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 April 3, 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 the close of the period covered by this report.
Common Stock, $0.01 par value 36,588,757 Shares
<PAGE> 1
BURR-BROWN CORPORATION AND SUBSIDIARIES
INDEX
-----
PART I. FINANCIAL INFORMATION Page #
- ------------------------------ ------
Item 1 Financial Statements (Unaudited)
Consolidated Statements of Income, Three
Months Ended April 3, 1999, and April 4, 1998 3
Consolidated Balance Sheets, April 3, 1999,
and December 31, 1998 4
Consolidated Statements of Cash Flows, Three
Months Ended April 3, 1999, and April 4, 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 15
SIGNATURES
----------
Signature Page 15
<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
Apr. 3, Apr. 4,
1999 1998
-------- --------
<S> <C> <C>
Net Revenue $ 61,007 $ 68,685
Cost of Goods Sold 30,228 33,087
-------- -------
Gross Margin 30,779 35,598
% of revenue 50.5% 51.8%
Expenses:
Research & Development 10,063 9,810
% of revenue 16% 14%
Sales, Marketing, General and
Administrative 11,091 12,131
% of revenue 18% 18%
-------- -------
Total Operating Expenses 21,154 21,941
% of revenue 35% 32%
Income from Operations 9,625 13,657
% of revenue 16% 20%
Interest Expense 117 93
Other (Income) Expense (717) (959)
-------- -------
Income Before Income Taxes 10,225 14,523
% of revenue 17% 21%
Provision for Income Taxes 2,761 4,357
Effective Tax Rate 27% 30%
-------- -------
Net Income $ 7,464 $ 10,166
% of revenue 12% 15%
======== ========
Basic Earnings per Common Share $ 0.20 $ 0.28
======== ========
Shares used in basic per share
calculation 36,692 36,448
======== =======
Diluted Earnings per Common Share $ 0.20 $ 0.27
======== =======
Shares used in diluted per share
calculation 38,248 38,359
======== =======
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
BURR-BROWN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
Apr. 3, Dec. 31,
1999 1998
----------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $ 74,638 $ 72,427
Short-Term Investments 3,622 3,620
Trade Receivables 54,809 54,677
Inventories 50,910 52,296
Deferred Income Taxes 6,618 6,447
Other 10,611 9,960
--------- ---------
Total Current Assets 201,208 199,427
Long-Term Investments 42,782 44,209
Land, Buildings and Equipment
Land 5,133 5,145
Buildings and Improvements 28,443 28,214
Equipment 169,381 167,596
---------- ---------
202,957 200,955
Less Accumulated Depreciation (111,110) (108,791)
---------- ---------
91,847 92,164
Other Assets 2,750 2,891
---------- ---------
$ 338,587 $ 338,691
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes Payable $ 16,334 $ 17,289
Accounts Payable 14,362 16,179
Accrued Expenses 4,231 3,649
Accrued Employee Compensation and
Payroll Taxes 5,004 6,056
Deferred Profit from Distributors 7,167 8,790
Income Taxes Payable 7,169 4,857
Current Portion of Long-Term Debt 1,151 1,235
----------- ---------
Total Current Liabilities 55,418 58,055
Long-Term Debt 2,471 2,921
Deferred Income Taxes 3,832 3,547
Other Long-Term Liabilities 611 655
Stockholders' Equity
Preferred Stock - -
Common Stock 387 386
Additional Paid-In Capital 101,282 100,212
Retained Earnings 192,755 185,295
Accumulated Other Comprehensive Income 2,009 2,739
Treasury Stock (20,178) (15,119)
----------- ---------
276,255 273,513
----------- ---------
$ 338,587 $ 338,691
=========== =========
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
BURR-BROWN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of dollars)
Three Months Ended
Apr. 3, Apr. 4,
1999 1998
------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 7,464 $ 10,166
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 4,585 3,956
Benefit from Deferred Income Taxes (47) (158)
Increase (Decrease) in Deferred Profit
from Distributors (1,623) 82
Other 363 (235)
Changes in Operating Assets and Liabilites:
(Increase) Decrease in Trade Receivables (1,174) (4,455)
(Increase) Decrease in Inventories 1,086 (2,265)
(Increase) Decrease in Other Assets (837) (2,849)
Increase (Decrease) in Accounts Payable (1,346) 1,315
Increase (Decrease) in Accrued Expenses
and Other Liabilities 2,190 (3,317)
------- --------
Net Cash Provided By Operating Activities 10,661 2,240
INVESTING ACTIVITIES:
Purchases of Investments (2,033) (3,568)
Maturities of Investments 3,552 15,648
Purchases of Land, Buildings and Equipment (4,806) (4,396)
Proceeds from Sale of Equipment - 101
------- --------
Net Cash Provided by (Used in) Investing
Activities (3,287) 7,785
FINANCING ACTIVITIES:
Proceeds from Short-Term and Long-Term
Borrowings 40 5,012
Payments on Short-Term and Long-Term
Borrowings (299) (156)
Proceeds from (Payments for) Capital Stock
Activity, Net (3,992) 2,274
------- --------
Net Cash Provided By (Used In) Financing
Activities (4,251) 7,130
Effect of Exchange Rate Changes (912) 502
------- --------
Increase in Cash and Cash Equivalents 2,211 17,657
Cash and Cash Equivalents at Beginning of
Year 72,427 54,284
------- --------
Cash and Cash Equivalents at End of Three
Months $74,638 $ 71,941
======= ========
<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 quarter ended April 3, 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 April 3, 1999 and April 4, 1998.
<TABLE>
<CAPTION>
Apr.3, Apr.4,
1999 1998
--------- --------
<S> <C> <C>
Weighted average common shares
outstanding 36,692 36,448
Dilutive effect of stock
options outstanding using
the Treasury Stock Method 1,556 1,911
--------- --------
Shares used in computed Diluted
Earnings Per Share 38,248 38,359
========= ========
</TABLE>
3. COMPREHENSIVE INCOME
- ------------------------
The components of comprehensive income, net of related tax, for
the three months ended April 3, 1999 and April 4, 1998 are as
follows:
<TABLE>
<CAPTION>
Apr. 3, Apr. 4,
1999 1998
--------- --------
<S> <C> <C>
Net Income $ 7,464 $ 10,166
Unrealized gain on cash flow
hedges 398 -
Unrealized loss on investments (11) (83)
Foreign currency translation
adjustment (1,117) (593)
--------- --------
Comprehensive income $ 6,734 $ 9,490
========= ========
</TABLE>
The components of accumulated other comprehensive income, net of
related tax, at April 3, 1999 and December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Apr. 3, Dec. 31,
1999 1998
--------- --------
<S> <C> <C>
Unrealized gain/(loss) on cash
flow hedges $ 247 $ (151)
Unrealized gain on investments 154 165
Foreign currency translation
adjustment 1,608 2,725
--------- --------
Accumulated other comprehensive
income $ 2,009 $ 2,739
========= ========
</TABLE>
<PAGE> 6
4. INVENTORIES
- ---------------
<TABLE>
<CAPTION>
Inventories consist of the following:
Apr. 3, Dec. 31,
1999 1998
--------- --------
<S> <C> <C>
Raw Material $ 8,042 $ 8,762
Work-in-Process 26,213 25,718
Finished Goods 16,655 17,816
--------- --------
$ 50,910 $ 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), Far Eastern (principally Japan,
but including Singapore beginning in 1998) and European
(principally the United Kingdom, France, Germany, and Italy).
Each of these segments derives revenue from the sale of the full
array of the Company's product lines, although the Far Eastern
segment has a higher concentration of sales from certain mixed
signal products.
Segment information at and for the three months ended April 3,
1999 and April 4, 1998 is as follows:
<TABLE>
<CAPTION>
Apr. 3, Apr. 4,
1999 1998
---------- ----------
<S> <C> <C>
Net Revenue:
North American Operations:
Unaffiliated customers $ 23,322 $ 25,820
Foreign unaffiliated
customers 11,641 10,485
Consolidated subsidiaries 16,840 19,030
---------- ----------
51,803 55,335
European Operations:
Unaffiliated customers 7,969 10,622
Consolidated subsidiaries - 1,603
---------- ----------
7,969 12,225
Far Eastern Operations:
Unaffiliated customers 18,075 21,758
Consolidated subsidiaries 4,251 2,272
---------- ----------
22,326 24,030
Eliminations (21,091) (22,905)
---------- ----------
$ 61,007 $ 68,685
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Apr. 3, Apr. 4,
1999 1998
---------- ----------
<S> <C> <C>
Income (Loss) Before Income Taxes:
North American Operations $ 9,083 $ 10,764
European Operations 470 390
Far Eastern Operations 539 4,029
Eliminations - primarily
United States 133 (660)
---------- ----------
$ 10,225 $ 14,523
========== ==========
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
Apr. 3, Apr. 4,
1999 1998
---------- ----------
<S> <C> <C>
Identifiable Assets:
North American Operations $ 297,729 $ 274,981
European Operations 23,448 25,960
Far Eastern Operations 45,453 46,552
Eliminations (28,043) (34,332)
---------- ----------
$ 338,587 $ 313,161
========== ==========
</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 April 3,
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 $16,860 and hedged
anticipated Japanese Yen denominated sales transactions. At
April 3, 1999, the Company's fair value hedges consisted of
forward contracts. These contracts had a notional value of
$3,419 and hedged Japanese Yen denominated accounts receivable.
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 quarter ended
April 3, 1999. The gains deferred as other comprehensive income
on cash flow hedges amounted to $247 net of the deferred tax
effect of $68. Such amounts will be reflected in the Company's
income statements between April and September 1999 as the forecasted
transactions occur. Gains on fair value hedges were reflected in
other (income) expense, and were immaterial to the quarter ended
April 3,1999.
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 April 3, 1999:
Foreign Currency Contracts-Japanese Yen
Foreign Currency Contracts Notional Fair Value
- -------------------------------------------------------
Forward contracts $ 12,041 $ 254
Purchased option contracts 8,238 109
-------- ---------
$ 20,279 $ 363
======== =========
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 months ended April 4,
1998.
<PAGE> 8
BURR-BROWN CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis contains forward-looking
statements that involve risks and uncertainties. Factors that
might cause actual results to differ from those currently
anticipated include, but are not limited to, those discussed
under "Quantitative and Qualitative Disclosure of Market Risk."
RESULTS OF OPERATIONS
- ---------------------
Net income for the first quarter of 1999 was $7.5 million or $.20
per diluted share. This compares to net income of $8.7 million
or $.23 per diluted share for the preceding quarter and to net
income of $10.2 million or $.27 per diluted share for the same
quarter of 1998. The Company has been impacted by an industry-
wide cyclical downturn that began in the second quarter of 1998.
However, first quarter 1999 bookings showed an approximate 20%
increase relative to fourth quarter 1998.
First quarter revenue of $61.0 million was 1.2% lower than the
preceding quarter and 11.2% lower than the first quarter of 1998.
While revenue for most product lines were flat or slightly down,
compared to the prior quarter, the Company saw a 22.1% increase
in the revenue of its High Speed products. These products serve
primarily the communications market.
Sales declined in all regions of the world in the first quarter
of 1999, relative to the same quarter in 1998. The North American
region experienced the largest decline in dollar terms,
approximately $3.5 million. In percentage terms, the European
region showed the largest decline, experiencing a 34.8% drop
relative to the same quarter in 1998.
Gross margin for the quarter was 50.5% of revenue. This compares
to gross margin of 50.3% of revenue in the fourth quarter of 1998
and 51.8% of revenue in the first quarter of 1998. Like product,
like volume pricing, as has been typical, remained stable during
the quarter. Mix continues to shift toward higher volume products
with lower average selling prices, to date, without having an
adverse effect on aggregate gross margin. This is consistent with
the Company's strategy to offer high performance analog and mixed
signal intergrated circuits for high volume, fast growing, emerging
applications. The Company's plan is to improve gross margin if
there is an acceleration of revenue growth.
Operating expense growth was actively constrained during the
quarter given the uncertainty in demand. Total operating
expenses at $21.2 million were down $436,000 from the fourth
quarter of 1998 and $787,000 from the first quarter 1998. Sales,
Marketing and G&A (SMG&A) for the quarter was down $303,000,
sequentialy and $1,040,000 lower than a year ago. Research and
Development (R&D) expenses at 16.5% of revenue were flat compared
to last quarter and increased compared to 14.3% of revenue for
the same period last year. It is the Company's intention to
target investment in R&D at approximately 14% to 15% of revenue
and to maintain SMG&A at 18% or less 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.
First quarter operating income of $9.6 million or 15.8% of
revenue declined by 29.5% over the first quarter of 1998. This
decline was almost exclusively due to lower revenue. As compared
to the prior quarter, operating income as a percentage of revenue
increased 3.3%. This was due to continued functional expense
controls and to higher margins in the first quarter of 1999.
Other income was lower than fourth quarter 1998, and first
quarter 1998 due to lower investment and foreign exchange gain
income. 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,
foreign sales corporation, and tax credits.
As compared to last year, first quarter 1999 net income was down
26.6% on a 11.2% decline in revenue. 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
<PAGE> 9
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 April 3,
1999 remains very sound. Despite over $4.8 million in capital
spending and stock repurchases of $5.1 million, cash,
equivalents, and investments were $121 million at quarter end, an
increase of $.8 million or 0.7% during the quarter.
Inventories decreased by $1.4 million or 2.7% during the quarter
to $50.9 million at April 3, 1999. The Company was able to
decrease its finished goods inventory, while at the same time
continuing 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.
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 are essentially flat at 2.4 when
compared to the end of 1998. The Company's 1999 objective is to
improve this to over 3.
During the quarter, net accounts receivable remained essentially
flat relative to fourth quarter 1998. Days sales outstanding
(DSO) increased to 84 days at April 3, 1999 from 79 days at the
end of 1998. The increase in DSO reflected non-linearity in
monthly shipments during the first quarter. DSO is planned to
improve in 1999 due to increased use of distribution, improved
shipment linearity, and more aggressive collection activity.
Capital expenditures totaled $4.8 million for the first quarter
1999, $1.8 million lower than the fourth quarter 1998. Backend
capacity expansion for increased unit volume, next generation
technology development, and modernization and standardization
of manufacturing equipment were the primary users 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 April 3, 1999, total debt was $20 million of which $3.6
million was term debt. This represented a $1.5 million decline in
total debt compared to December 31, 1998. Most of this debt was
held internationally and represented an interest rate arbitrage
situation 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 $16.3 million or
39.5% was utilized. The current ratio improved to 3.63 at April
3, 1999 from 3.44 at December 31, 1998. The debt to equity ratio
declined from .08 at 1998's fiscal year end to .07 at 1999's first
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 April 3, 1999, the Company has
purchased 405,000 shares, 235,000 of which were purchased in
the first quarter of 1999. Stockholders' equity increased by
$29.6 million from the first quarter of 1998 and $2.7 million,
sequentially.
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 three months of 1998, the effect of
foreign exchange rate changes had an approximate 7.5% favorable
impact on 1999 year to date revenue.(See also "Business
Outlook-Market Risks")
The impact of inflation on the Company's financial position and
results of operations has not been significant during the three
month period ended April 3, 1999.
The Company's balance sheet continues to be strong and management
believes that it possesses more than sufficient capital resources
to meet the anticipated requirements of the next twelve months.
<PAGE> 10
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 nearly complete and is intended
to be completed enterprise-wide by mid-1999. However, if this
replacement is not completed on a timely basis, Year 2000 related
failures could adversely impact the Company. 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
internally assessing 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
are being developed for these and all other items on the
inventory. These plans include retirement, replacement,
renovation, integration, and testing.
The committee has completed its inventory of Non-IT
infrastructure and also has completed the assessment phase for
several critical systems. Non-IT infrastructure includes
physical fabrication and test facilities and equipment for
production. Burr-Brown's manufacturing processes are very
automated. The preliminary inventory has identified assembly and
test equipment that contains embedded proprietary software or is
integrated into PC software databases that will need 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 is formally communicating with significant past and
present suppliers, customers, and subcontractors to determine the
extent to which they are vulnerable to Year 2000 issues. To
date, the Company has communicated with approximately 400 such
<PAGE> 11
parties, and will continue to communicate with key suppliers that
are not yet compliant in an effort to eliminate or minimize any
impact their non-compliance may have on the Company's operations.
Continuing feedback 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 anticipates completing its remediations and
contingency plans by the third 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 million on information system replacement. The
committee currently anticipates spending between $0.7 - $1.7
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
will 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.
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 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 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 substantial 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, 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
<PAGE> 12
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 will continue to increase its
R&D expenditures. The Company intends 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. This will be met 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.
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 is virtually debt-free, the
Company's interest rate risk at April 3, 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 April
3, 1999:
Fair Value Weighted Yield
------------------------------
Maturities in 1999 $ 59,471,000 3.67%
Maturities in 2000 42,782,000 4.75%
- -------------------------------------------------------
Total $102,253,000 4.11%
==============================
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 1999, in effect at April 3, 1999:
Notional Average Fair
Amount Rate Value
---------------------------------
Japanese Yen Forward Contracts $12,041,000 116.50 $254,000
Japanese Yen Option Contracts 8,238,000 121.46 109,000
- -----------------------------------------------------------------
Total $20,279,000 $363,000
=================================
QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
- ------------------------------------------------------
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
<PAGE> 13
and subject to significant economic downturns at various times.
As noted above, the industry is currently experiencing a downturn
and the Company is unable to predict the likely extent or
duration of this downturn. 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 domestic and international 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.
The Company has in the past been, and may in the future be,
subject to or initiate 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,
<PAGE> 14
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.
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: The Company did not file any
reports on Form 8-K during the quarter ended April 3, 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: May 17, 1999
------------
<PAGE> 15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS OF BURR-BROWN CORPORATION FOR THE
QUARTER ENDED APRIL 3, 1999
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> APR-3-1999
<CASH> 74,638
<SECURITIES> 46,404
<RECEIVABLES> 55,653
<ALLOWANCES> 844
<INVENTORY> 50,910
<CURRENT-ASSETS> 201,208
<PP&E> 202,957
<DEPRECIATION> 111,110
<TOTAL-ASSETS> 338,587
<CURRENT-LIABILITIES> 55,418
<BONDS> 0
0
0
<COMMON> 387
<OTHER-SE> 275,868
<TOTAL-LIABILITY-AND-EQUITY> 338,587
<SALES> 61,007
<TOTAL-REVENUES> 61,007
<CGS> 30,228
<TOTAL-COSTS> 30,228
<OTHER-EXPENSES> 21,154
<LOSS-PROVISION> (71)
<INTEREST-EXPENSE> 117
<INCOME-PRETAX> 10,225
<INCOME-TAX> 2,761
<INCOME-CONTINUING> 7,464
<DISCONTINUED> 0
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<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
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