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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
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(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------ EXCHANGE ACT OF 1934
For the Quarter ended September 30, 2000
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------ EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission File Number: 0-19299
________________________________
INTEGRATED CIRCUIT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2000174
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2435 Boulevard of the Generals
Norristown, Pennsylvania 19403
(Address of principal executive offices)
(610) 630-5300
(Registrant's telephone number including area code)
________________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
As of November 10, 2000, there were 64,596,406 shares of Common Stock; $0.01 par
value, outstanding.
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1
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INTEGRATED CIRCUIT SYSTEMS, INC.
--------------------------------
INDEX
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Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets:
September 30, 2000 (Unaudited) and July 1, 2000 3
Consolidated Statements of Operations (Unaudited):
Three Months Ended September 30, 2000 and October 2, 1999 4
Consolidated Statements of Cash Flows (Unaudited):
Three Months Ended September 30, 2000 and October 2, 1999 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 Disclosures About 13
Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
2
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Item 1. Consolidated Financial Statements
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
September 30, July 1,
2000 2000
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 42,250 $ 28,940
Marketable securities 284 282
Accounts receivable, net 24,517 23,660
Inventory, net 10,890 10,718
Prepaid income taxes 4,372 9,358
Prepaid assets 3,938 4,191
Current portion of deposit on purchase contracts 9,532 9,877
-------------- --------------
Total current assets 95,783 87,026
-------------- --------------
Property and equipment, net 13,014 13,058
Other assets 1,077 1,135
-------------- --------------
Total assets $ 109,874 $ 101,219
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations $ 429 $ 10,435
Accounts payable 14,309 13,408
Accrued expenses and other current liabilities 5,470 6,079
-------------- --------------
Total current liabilities 20,208 29,922
-------------- --------------
Long-term debt, less current portion 702 835
Other liabilities 1,414 1,542
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Total liabilities 22,324 32,299
-------------- --------------
Shareholders' equity:
Common stock, $0.01 par, authorized 300,000;
Issued and outstanding 64,570 and 64,269 shares as of
September 30, 2000 and July 1, 2000, respectively. 646 643
Additional paid in capital 201,752 199,018
Accumulated deficit (111,136) (126,687)
Deferred compensation (3,482) (3,768)
Notes receivable (230) (286)
-------------- --------------
Total shareholders' equity 87,550 68,920
-------------- --------------
Total liabilities and shareholders' equity $ 109,874 $ 101,219
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
3
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INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------
September 30, October 2,
2000 1999
---------------------- -------------------
<S> <C> <C>
Revenues: $51,351 $37,840
Cost and expenses:
Cost of sales 19,469 15,775
Research and development 7,140 5,940
Selling, general and administrative 6,117 4,440
Management fee -- 250
Goodwill amortization 59 59
---------------------- -------------------
Operating income 18,566 11,376
---------------------- -------------------
Interest and other income 601 137
Interest expense (153) (4,763)
---------------------- -------------------
Income before income taxes and extraordinary gain 19,014 6,750
Income taxes 3,463 1,332
---------------------- -------------------
Income before extraordinary gain 15,551 5,418
Extraordinary gain on early extinguishment of debt -- 36
---------------------- -------------------
Net income $15,551 $ 5,454
====================== ===================
Basic income per share:
Income before extraordinary gain $ 0.24 $ 0.15
Extraordinary gain on early extinguishment of debt -- --
-------------------- --------------------
Net income $ 0.24 $ 0.15
-------------------- --------------------
Diluted income per share:
Income before extraordinary gain $ 0.22 $ 0.14
Extraordinary gain on early extinguishment of debt -- --
-------------------- --------------------
Net income $ 0.22 $ 0.14
-------------------- --------------------
Weighted average share outstanding - basic 64,375 35,950
Weighted average share outstanding - diluted 69,428 37,623
</TABLE>
See accompanying notes to consolidated financial statements.
4
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INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
------------------
September 30, October 2,
2000 1999
------------- ---------------
<S> <C> <C>
Net income $ 15,551 $ 5,454
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,286 1,101
Amortization of bond premiums (3) 2
Deferred financing charge 3 390
Amortization of deferred compensation 286 --
(Gain) loss on sale of assets (29) 56
Tax benefit of stock options 2,586 --
Deferred income taxes (543) 460
Changes in assets and liabilities:
Accounts receivable (857) (1,244)
Inventory (172) 1,725
Other assets, net 748 (622)
Accounts payable, accrued expenses and other current liabilities 305 (788)
Accrued interest expense (14) 2,737
Income taxes 4,986 (47)
------------- ---------------
Net cash provided by operating activities 24,133 9,224
------------- ---------------
Cash flows from investing activities:
Capital expenditures (1,182) (1,478)
Change in deposits on purchase contracts 344 444
Proceeds from sale of fixed assets 3 47
------------- ---------------
Net cash used in investing activities (835) (987)
------------- ---------------
Cash flows from financing activities:
Net repayments under line of credit agreement (10,000) --
Exercise of stock options 190 --
Shares purchased through stock purchase plan 155 --
Initial public offering expenses (194) --
Repayments of long-term debt (139) (8,110)
------------- ---------------
Net cash used in financing activities (9,988) (8,110)
------------- ---------------
Net increase in cash and cash equivalents 13,310 127
Cash and cash equivalents:
Beginning of period 28,940 9,285
------------- ---------------
End of period $ 42,250 $ 9,412
============= ===============
</TABLE>
5
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INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) INTERIM ACCOUNTING POLICY
The accompanying financial statements have not been audited. In the opinion of
our management, the accompanying consolidated financial statements reflect all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly our financial position at September 30, 2000 and results of operations
and cash flows for the interim periods presented. Certain items have been
reclassified to conform to current period presentation.
Certain footnote information has been condensed or omitted from these financial
statements. Therefore, these financial statements should be read in conjunction
with the consolidated financial statements and related notes included in our
Annual Report on Form 10-K for the year ended July 1, 2000. Results of
operations for the three months ended September 30, 2000 are not necessarily
indicative of results to be expected for the full year.
(2) CONSOLIDATION POLICY
The accompanying consolidated financial statements include the accounts of the
Company and all of our subsidiaries (wholly and majority-owned), after
elimination of all significant intercompany accounts and transactions.
(3) INVENTORY
Inventory is valued at the lower of market or standard cost, which approximates
actual costs using the first-in, first-out (FIFO) method.
The components of inventories are as follows (in thousands):
September 30, July 1,
2000 2000
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Work-in-process $ 5,821 $ 4,934
Finished parts 8,569 9,306
Less: Obsolescence reserve (3,500) (3,522)
------- -------
$10,890 $10,718
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(5) DEBT
In June 2000, we obtained a $30.0 million revolving credit facility with a
commercial bank. The facility expires in June 2002, with an option to extend
the facility for additional period and is subject to certain covenants,
including maintenance of certain financial ratios. As of September 30, 2000, we
had no outstanding balances under this agreement, and we were in compliance with
the revolving credit facility covenants.
6
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(6) BUSINESS SEGMENT INFORMATION
We have two reportable segments, Core products and Non-Core products. The Core
segment represents parts that synchronize the timing signals in electronic
devices. The Non-Core products include data communication transceivers and
custom components.
Our reportable segments are strategic product lines that differ in nature and
have different end uses. As such these product lines are managed and reported
to the chief operating decision-maker separately.
Core products are standard application specific products that are sold into a
variety of applications. The average selling prices tend to be stable, gross
margins are higher than commodity products, and the volumes higher than the Non-
Core segment. The Non-Core segment is made up of custom parts using varied
technologies for different applications such as transceivers. Each component in
the custom product line is developed specifically for one customer for their
specific application.
Revenue, operating profit, depreciation and amortization and capital
expenditures by business segment were as follows:
<TABLE>
<CAPTION>
Business Segment Net Revenue
---------------------------------------------------
September 30, October 2,
2000 1999
---------------------------------------------------
<S> <C> <C>
Core $48,555 $32,744
Non - Core 2,796 5,096
---------------------------------------------------
Total Net Revenues $51,351 $37,840
===================================================
</TABLE>
<TABLE>
<CAPTION>
Business Segment Profit
------------------------------------------------------
Operating Profit: September 30, October 2,
2000 1999
------------------------------------------------------
<S> <C> <C>
Core $17,364 $ 9,476
Non - Core 1,202 2,150
Management fee -- (250)
------------------------------------------------------
Total Operating Profit $18,566 $11,376
Reconciliation to statements of operations:
Interest & Other Income 601 137
Interest Expense (153) (4,763)
------------------------------------------------------
Net income before
Income taxes and extraordinary gains $19,014 $ 6,750
======================================================
</TABLE>
We do not allocate items below operating income to specific segments. The Core
and Non-Core profit is calculated as revenues less cost of sales, research and
development and selling, general and administrative expenses for that segment.
(7) NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued staff
accounting bulletin No. 101 "Revenue Recognition" ("SAB 101"), which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met in order to recognize revenue and provides guidance for disclosure related
to revenue recognition policies. The subsequent issuance of SAB 101A and SAB
101B has deferred the timing of the adoption of the requirements until the
fourth quarter of fiscal year
7
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2001. We believe that the adoption of SAB 101 will not have a material effect on
our business, financial position or results of operations.
(8) NET INCOME PER SHARE
Basic net income per share is based on the weighted-average number of common
shares outstanding excluding contingently issuable or returnable shares that
contingently convert into Common Stock upon certain events. Diluted net income
per share is based on the weighted average number of common shares outstanding
and diluted potential common shares outstanding.
The following table set forth the computation of net income (numerator) and
shares (denominator) for earnings per share:
<TABLE>
<CAPTION>
Three Months Ended
September 30, October 2,
2000 1999
<S> <C> <C>
Numerator (in thousands):
Net income $15,551 $ 5,454
----------------------------------------------
Denominator (in thousands):
Weighted average shares outstanding used for basic 64,375 35,950
income per share
Common stock options 5,053 1,673
----------------------------------------------
Weighted average shares outstanding used for diluted 69,428 37,623
income per share
==============================================
</TABLE>
(9) INCOME TAXES
Our effective income tax rate was 18.2% for the first quarter of 2001 as
compared to 19.7% in the prior year period. The decrease in the tax rate is
primarily attributable to the increased profitability at our Singapore
operations. Our Singapore operations has been given pioneer status, or
exemption of taxes on non-passive income for five years, ending on December 31,
2002.
8
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Except for the historical statements and discussions contained herein,
statements contained in this Report on Form 10-Q constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, such as when we describe
what we believe, expect or anticipate will occur, and other similar statements,
you must remember that our expectations may not be correct. While we believe
these expectations and projections are reasonable, such forward-looking
statements are inherently subject to risks, uncertainties and assumptions about
us, including, among other things:
. Our dependence on continuous introduction of new products based on the
latest technology
. The intensely competitive semiconductor and personal computer component
industries
. The importance of frequency timing generator products to total revenue
. Our dependence on the personal computer industry and third-party silicon
wafer fabricators and assemblers of semiconductors
. Risks associated with international business activities and acquisitions
and integration of acquired companies or product lines
. Our dependence on proprietary information and technology and on key
personnel
. Our product liability exposure and the potential unavailability of
insurance
. General economic conditions, including economic conditions related to the
semiconductor and personal computer industries
We do not guarantee that the transactions and events described in this Form 10-Q
will happen as described or that they will happen at all. You should read this
Form 10-Q completely and with the understanding that actual future results may
be materially different from what we expect. We disclaim any intention or
obligation to update these forward-looking statements, even though our situation
will change in the future.
9
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Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship to revenue of certain cost, expense and income items. The table
and the subsequent discussion should be read in conjunction with the financial
statements and the notes thereto:
<TABLE>
Three Months Ended
-------------------
<S> <C> <C>
September 30, October 2,
2000 1999
--------------------- --------------------
Revenues: 100.0% 100.0%
Cost and expenses:
Cost of sales 37.9 41.7
Research and development 13.9 15.7
Selling, general and administrative 11.9 11.7
Management fee -- 0.7
Goodwill amortization 0.1 0.2
--------------------- -------------------
Operating income 36.2 30.0
--------------------- -------------------
Interest and other income 1.2 0.4
Interest expense (0.3) (12.6)
--------------------- -------------------
Income before income taxes and extraordinary gain 37.1 17.8
Income taxes 6.8 3.5
--------------------- -------------------
Income before extraordinary gain 30.3 14.3
Gain on early retirement of bonds -- 0.1
--------------------- -------------------
Net income 30.3% 14.4%
===================== ===================
</TABLE>
FIRST QUARTER FISCAL 2001 AS COMPARED TO FIRST QUARTER FISCAL 2000
Consolidated revenue increased by $13.5 million to $51.4 million for the first
quarter ended September 30, 2000 as compared to the prior year quarter. The
increase is primarily due to the increase in revenue generated by our Core
applications.
Our Core silicon timing revenue increased by $15.8 million to $48.6 million for
the first quarter ended September 30, 2000 as compared to the prior year
quarter. The increase is attributable to strong demand from the communications
equipment industry. Shipments to the communications market were 22% of revenue.
This was driven by increased shipments of our networking and other broadband
applications. Our Core silicon timing revenue contributed approximately 94.6%
of consolidated revenue for the first quarter of fiscal 2001, which represented
an increase from 86.5% for the prior year quarter. The average selling price
for Core clocks declined 7.5%, while the volume increased 59.6%.
Non-Core revenue decreased by $2.3 million to $2.8 million for the quarter ended
September 30, 2000, as compared to the prior year quarter. Non-Core revenue
represented approximately 5.4% of total revenue in the first quarter of fiscal
year 2001, as compared to 13.5% in the prior year period. This is primarily due
to our strategic shift from the transceiver market to our other product groups.
The average selling price for Non-Core revenue increased 2.1%, and the volume
decreased 35.9%.
Foreign revenue (which includes shipments of integrated circuits ("ICs") to
foreign companies as well as offshore subsidiaries of US multinational
companies) was 72.2% of total revenue for the first quarter of fiscal 2001 as
compared to 70.9% of total revenue in the prior year quarter. While the
percentage increase reflected growing sales to the Pacific
10
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Rim markets, certain of our international sales were to customers in the Pacific
Rim, which in turn sold some of their products to North America, Europe and
other non-Asian markets. Our sales are denominated in U.S. dollars and minimize
foreign currency risk.
Cost of sales increased $3.7 million to $19.5 million for the quarter ended
September 30, 2000, as compared to the prior year quarter. Cost of sales as a
percentage of total revenue was 37.9% for the first quarter of fiscal 2001 as
compared to 41.7% in the prior year quarter. We continue to realize material
cost savings in the manufacturing processes and cost savings from our increased
in-house testing.
Research and development ("R&D") expense increased $1.2 million to $7.1 million
for the first quarter of fiscal 2001 from $5.9 million in the prior year
quarter. Our continued emphasis on R&D includes greater spending in research
and development for our Core silicon timing business. As a percentage of
revenue, research and development decreased to 13.9% in the first quarter of
fiscal 2001 as compared to 15.7% in the prior year period. The increased
expense represented a lower percentage of revenue due to the significant
increase in sales during the first quarter of fiscal 2001.
Selling, general and administrative expense increased $1.7 million to $6.1
million for the first quarter of fiscal 2001 as compared to the prior year
period. As a percentage of total revenue, selling, general and administrative
expenses increased to 11.9% in the first quarter of fiscal 2001 as compared to
11.7% in the prior year period. The increase is attributable to higher sales
commissions as a result of increased revenues as well as the amortization of
deferred compensation.
In connection with our initial public offering, we paid $2.7 million in fiscal
2000 to terminate the consulting agreement with both Bain Capital Inc. and Bear,
Stearns & Co., Inc. and therefore we no longer pay management fees. The
management fee incurred for the period ended October 2, 1999 was $0.3 million,
or 0.7% of revenue.
In dollar terms, operating income was $18.6 million in the first quarter of
fiscal 2001 compared to $11.4 million in the first quarter of fiscal 1999.
Expressed as a percentage of revenue, operating income was 36.2% and 30.0% in
the first quarter of fiscal 2001 and the prior year period, respectively.
Interest and other income was $0.6 million for the quarter ended September 30,
2000 and $0.1 million in the prior year period. Cash balance available for
investing increased due to the extinguishments of debt, resulting in higher
interest income.
Interest expense was $0.2 million in the first quarter of fiscal 2001 and $4.8
million in the first quarter of fiscal 2000. As result of our initial public
offering, we paid down our financing obtained in connection with our May 1999
recapitalization and therefore interest expense has decreased significantly.
Our effective income tax rate was 18.2% for the first quarter of 2001 as
compared to 19.7% in the prior year period. The decrease in the tax rate is
primarily attributable to the increased profitability at our Singapore
operations. Our Singapore operation has been given pioneer status, or exemption
of taxes on non-passive income for five years ending on December 31, 2002.
INDUSTRY FACTORS
Our strategy has been to develop new products and introduce them ahead of the
competition in order to have them selected for design into products of leading
OEMs. Our newer components, which include advanced motherboard FTG components,
data communication components and PC multimedia audio and graphics components,
are examples of this strategy. However, there can be no assurance that we will
continue to be successful in these efforts or that further competitive pressures
would not have a material impact on revenue growth or profitability.
11
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We include customer released orders in our backlog, which may be canceled
generally with 30 days advance notice without significant penalty to the
customers. Accordingly, we believe that our backlog, at any time, should not be
used as a measure of future revenues.
The semiconductor and personal computer industry, in which we participate, is
generally characterized by rapid technological change, intense competitive
pressure, and, as a result, products price erosion. Our operating results can
be impacted significantly by the introduction of new products, new manufacturing
technologies, rapid changes in the demand for products, decreases in the average
selling price over the life of a product and our dependence on third-party wafer
suppliers. Our operating results are subject to quarterly fluctuations as a
result of a number of factors, including competitive pressures on selling
prices, availability of wafer supply, fluctuation in yields, changes in the mix
of products sold, the timing and success of new product introductions and the
scheduling of orders by customers. We believe that our future quarterly
operating results may also fluctuate as a result of Company-specific factors,
including pricing pressures on our more mature FTG components as well as the
competitive pressure, continuing demand for our custom ASIC products and
acceptance of our newly introduced ICs, board level and software products and
market acceptance of our customers' products. Due to the effect of these
factors on future operations, past performance may be a limited indicator in
assessing potential future performance.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, our principal sources of liquidity included cash and
investments of $42.5 million as compared to the July 1, 2000 balance of $29.2
million. Net cash provided by operating activities was $24.1 million in the
first quarter of fiscal 2001, as compared to $9.2 million in the prior year
quarter. This increase is primarily attributable to the increase in our
profitability and our federal tax refund of $3.6 million received in the first
quarter of fiscal 2001. Our days sales outstanding decreased from 48 days as of
fourth quarter of fiscal 2000 to 43 days in the first quarter of fiscal 2001,
while inventory turns increased from 7.0 times in fiscal 2000 to 7.2 times in
the first quarter of fiscal 2001.
As a result of our continued expansion of our Phoenix design center and our San
Jose facility, expenditures for property and equipment were $1.2 million in the
first quarter of fiscal 2001 as compared to $1.5 million in the prior year
quarter.
In June 2000, we secured a $30.0 million revolving credit facility with a
commercial bank. The facility expires in June 2002, with an option, at the
bank's sole discretion, to extend the facility for additional period and is
subject to certain covenants, including maintenance of certain financial ratios.
In the first quarter of fiscal 2001, we had no outstanding balances under this
agreement. As of September 30, 2000, we were in compliance with the revolving
credit facility covenants.
We believe that the existing sources of liquidity and funds, which we expect to
generate from operations, will provide adequate cash to fund our anticipated
working capital needs over the short term. Further expansion of our business or
the completion of any material strategic acquisitions may require additional
funds which, to the extent not provided by internally generated sources, could
require us to seek access to the debt or equity market.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued staff
accounting bulletin No. 101 "Revenue Recognition" ("SAB 101"), which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met in order to recognize revenue and provides guidance for disclosure related
to revenue recognition policies. The subsequent issuance of SAB 101A and SAB
101B has deferred the timing of the adoption of the requirements until the
fourth quarter of fiscal year 2001. We believe that the adoption of SAB 101
will not have a material effect on our business, financial position or results
of operations.
12
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exposures
Our sales are denominated in U.S. dollars, accordingly, we do not use forward
exchange contracts to hedge exposures denominated in foreign currencies or any
other derivative financial instruments for trading or speculative purposes. The
effect of an immediate 10% change in exchange rates would not have a material
impact on our future operating results or cash flows.
Interest Rate Risk
As of September 30, 2000 we did not have obligations under the bank credit and,
therefore, we currently do not engage in interest rate hedging activities.
13
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
14
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRATED CIRCUIT SYSTEMS, INC.
Date: November 14, 2000 By: /S/ Hock E. Tan
------------------------------------------
Hock E. Tan
President and Chief Executive Officer
Date: November 14, 2000 By: /S/ Justine F. Lien
------------------------------------------
Justine F. Lien
Vice President, Finance and Chief Financial Officer
(Principal financial & accounting officer)
15
