endeavor to improve its market
position in the relatively larger and faster growth
communications and computing markets.
PRODUCTS: The Company possesses very strong core competencies in
the development, manufacture, and marketing of high performance
analog and mixed signal integrated circuits. It also maintains a
strong presence in digital audio and video applications.
Increasingly, it has been expanding its product offerings to
selected aspects of the communications market, including wireless
and broadband applications. The Company believes that, by using
these capabilities to address the requirements of its target
markets, it can sustain growth over the next five years. To
capitalize on rapid growth opportunities, the Company is seeking
to increase its number of product offerings and reduce the time
required to bring new products to market. The Company is also
seeking to design products for a wide customer base. Product
offerings will include both standard linear products which will
serve a wide range of market applications and, on a selective
basis, application specific products which target specific needs
of very high growth market segments.
GROSS MARGIN: The Company's plans call for a continually
expanding gross margin over the next five years. Product pricing
is expected to remain stable and continue to reflect the high
value-added content of these products. Accordingly, the Company's
ability to increase revenues will depend in part upon its ability
to increase unit sales volumes of existing products and to
introduce and sell new products. Increased volume and improved
manufacturing efficiency are expected to continue to reduce
product costs. Some products targeting very high volume, rapid
growth applications will be characterized by relatively lower
gross margins but should require lower levels of operating costs
compared to products serving more traditional markets.
OPERATING EXPENSES: In order to support acceleration of new
product development, the Company expects to continue to increase
its R&D expenditures. The Company expects to constrain SMG&A
expenses to a rate substantially lower than that of revenue
growth. The goal is continual expansion of operating margins with
sales growth while allowing for increased research and
development investment as the primary engine of that growth.
INVESTMENTS: The Company believes the growth opportunities
inherent in this strategy will require significant additions to
manufacturing capacity and technological capabilities over the
next five years. The Company plans to meet these requirements in
the form of internal capital investments and development of
source of supply arrangements with third party vendors as well as
potential timely and synergistic business acquisitions.
QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
- - ------------------------------------------------------
MARKET RISKS: The Company is exposed to certain financial market
risks, principally changes in interest rates and foreign currency
exchange rates.
INTEREST RATE RISKS: As the Company has a relatively low debt
burden, the Company's interest rate risk at October 2, 1999
relates primarily to its cash equivalents, short-term, and long-
term investments.
The following summarizes the future maturities of the Company's
cash equivalents, short-term, and long-term investments at
October 2, 1999:
Fair Value Weighted Yield
------------------------------
Maturities from 10/99 to 09/2000 $ 130,328,000 6.07%
Maturities after 09/2000 6,816,000 5.01%
- - -----------------------------------------------------------------
Total $ 137,144,000 5.96%
==============================
It is the objective of the Company to concentrate investments in
tax advantaged securities to maximize after tax return.
FOREIGN CURRENCY RISKS: International markets account for a
majority of the Company's revenue. The resulting transactions
have exchange rate fluctuation risk associated with them. The
Company acts to minimize the impact of foreign currency exchange
rate transactions through natural hedges afforded by its
significant foreign operations and through the use of financial
hedges in the form of forward contracts and option contracts.
These contracts have historically been in three currencies,
Japanese Yen, British Pounds and German Marks, although such
contracts have been exclusively in Japanese Yen in 1998 and 1999.
The following summarizes the foreign currency forward and option
contracts, which settle in between October 1999 and March 2000,
in effect at October 2, 1999:
Notional Average
Amount Rate Fair Value
----------------------------------------
Japanese Yen Forward
Contracts $12,452,000 110.97 $(781,000)
Japanese Yen Option
Contracts 7,336,000 114.92 --
- - ----------------------------------------------------------------
Total $19,788,000 $(781,000)
=======================================
<PAGE> 13
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS AND FINANCIAL CONDITIONS
- - -------------------------------------------------------------------------
The Company's quarterly and annual operating results are affected
by a variety of factors that could materially and adversely
affect revenue, net income, gross profit, and profitability;
including the volume and timing of orders, changes in product
mix, market acceptance of the Company's and its customers'
products, competitive pricing pressures, fluctuations in foreign
currency exchange rates, economic conditions in the United States
and international markets, the timing of new product
introductions, availability of wafers and other materials and
services, fluctuations in manufacturing yields, and the continued
service of key management, employees, and providers. The Company
has experienced significant fluctuations in operating results in
the past and may likely experience such fluctuations in the
future. The semiconductor market has historically been cyclical
and subject to significant economic downturns at various times.
Historically, average selling prices in the semiconductor
industry have decreased over the life of particular products. If
the Company is unable to introduce new products with higher
average selling prices or is unable to reduce manufacturing costs
to offset decreases in the prices of its existing products, the
Company's operating results will be adversely affected. In
addition, the Company is limited in its ability to reduce costs
quickly in response to any revenue shortfalls.
The fabrication of integrated circuits is a highly complex and
precise process. Manufacturing yields can be impacted by a
variety of factors, many of which are outside the Company's
control. A large portion of the Company's manufacturing costs
are relatively fixed and consequently the number of shippable die
per wafer for a given product is critical to the Company's
results of operations. To the extent the Company does not achieve
acceptable manufacturing yields or experiences product shipment
delays, its financial condition, cash flows, and results of
operations would be materially and adversely affected. To meet
anticipated future demand and to utilize a broader range of
fabrication processes, the Company intends to increase its
manufacturing capacity at some future point. Although the Company
has internal capability to produce wafers for many of its
products, it is dependent on outside wafer fabs for a significant
portion of its wafer supply. As is typical in the semiconductor
industry, from time to time the Company has experienced
disruptions in the supply of processed wafers from external fabs
due to quality and yield problems and capacity constraints. If
these outside wafer foundries are not able to produce required
supplies of processed wafers conforming to the Company's quality
standards, the Company's business and relationships with its
customers for the quantities of products produced by these
foundries could be adversely affected. In addition, the Company
relies on subcontractors to perform assembly, packaging, and
testing services. Disruption of these services could adversely
affect the Company's operations.
The Company desires to continue to expand its operations outside
of the United States and to enter additional international
markets, which will require significant management attention and
financial resources and subject the Company further to the risks
of operating internationally. These risks include unexpected
changes in regulatory requirements, delays resulting from
difficulty in obtaining export licenses for certain technology,
tariffs, and other barriers and restrictions, and the burdens of
complying with a variety of foreign laws. In addition, because
most of the Company's international sales are denominated in
foreign currencies, gains and losses on the conversion to U.S.
dollars of accounts receivable and accounts payable arising from
international operations may contribute to fluctuations in the
Company's operating results. A substantial portion of the
Company's revenue is attributable to sales in Japan and Southeast
Asia. The recent economic instability in Japan and Southeast
Asia has had a negative impact on the Company's sales during 1998
and 1999, and there can be no assurance that this condition will
not continue. This situation could have a material adverse
effect on the Company's business, financial condition, cash
flows, or operating results, particularly to the extent that this
instability materially impacts the sales of products manufactured
by the Company's customers.
<PAGE> 14
The Company has in the past been, and may in the future be,
subject to intellectual property litigation in the United States
or elsewhere, which can demand significant financial and
management resources. From time to time, third parties assert
that the Company is infringing intellectual property rights of
such parties. There can be no assurance that infringement claims
by third parties will not be asserted against the Company in the
future or that such assertions, if proven to be true, will not
materially adversely effect the Company's business, financial
condition, cash flows, or operating results. Any litigation
relating to the intellectual property rights, whether or not
determined in the Company's favor or settled by the Company,
would at a minimum be costly and could divert the efforts and
attention of the Company's management and technical personnel,
which could have a material adverse effect on the Company's
business, financial condition, cash flows, or operating results.
The Company's success depends upon its ability to develop new
products for existing and new markets, to introduce such products
in a timely manner and to have such products gain market
acceptance. The development of new products is highly complex,
and from time to time the Company has experienced delays in
developing and introducing new products. Successful product
development and introduction depends on a number of factors,
including proper new product definition, timely completion of
design and testing of new products, achievement of acceptable
manufacturing yields, and market acceptance of the Company's and
its customers' products. Moreover, successful product design and
development is dependent on the Company's ability to attract,
retain, and motivate qualified analog design engineers, of which
there is a limited number. There can be no assurance that the
Company will be able to meet these challenges or adjust to
changing market conditions as quickly and cost-effectively as
necessary to compete successfully. The semiconductor industry
is intensely competitive and is characterized by price erosion,
rapid technological change, product obsolescence, and heightened
international competition in many markets. Many of the Company's
competitors have substantially greater financial, technical,
marketing, distribution, and other resources, broader product
lines and longer standing relationships with customers than the
Company. In the event of a downturn in the market for analog
circuits, companies that have broader product lines and longer
standing customer relationships may be in a stronger competitive
position than the Company. Competitors with greater financial
resources or broader product lines also may have more resources
than the Company to engage in sustained price reductions in the
Company's primary markets to gain market share.
<PAGE> 15
PART II. OTHER INFORMATION
- - ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- - -----------------------------------------
a. Exhibits
27. Financial Data Schedule.
b. Reports on Form 8-K: On August 11, 1999, the Company
filed a Report on Form 8-K relating to the Company's adoption of
an Amended and Restated Stockholder Rights Plan, effective August
9, 1999.
SIGNATURES
- - ----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BURR-BROWN CORPORATION
-----------------------
Registrant
By: J. SCOTT BLOUIN
----------------
J. Scott Blouin
Chief Financial Officer
Principal Accounting Officer
Date: November 16, 1999
<PAGE> 16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS OF BURR-BROWN CORPORATION FOR THE
NINE MONTHS ENDED OCTOBER 2, 1999
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> OCT-2-1999
<CASH> 102,493
<SECURITIES> 41,091
<RECEIVABLES> 68,789
<ALLOWANCES> 715
<INVENTORY> 52,277
<CURRENT-ASSETS> 272,996
<PP&E> 213,247
<DEPRECIATION> 119,744
<TOTAL-ASSETS> 376,315
<CURRENT-LIABILITIES> 62,180
<BONDS> 0
0
0
<COMMON> 391
<OTHER-SE> 305,063
<TOTAL-LIABILITY-AND-EQUITY> 376,315
<SALES> 207,254
<TOTAL-REVENUES> 207,254
<CGS> 99,552
<TOTAL-COSTS> 99,552
<OTHER-EXPENSES> 67,800
<LOSS-PROVISION> (98)
<INTEREST-EXPENSE> 343
<INCOME-PRETAX> 41,872
<INCOME-TAX> 11,307
<INCOME-CONTINUING> 30,565
<DISCONTINUED> 0
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<NET-INCOME> 30,565
<EPS-BASIC> 0.83
<EPS-DILUTED> 0.79
</TABLE>
